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Although the NextGen effort involves multiple government agencies and the private sector, FAA will be the entity largely responsible for implementing the policies and systems necessary for NextGen while safely operating the current air traffic control system 24 hours a day, 7 days a week. This means that FAA will be responsible for keeping a number of large NextGen systems acquisitions on budget and on schedule as it manages and sustains the current system. Historically, FAA has had serious weaknesses in its financial management as well as chronic cost and schedule difficulties with air traffic control system acquisitions. During the past few years, FAA has made significant progress in implementing businesslike processes and procedures for financial management, acquisitions, and organization structures. The implementation of these types of initiatives has improved FAA’s management of the current system and should better position the agency to manage the enormously complex transition to NextGen. However, further work remains to fully address past problems and institutionalize these changes throughout the agency, especially given the changing leadership within both FAA and its ATO. Sound financial management, including sound cost accounting and cost allocation systems, is important for the current operation of FAA and lays the foundation for the transformation to NextGen and proposed changes to the agency’s funding system laid out in the administration’s reauthorization proposal. In 1999, we placed FAA on our high-risk list for its financial management practices, noting weaknesses that rendered the agency vulnerable to fraud, waste, and abuse by undermining its ability to manage operations and limiting the reliability of financial information provided to Congress. In 2005, we removed FAA’s financial management from our high-risk list because the agency had made significant progress, including implementing a new financial management system called Delphi and receiving unqualified opinions from auditors on its annual financial statements for fiscal years 2001 through 2005. Nonetheless, external auditors issued a qualified opinion on FAA’s fiscal year 2006 financial statement and repeated a material internal control weakness that was reported in 2005. The concerns that led to the qualified opinion stemmed from FAA’s inability to support the accuracy and completeness of its construction-in-progress account, reported in the financial statement as $4.7 billion. FAA is working to address the problem. As part of its improved financial management, FAA has developed a cost accounting system and a cost allocation methodology, which are critical to the successful implementation of the new cost-based funding system included in the administration’s reauthorization proposal. The proposal would change FAA’s financing system from one based mainly on excise taxes to one that provides a better link between revenues and the costs that users of the national airspace system impose on the system, according to the agency. FAA also says the proposal would improve revenue adequacy, equity, and efficiency. While the reauthorization proposal may address some of the equity and efficiency concerns that FAA has raised with the current funding structure, we have reported that it is not yet clear if FAA has developed a sound cost allocation methodology from which to derive the new cost-based funding. We are reviewing FAA’s cost allocation methodology and expect to issue a report later this year. FAA has also improved its financial management through increased efforts to achieve cost savings and cost avoidance throughout the agency. For example, FAA is outsourcing flight service stations and estimates a $2.2 billion savings over 12 years. Similarly, FAA is seeking savings through outsourcing its planned nationwide deployment of Automatic Dependent Surveillance-Broadcast (ADS-B), a critical element of NextGen. FAA is planning to implement ADS-B through a performance-based contract in which FAA will pay “subscription” charges for the ADS-B services and the vendor will be responsible for building and maintaining the infrastructure. (FAA also reports that the ADS-B rollout will allow the agency to remove 50 percent of its current secondary radars, saving money in the program’s baseline. The remaining radars will serve as a back-up system to ADS-B.) As for consolidating facilities, FAA is currently restructuring ATO’s administrative service areas from nine offices to three offices, which FAA estimates will save up to $460 million over 10 years. We previously reported that FAA should pursue further cost control options, such as exploring additional opportunities for contracting out services and consolidating facilities. However, we recognize that FAA faces challenges with consolidating facilities, an action that can be politically sensitive. In recognition of this sensitivity, the administration’s reauthorization proposal presents a “BRAC-like” initiative in which the Secretary of Transportation would be authorized to establish an independent, five-member commission, known as the Realignment and Consolidation of Aviation Facilities and Services Commission, to independently analyze FAA’s recommendations to realign facilities or services. The commission would then send its own recommendations to the President and Congress. In the past, we noted the importance of potential cost savings through facility consolidations; however, it must also be noted that any such consolidations must be handled through a process that solicits and considers stakeholder input throughout and fully considers the safety implications of both proposed facility closures and consolidations. A successful transition to NextGen will depend, to a great extent, on FAA’s ability to manage the acquisition and integration of multiple NextGen systems. Since 1995, we have designated FAA’s air traffic control modernization program as high risk because of systemic management and acquisition problems. However, in recent years, FAA has made significant progress toward improving its acquisition management. Realization of NextGen goals could be severely compromised if FAA’s improved processes are not institutionalized and carried over into the implementation of NextGen, which is an even more complex and ambitious undertaking than past modernization efforts. To its credit, FAA has taken a number of actions to improve its acquisition management. By creating ATO in 2003 and appointing a chief operating officer (COO) to head ATO, FAA established a new management structure and adopted more leading practices of private sector businesses to address the cost, schedule, and performance shortfalls that have plagued air traffic control acquisitions. ATO has worked to create a flatter organization, with fewer management layers, and has reported reducing executive staffing by 20 percent and total management by 16 percent. In addition, FAA uses a performance management system to hold managers responsible for the success of ATO. More specifically, to better manage its acquisitions and address problems we have identified, FAA has undertaken human capital initiatives to improve its acquisition workforce culture and build towards a results-oriented, high-performing organization; developed and applied a process improvement model to assess the maturity of its software and systems acquisitions capabilities resulting in, among other things, enhanced productivity and greater ability to predict schedules and resources; and reported that it has established a policy and guidance on using Earned Value Management (EVM) in its acquisition management system and that 19 of its major programs are currently using EVM. Institutionalizing these improvements throughout the agency will continue to be a challenge for FAA. For example, the agency has yet to implement its cost-estimating methodology, although, according to the agency, it has provided training on the methodology to employees. Furthermore, FAA has not established a policy to require use of its process improvement model on all major acquisitions for the national airspace system. Until the agency fully addresses these residual issues, it will continue to risk program management problems affecting cost, schedule, and performance. With a multibillion dollar acquisition budget, addressing these issues is as important as ever. In another effort to improve agency processes, FAA expanded its use of performance measures to track its performance. In its fiscal year 2007 portfolio of goals, FAA lists 30 performance measures. As part of our ongoing work, we are currently reviewing how FAA selects and measures two of these goals in particular: critical acquisitions on budget and critical acquisitions on schedule. FAA has reported exceeding targets for both of these measures for the past 3 fiscal years. FAA’s targets for fiscal year 2006 were to have 85 percent of critical acquisition programs within 10 percent of budget, as reflected in its capital investment plan, and to have 85 percent of critical acquisition programs on schedule. For fiscal year 2006, FAA reported that its critical acquisitions were 100 percent on budget and over 97 percent on schedule. This represents a major turnaround in a program that remains on our high-risk list. It will be important, as FAA begins to implement NextGen systems, to maintain critical acquisitions on schedule and on budget in order to meet the goal of transitioning to NextGen by 2025 and to prevent escalation of the costs of NextGen. Our ongoing work is examining FAA’s performance and reporting on its critical acquisitions, including applicable performance measures. We are also exploring FAA’s use of the most recently approved cost and schedule baselines, which may have changed significantly since the start of an acquisition, to measure program performance. Rebaselining acquisitions is an accepted practice and there are valid reasons for doing so, such as when changes in a program’s requirements fundamentally alter the acquisition and make the originally approved schedule unrealistic. Because rebaselining resets the cost and schedule variances to zero, we want to verify that FAA’s practice is not masking acquisition performance problems. We expect to issue a report on these issues later this year. While the acquisition and deployment of NextGen technology are key issues facing the agency, it will be critical for FAA to continue to maintain existing systems and phase out existing systems using a risk-based approach. The adequacy of FAA’s maintenance of existing systems was raised following a power outage and equipment failures in Southern California that caused hundreds of flight delays during the summer of 2006. Investigations by FAA and the Department of Transportation Inspector General into these incidents identified a number of underlying issues, including the age and condition of equipment. Nationwide, the number of scheduled and unscheduled outages of air traffic control equipment and ancillary support systems has been increasing (see fig. 1). Increases in the number of unscheduled outages indicate that systems are failing more frequently. In addition, the duration of unscheduled equipment outages has also been increasing in recent years from an average of about 21 hours in 2001 to about 40 hours in 2006 (see fig. 2), which may indicate, in part, that maintenance and troubleshooting activities are requiring more effort and longer periods of time. However, according to FAA, it considers user impact and resource efficiency when planning and responding to equipment outages. As a result, according to the agency, although some outages will have longer restoration times, the agency believes they do not adversely affect air traffic control operations. It will be critical for FAA to monitor and address equipment outages to ensure the safety and efficiency of the legacy systems, since they will be the core of the national airspace system for a number of years and, in some cases, will become part of NextGen. While FAA has implemented many positive changes to its management and business processes in recent years, it currently faces the loss of key leaders. We reported that the experiences of successful transformations and change management initiatives in large public and private organizations suggest that it can take 5 to 7 years or more until such initiatives are fully implemented and cultures are transformed in a sustainable manner. Such changes require focused, full-time attention from senior leadership and a dedicated team. However, the agency will have lost two of its significant agents for change—the FAA administrator and the COO, who heads ATO—by the end of September 2007. The administrator’s term ends in September 2007; the COO left in February 2007, after serving 3 years. This situation is exacerbated by the fact that the current director of JPDO is new, having assumed that position in August 2006. For the financial, management, and acquisition improvements to further permeate the agency, and thus provide a firm foundation upon which to implement NextGen, FAA’s new leaders will need to demonstrate the same commitment to improvement as the outgoing leaders. This continued commitment to change is critical over the next few years, as foundational NextGen systems begin to be implemented. Because this is a critical time for FAA, the agency needs to move expeditiously to find a new COO for ATO. It could be useful to have a COO whose tenure lasted the length of the current statutory 5-year term. This would allow for stable leadership at ATO during this critical transition from planning to early implementation of NextGen. Several key issues will need to be addressed to help ensure a successful transition to NextGen as FAA moves from the conceptualization and planning of NextGen, handled largely through the interagency collaborative efforts of FAA’s JPDO, to the implementation of NextGen technologies and systems. Those issues include (1) continuing to focus on the coordination between ATO and JPDO and stakeholder involvement; (2) determining which entities will fund the necessary research, development, and demonstration projects for NextGen; and (3) determining whether FAA has the technical and contract management expertise necessary to oversee the complex implementation of NextGen. FAA has become steadily more focused on NextGen implementation, but some key stakeholders, such as FAA technicians who will maintain NextGen systems, are not currently involved. One of the most important changes FAA has made with regard to NextGen is the expansion and revamping of its Operational Evolution Plan (OEP)—renamed the Operational Evolution Partnership—to become FAA’s implementation plan for NextGen. This is a step in the right direction. The OEP is being expanded to apply to all of FAA and is intended to become a comprehensive description of how the agency will implement NextGen, including the required technologies, procedures, and resources. (Figure 3 shows the OEP framework.) An ATO official told us that the new OEP is expected to be consistent with JPDO’s key planning documents and partner agency budget guidance. According to FAA, the OEP will allow it to demonstrate appropriate budget control and linkage to NextGen plans and will force FAA’s research and development to be relevant to NextGen’s requirements. According to FAA documents, the agency plans to publish the new OEP in June 2007. In an effort to further align FAA’s efforts with JPDO’s plans for NextGen, FAA has created a NextGen Review Board to oversee the OEP. This review board will be co-chaired by JPDO’s director and ATO’s vice president of operations planning services. Initiatives, such as concept demonstrations or research proposed for inclusion in the OEP will now need to go through the review board for approval. Initiatives are to be assessed for their relation to NextGen requirements, concept maturity, and risk. An ATO official told us that the new OEP process should also help identify some smaller programs that might be inconsistent with NextGen and could be discontinued and will assist in project integration. Additionally, as a further step towards integrating ATO and JPDO, the administration’s reauthorization proposal calls for the JPDO director to be a voting member of FAA’s Joint Resources Council and ATO’s Executive Council. Some stakeholders, such as current air traffic controllers and technicians, will play critical roles in NextGen, and their involvement in planning for and deploying the new technology will be important to the success of NextGen. In November 2006, we reported that air traffic controllers were not involved in the NextGen planning effort. Controllers are beginning to become involved as they are now represented on a key planning body. However, the technicians do not participate in NextGen efforts. Input from current air traffic controllers who have recent experience controlling aircraft and current technicians who will maintain the new equipment is important in considering human factors and safety issues. Our work on past air traffic control modernization projects has shown that a lack of stakeholder involvement early and throughout a project can lead to cost increases and delays. JPDO recently reported some estimated costs for NextGen, including specifics on some early NextGen programs. JPDO believes the total federal cost for NextGen infrastructure through 2025 will range between $15 billion and $22 billion. JPDO also reported a preliminary estimate of the corresponding cost to system users to equip themselves with the advanced avionics that are necessary to realize the full benefits of some NextGen technologies may range from $14 billion to $20 billion. JPDO, in its recently released 2006 Progress Report, noted that this range for avionics costs reflects uncertainty about equipage costs for individual aircraft, the number of very light jets that will operate in high-performance airspace, and the amount of out-of-service time required for installation. In its capital investment plan for fiscal years 2008-2012, FAA includes estimated expenditures for 11 line items that are considered NextGen capital programs. The total 5-year estimated expenditures for these programs is $4.3 billion. In fiscal year 2008, only 6 of the line items are funded for a total of roughly $174 million; funding for the remaining 5 programs would begin with the fiscal year 2009 budget. According to FAA, in addition to capital spending for NextGen, the agency will spend an estimated $300 million on NextGen-related research and development from fiscal years 2008 through 2012. The administration’s budget for fiscal year 2008 for FAA includes a total of $17.8 million to support the activities of JPDO. The administration’s reauthorization proposal would allow for $5 billion in Treasury debt financing authority for NextGen-related capital needs for fiscal years 2013-2017. Projects that might be appropriate for such financing include safety-critical and mission-essential software and systems that controllers and traffic flow managers will use to support certain aircraft operations in the NextGen system, according to the proposal. However, the proposed borrowing authority seems unlikely to have a major impact on FAA’s ability to pay for capital investment associated with moving to NextGen because the payback period is relatively short. With a maximum payback period of 5 years, the advantage of matching the time period for paying for a capital investment with the time period in which the benefits of that investment are realized is unlikely to be achieved. Therefore, the advantage of borrowing versus receiving appropriations for a period of up to 5 years is unclear. While FAA and JPDO have begun to release estimates for FAA’s NextGen investment portfolio, questions remain over which entities will fund and conduct some of the necessary research, development, and demonstration projects that will be key to achieving certain NextGen capabilities and keeping the development of new systems on schedule. In the past, a significant portion of aeronautics research and development, including intermediate technology development, has been performed by NASA. However, NASA’s aeronautics research budget and proposed funding shows a 30-percent decline, in constant 2005 dollars, from fiscal year 2005 to fiscal year 2011. To its credit, NASA plans to focus its research on the needs of NextGen. However, NASA is also moving toward a focus on fundamental research and away from developmental work and demonstration projects. FAA and JPDO face the challenge of determining the nature and scope of the research and technology development necessary to begin the transition to NextGen. They also have to identify the entities that can conduct that research and development and the source of funding to support it. In the past, a lack of expertise contributed to weaknesses in FAA’s management of air traffic control modernization efforts, and industry experts with whom we spoke questioned whether FAA will have the technical expertise needed to implement NextGen. In addition to technical expertise, FAA will need contract management expertise to oversee the systems acquisitions and integration involved in NextGen. In November 2006, we recommended that FAA examine its strengths and weaknesses with regard to the technical expertise and contract management expertise that will be required to define, implement, and integrate the numerous complex programs inherent in the transition to NextGen. In response to our recommendation, FAA is considering convening a blue ribbon panel to study the issue and make recommendations to the agency about how best to proceed with its management and oversight of the implementation of NextGen. We believe that such a panel could help FAA begin to address this challenge. As FAA works to develop the policies and systems to transition to NextGen, it will be important for the agency to also ensure that its safety programs are aligned with these changes. While recent safety trends are generally positive, improving upon those trends will be necessary simply to maintain the same level of safety if air traffic doubles or triples during the coming decades. Moreover, certain recent trends—such as the commercial air carrier fatal accident rate—may warrant immediate attention. Although this accident rate has steadily declined in recent years, FAA did not meet its performance target in this area for fiscal year 2006 due to four accidents, including two accidents on runway and ramp areas and one runway overrun. FAA’s ability to deal with current safety issues and the transition to NextGen would be enhanced by (1) acquiring and deploying new safety enhancing technologies; (2) establishing appropriate regulatory approaches for current airspace users and emerging sectors; (3) improving the accuracy and completeness of its safety data; and (4) addressing human capital issues associated with hiring, training, and deploying its skilled workforce of air traffic controllers, safety inspectors, engineers, and technicians. Safety in the airport environment is an area of increasing concern because air traffic is forecast to grow substantially during the coming decades. More aircraft and congestion at the airport will make maintaining safety even more critical, as the airport environment involves enormously complex interactions between air traffic controllers and the people who operate on the airport surface, including pilots, mechanics, maintenance technicians, and airport employees. FAA’s efforts to improve safety in the airport environment include deploying NextGen technology, such as the Airport Surface Detection Equipment Model X (ASDE-X), evaluating runway status lights, and testing a low-cost surface surveillance system. FAA pursues new technologies to improve runway safety because the incursion rate at U.S. airports was higher in fiscal year 2006 than it was in fiscal year 2002. (Incursions are potential collisions on the ground.) However, the deployment of new technology has faced schedule delays. FAA originally planned to deploy ASDE-X at 35 major airports by 2007, but the technology is operational at only 8 airports to date, and deployment at the remaining 27 airports is not scheduled to be complete until 2011 (see fig. 4). At the same time, FAA is evaluating the performance of runway status lights, another technology aimed at preventing runway incursions by warning pilots when a runway is unsafe for crossing or departure. FAA expects to decide this year whether to deploy the system at 35 large airports at an estimated cost of $300 million. Although the 35 airports that are to receive ASDE-X—and may receive runway status lights—handle about 70 percent of enplanements in the United States, they represent only about 6 percent of the country’s 573 commercial service airports. Therefore, FAA is also evaluating a low-cost surface surveillance system that could meet the needs of small- to medium-sized airports. The system is designed to alert controllers of potential conflicts and hazards and provide direct warnings to pilots entering or approaching active runways. The number of serious incursions—incidents where a collision was narrowly avoided—rose from 28 in fiscal year 2004 to 31 in fiscal year 2006. As a result, NTSB continues to place runway incursions on its Most Wanted Transportation Safety Improvements list. FAA has not yet implemented any of the six runway incursion prevention recommendations that NTSB made in 2000. The recommendations include such things as implementing at commercial airports ground movement safety systems that provide a direct warning to flight crews of possible incursions and changing air traffic control procedures. According to NTSB, FAA has not completed its evaluation and implementation of technology to address the recommendation on safety systems, and the two agencies have not reached agreement on the recommendations to change air traffic control procedures. FAA is also making efforts to prevent runway overruns, which occur when aircraft pass the ends of runways during aborted takeoffs or while landing, by the construction of runway safety areas or the installation of arresting material at the end of runways. In 2000, FAA established its Runway Safety Area program to accelerate the construction of runway safety areas— areas surrounding the runways designed to reduce the risk of damage to aircraft from overruns. Since 2005, commercial service airports have been required to bring their runway safety areas into compliance with FAA standards by 2015. According to FAA, as of January 2007, 70 percent of the 1,020 runways at 573 commercial airports in the United States substantially comply with runway safety area standards, up from 55 percent in 2000. In fiscal year 2006, the Airport Improvement Program (AIP) awarded more than $240 million in grants for runway safety area improvement projects. FAA indicates that about $1.1 billion in AIP funds will be needed to complete the remainder. The administration’s budget request for FAA calls for $2.75 billion in AIP funds in fiscal year 2008, a substantial reduction from the $3.5 billion funding levels for fiscal years 2006 and 2007. It will be important for FAA to consider these runway safety areas as it prioritizes AIP funds. FAA considers the installation of an Engineered Materials Arresting System (EMAS), a bed of crushable concrete designed to safely decelerate and stop overrunning aircraft, to be an acceptable alternative for meeting runway safety area standards. As of December 2006, EMAS was installed on 21 runways at 16 U.S. airports and had successfully stopped three aircraft from overrunning runways. We are conducting ongoing work for this subcommittee on runway and ramp safety and expect to issue our final report later this year. Future air traffic is expected to include not only increases in the number of traditional airspace users, but new users as well. It will be important for FAA to establish the appropriate regulatory approach for current users and new users such as the emerging space tourism industry and unmanned aircraft systems. For example, we recently found that FAA’s current oversight approach for air ambulances was not geared to the unique operating characteristics and risks associated with that sector. Further, in 2006, NTSB recommended, among other things, that FAA require that all air ambulance operators comply with Part 135 of Title 14 of the Code of Federal Regulations during all flights with medical personnel on board. Under FAA regulation, most air ambulances operate under rules specified in Part 135. However, pilots may operate under different standards, depending on whether they are carrying patients. Without patients or passengers on board, pilots may operate under rules specified in Part 91 of Title 14 of the Code of Federal Regulations. With patients on board, pilots are required to operate under Part 135 rules. Parts 91 and 135 flight rules differ significantly in two key areas—(1) weather and visibility minimums and (2) rest requirements—with Part 135 requirements being more stringent. In many air ambulance trips, part of the trip may involve Part 135 rules, while another part may involve Part 91 rules. For example, scene response missions for air ambulance helicopters frequently have three legs—the flight en route to the accident scene, the transport of the patient to the hospital, and the reposition of the helicopter back to its base (see fig. 5). Only the leg during which patients or other passengers (medical crew members are not considered passengers) are on board must be flown under Part 135 flight rules. Of the 89 air ambulance accidents that we examined from 1998 through 2005, 64 took place during Part 91 flight and the remaining 25 took place during Part 135 flight. However, because air ambulance flights without patients or passengers could be flown under Part 91 requirements, there may be more than twice as many flights taking place under Part 91 compared with Part 135. A better understanding of the trends in the air ambulance industry, including accident data, will be important in deciding if the current regulatory approach is appropriate or if more fundamental changes, such as revising FAA regulations, need to be made. As another example, the need for a different regulatory approach for all- cargo operations has been raised. According to FAA, from 1998 through 2005, the accident rate for scheduled air cargo operators declined significantly but was still about 2.5 times higher than the accident rate for scheduled passenger operators. The Congressional Research Service pointed out that the size of aircraft, the range of operations flown by all- cargo operators, and the large growth in the all-cargo sector introduce unique risks to operators, airports, and the public that may call for revisiting the safety standards that apply to all-cargo operations. In recent work, we also raised issues concerning FAA’s regulation of the emerging space tourism industry. Specifically, we suggested that Congress should consider revisiting the granting of FAA’s dual mandate for ensuring safety and promoting space tourism and decide whether the elimination of FAA’s promotional role is necessary to alleviate a potential conflict. FAA licenses the operation of commercial space launches and launch sites. Historically, these launches carried commercial payloads and were unmanned. The prospect for commercial space tourism materialized in 2004, after the successful launches of SpaceShipOne raised the possibility of an emerging U.S. commercial space tourism industry that would make human space travel available to the public. Several companies are planning to start taking paying passengers on suborbital flights within the next few years and a number of commercial spaceports are being planned. For example, Virgin Galactic intends to provide suborbital space flight from a planned spaceport in New Mexico starting in 2009. It plans to carry 3,000 passengers over 5 years, with 100 individuals having already paid the full fare of $200,000. Figure 6 shows current and planned spaceports. In 1984, the Commercial Space Launch Act gave DOT the authority to license and monitor the safety of commercial space launches and to promote the industry. It is important that FAA’s statutory responsibility to promote the commercial space launch industry does not interfere with its safety oversight of the industry as the space tourism sector develops. We have no evidence that FAA’s promotional activities, such as sponsoring an annual industry conference and publishing economic impact studies, have conflicted thus far with its safety regulatory role, but conflicts could occur as the industry matures. In addition, FAA faces the challenge of determining the circumstances under which it would regulate the safety of crew and space flight participants. In 2004, the Commercial Space Launch Amendments Act prohibited FAA from regulating crew and passenger safety before 2012, except in response to high-risk incidents, serious injuries, or fatalities. FAA has interpreted this limited authority as allowing it to regulate crew safety in certain circumstances and has been proactive in proposing regulations concerning emergency training for crews and passengers. However, FAA has not developed safety indicators by which it would monitor the developing space tourism sector and determine when to step in and regulate human space flight. We have recommended that the agency be proactive about safety rather than respond only after a fatality or serious incident occurs by identifying and monitoring safety indicators that might trigger the need for regulation before 2012. Actions have not been taken on our recommendations. Another emerging sector that poses regulatory issues is unmanned aircraft systems (UAS) (see fig. 7), which are expected to be part of the mix of aircraft that will operate in NextGen. A small number of UASs are currently used by government agencies for a variety of purposes, such as border security, search and rescue, firefighting, military training exercises, and other law enforcement and homeland security initiatives. Recent projections indicate that over 10,000 UASs could be in operation in the United States by 2015, but FAA believes that the number may be less. We have work ongoing for this subcommittee to assess issues such as the technological and regulatory issues that remain in order for UASs to be safely integrated in the national airspace system, the timeframes for completing such work, and the identification of entities that should take the lead in such work. We expect to issue a report later this year. Our preliminary work, indicates that UASs pose unique safety challenges and questions. For example, what standards should UASs meet to ensure that they detect, sense, and avoid other aircraft? What standards should be set for UAS safety and reliability? How should FAA classify UASs, which can range in size from very small, hand launched systems to those similar in size to a large passenger aircraft? What pilot qualifications are needed for UAS operators? FAA has begun to answer such questions by reviewing its existing safety regulations developed for manned aircraft to determine how or whether they need to be modified to enable UASs to be safely integrated into the national airspace system. FAA expects this to be a 5- to 10-year effort. In the meantime, FAA will continue its existing oversight approach and review each request to operate on a case-by-case basis. If FAA determines that a UAS can operate safely under specified conditions, the agency issues a certificate of authorization and the airspace is restricted during the period of operation. In fiscal year 2006, FAA processed 96 applications for certificates of authorization and issued 62 certificates. FAA projects that it will receive over 400 applications in 2010. The agency may have difficulty handling such an increase under its existing case-by-case process, which could serve as a de facto limit on the number of UASs operating in the next few years. FAA cannot rely on its current oversight approach, which focuses on labor-intensive inspections to maintain and expand the margin of safety, especially if substantial growth in air traffic materializes. FAA acknowledges this situation and sees the need to establish a safety information system that can provide an early warning of hazards that may lead to accidents and help the agency manage risk. However, our past work has found problems with the accuracy and completeness of FAA’s safety data. For example, FAA does not collect actual flight activity data for general aviation operators, air taxis, or air ambulances. As a result, FAA lacks information to monitor the rate of accidents and determine the effectiveness of its oversight. We have recommended that FAA improve the accuracy and completeness of its safety data and evaluate this information to identify nationwide trends. FAA is in the early planning stages of addressing our recommendations, but more work remains. An important aspect of FAA’s safety oversight is the use of over 13,000 private individuals and organizations, known as designees, to leverage inspector resources. Designees act as representatives of the agency to conduct many safety certification activities, such as administering flight tests to pilots, inspecting repair work by maintenance facilities, and approving designs for aircraft parts. In reviewing FAA’s designee programs, we found that the agency’s oversight of designees was hampered, in part, by limited data on designees’ performance. FAA is in the early stages of addressing our recommendation to improve the consistency and completeness of designee information. FAA is also changing and expanding the designee programs by replacing certain designee programs with an organization designation authorization. By expanding the number and types of organizational designees, FAA’s role is being further transformed to monitoring the performance of organizations rather than overseeing the individuals who perform the certification activities. It will be important for FAA to have the data, evaluative processes, and a well-trained inspector staff to effectively monitor the new program to make sure that safety is not adversely affected. FAA is in the early stages of addressing some of these data issues as it begins planning a new system— Aviation Safety Information Analysis and Sharing System—that would provide access to large volumes of industry safety data. FAA began planning for the new system in 2006. Because this activity is in the early planning stages, our concerns about FAA’s data remain relevant. The successful completion of this planning effort will be critical to FAA’s ability to improve safety. In fiscal year 2008, FAA proposes budgeting $32 million for safety databases and computer systems. As FAA prioritizes the activities that it undertakes with these funds, it will be important to continue addressing these critical data limitations. In addition, FAA is shifting to a data-driven, risk-based approach to maintaining the agency’s approximately 40,000 pieces of air traffic control equipment, but it has not yet determined its new data needs. FAA is in the very early planning stages of a 10-year or longer effort to switch to this new approach, termed reliability centered maintenance (RCM), which private industry and other federal agencies, such as the Department of Defense (DOD) and NASA, use to maintain equipment. FAA expects the new approach to improve equipment performance. However, we reported in November 2006 that FAA had not developed a plan to implement RCM, has not determined the data needs for RCM, and has not decided what training will be provided to staff. As the agency moves forward with this approach, it will be important for FAA to address the issues we identified as well as work with stakeholders, including FAA maintenance technicians, to ensure that decisions are not driven entirely by cost savings and that the safety and efficiency of national airspace operations are not adversely affected. FAA’s ability to ensure safety in NextGen will also be affected by its ability to manage its human capital, including air traffic controllers, safety inspectors, engineers, and technicians. FAA faces a challenge in managing human capital due to contentious relations with its labor unions. Fourteen unions represent more than 34,000 of FAA’s 43,200 full time permanent employees. With the exception of two unions—the National Air Traffic Controllers Association (NATCA) and the Professional Airway System Specialists (PASS), which represent about 23,000 FAA employees—12 unions have negotiated a contract or memorandum of agreement with FAA, according to agency officials. In April 2006, after reaching an impasse in negotiations with NATCA, FAA used its authority to settle the impasse by imposing a contract on its air traffic controllers. After 4 years of contract negotiations with PASS, FAA reached an agreement in April 2006. The PASS membership, however, according to an FAA official, rejected this proposed contract. Subsequently, FAA filed a complaint with the Federal Labor Relations Authority claiming an unfair labor practice, according to the same FAA official. Until this complaint is adjudicated, the previous PASS contract remains in effect, according to the FAA official. Improving the contentious relationship between FAA and these unions could have positive effects on both the safety of FAA operations and the implementation of new air traffic management systems under NextGen. For example, delays in union approvals that may be needed to implement new systems could lead to delays in their implementation if labor management relations are acrimonious. In addition, the current contract situations have the potential to hinder FAA’s ability to retain and recruit skilled technical staff. FAA estimates it will lose about 72 percent of its air traffic controller workforce over the next 10 years. (See fig. 8.) To replace these controllers, FAA plans to hire 15,004 new controllers from fiscal years 2006 through 2016, according to the agency’s March 2007 controller workforce plan. This recent hiring target is higher than FAA’s June 2006 hiring target to reflect recent data indicating that controllers are retiring at a faster rate than FAA anticipated. To meet these higher targets, FAA has expanded its hiring sources, which had focused on individuals with prior FAA or DOD air traffic control experience and graduates from FAA’s collegiate training initiative program to include the general public. This strategy is needed, according to FAA officials, because DOD has recently become less of a hiring source for controllers due to military incentives for retaining controllers and DOD’s higher salaries than FAA’s entry-level salary. However, those new hires that lack prior air traffic control experience will require more training to become certified controllers. Additionally, since it can take up to 3 to 5 years for a controller to become certified, within a few years, a large portion of the controller workforce may be trainees and not fully certified. Based on FAA’s hiring and retirement projections, by 2010, about 40 percent of the air traffic controller workforce will have 5 or fewer years of experience. This high percentage of newly hired controllers will continue for a number of years, making it important for FAA to carefully balance the ratio of trainees to certified controllers at each air traffic control facility. In addition to the challenge of hiring and training new air traffic controllers, it will be important to deploy them in an optimal manner to reflect changing air traffic demands. FAA’s recent controller workforce plan includes facility-by-facility staffing standards for fiscal year 2007 expressed as ranges. The staffing standards are intended to take into consideration facility-specific information, such as air traffic operations, productivity trends, expected retirements, and the number of controllers in training. These new standards are an improvement over FAA’s historical approach, which was to compute the number of controllers needed systemwide and negotiate the distribution of these totals to the facility level. However, FAA’s current staffing does not align with the new standards at about one-third of FAA’s 314 facilities—93 of which are currently overstaffed and 11 understaffed. This situation adds further complexity to the controller hiring, training, and staffing issues that FAA must carefully manage in the upcoming years. Furthermore, FAA has not factored into its staffing standards or its projected hiring targets the effect of new NextGen technologies on controller workload. The new technologies will result in a more automated system that, over time, is expected to change the role of controllers as well as productivity. In future updates of the controller workforce plan, it will be important to begin to factor in this impact. Furthermore, having the right skill mix of safety inspectors and technicians and deploying them to make best use of their skills is especially important as new and developing sectors emerge. By 2010, 44 percent of FAA’s inspector workforce of about 3,865 will be eligible to retire. To begin addressing this situation, FAA has requested funding to hire an additional 87 inspectors in fiscal year 2008. In addition to maintaining a sufficient number of safety inspectors, it will be important to deploy them where they are most needed. However, FAA lacks a staffing model to accomplish this. The National Academy of Sciences recently completed a study that analyzed FAA’s staffing processes for safety inspectors and identified a number of issues that the agency needed to address. For instance, the study indicated that the current staffing process does not focus resources in the areas of greatest need and the match between individual inspectors’ technical knowledge and the facilities and operations they oversee is not always optimal. In response to academy recommendations, FAA expects to develop a staffing model, but the agency does not have a specific time frame for initiating this effort. In addition, FAA lacks staffing standards for its approximately 6,100 technicians, who are responsible for maintaining the agency’s air traffic control equipment. The development of staffing models for safety inspectors and technicians is important in the changing aviation environment and is critical to FAA’s ability to ensure that its safety programs and workload are aligned to meet the future demands for which NextGen is preparing. For further information about this testimony, please contact Dr. Gerald L. Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Faye Morrison, Teresa Spisak, Nancy Boardman, Anne Dilger, Sharon Dyer, Kevin Egan, Colin Fallon, Jim Geibel, Bob Homan, Rosa Leung, Ed Menoche, Taylor Reeves, Richard Scott, Jeremy Sebest, Larry Thomas, Pam Vines, and Carrie Wilkes. Federal Aviation Administration: Observations on Selected Changes to FAA’s Funding and Budget Structure in the Administration’s Reauthorization Proposal. GAO-07-625T. Washington, D.C.: March 21, 2007. Aviation Safety: Improved Data Collection Needed for Effective Oversight of Air Ambulance Industry. GAO-07-353. Washington, D.C.: February 21, 2007. Federal Aviation Administration: Challenges Facing the Agency in Fiscal Year 2008 and Beyond. GAO-07-490T. February 14, 2007. Next Generation Air Transportation System: Progress and Challenges Associated with the Transformation of the National Airspace System. GAO-07-25. Washington, D.C.: November 13, 2006. FAA’s Proposed Plan for Implementing a Reliability Centered Maintenance Process for Air Traffic Control Equipment. GAO-07-81R. Washington, D.C.: November 9, 2006. Aviation Safety: FAA’s Safety Efforts Generally Strong but Face Challenges. GAO-06-1091T. Washington, D.C.: September 20, 2006. Commercial Space Launches: FAA Needs Continued Planning and Monitoring to Oversee the Safety of the Emerging Space Tourism Industry. GAO-07-16. Washington, D.C.: September 20, 2006. Aviation Safety: FAA’s Safety Oversight System Is Effective but Could Benefit from Better Evaluation of Its Programs’ Performance. GAO-06- 266T. Washington, D.C.: November 17, 2005. National Airspace System: Transformation will Require Cultural Change, Balanced Funding Priorities, and Use of All Available Management Tools. GAO-06-154. Washington, D.C.: October 14, 2005. Aviation Safety: System Safety Approach Needs Further Integration into FAA’s Oversight of Airlines. GAO-05-726. Washington, D.C.: September 28, 2005. Federal Aviation Administration: Stronger Architecture Program Needed to Guide Systems Modernization Efforts. GAO-05-266. Washington, D.C.: April 29, 2005. Aviation Safety: FAA Needs to Strengthen the Management of Its Designees Programs. GAO-05-40. Washington, D.C.: October 8, 2004. Air Traffic Control: System Management Capabilities Improved, but More can be Done to Institutionalize Improvements. GAO-04-901. Washington, D.C.: August 20, 2004. Information Technology: FAA Has Many Investment Management Capabilities in Place, but More Oversight of Operational Systems is Needed. GAO-04-822. Washington, D.C.: August 20, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Federal Aviation Administration (FAA) operates one of the safest air transportation systems in the world. It is, however, a system under strain. The skies are becoming more crowded every day, with an estimated 1 billion passengers per year expected by 2015. The current aviation system cannot be expanded to meet this growth. The reauthorization of FAA is an opportunity to examine how the agency is managing the operation and safety of the air transportation system as it leads the transition to the Next Generation Air Transportation System (NextGen)--a major redesign of the current system. GAO's testimony focuses on key issues related to FAA's reauthorization, including (1) FAA's progress in implementing initiatives that could provide a solid foundation for NextGen, (2) issues that need to be addressed to help ensure a successful transition to NextGen, and (3) safety areas that are important for the continued safe operation of the current and future system. This statement is based on recent GAO reports and ongoing work on some management and safety initiatives. FAA has made significant progress in moving to more businesslike and cost-effective operations and modernizing the air traffic control system. This progress should better position the agency for the complex implementation of NextGen. However, further work remains to fully address past problems in the modernization effort while at the same time finding new leadership--due to losses of key leaders at FAA and its Air Traffic Organization--that can continue an agencywide commitment to transformation. While FAA has improved its financial management capability, including implementing a new cost accounting system and developing a cost allocation methodology, it is not yet clear if that methodology provides a sound basis from which to derive the administration's proposed new cost-based funding structure for FAA. In addition, improved acquisition processes, such as establishing guidance on using Earned Value Management, are positive steps, but they need to be fully implemented across all critical acquisitions. As FAA works toward acquiring and deploying NextGen technology, it will also be important to phase out existing air traffic control equipment using a risk-based approach and continue to maintain existing systems. Key issues that FAA needs to address as it begins implementing NextGen include continued focus on coordination with the Joint Planning and Development Office (JPDO). FAA, in coordination with JPDO, is developing an implementation plan for NextGen that is expected to include details of the required technologies, procedures, and resources. This is a step in the right direction. While FAA estimates that its cost for NextGen programs may range between $15 billion and $22 billion, it will be important to determine which entities will fund and conduct the necessary developmental research. Also, GAO has recommended that FAA assess its capacity to handle the technical and contract management expertise to determine if it has the capabilities required to oversee the implementation of NextGen. FAA is considering action that would respond to this recommendation. To deal with current safety issues and the transition to NextGen, it will be important for FAA to address safety in the airport environment, where forecasted traffic growth could lead to increased ground congestion and safety hazards. FAA also needs to establish the appropriate regulatory approach for certain current airspace users, such as air ambulances, and new users, such as the emerging space tourism industry. In addition, to maintain and expand the margin of safety, especially if substantial growth in air traffic materializes, FAA will need to rely more on data than on labor-intensive inspections. GAO has recommended that FAA improve its safety data. FAA has taken some action to improve its data, but more work remains. FAA's ability to ensure a safe system will also be affected by its ability to hire, train, and deploy its workforce of air traffic controllers, inspectors, and technicians. |
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The NAS consists of a wide assortment of technologies operated by FAA, other federal agencies, such as DOD, and industry participants such as airlines. Technology transfer may be defined as the process by which technology or knowledge developed by one entity is applied and used by another. Technology transfer may involve the transfer of equipment, research, architecture, knowledge, procedures, or software code, or involve data integration. Technology transfer also encompasses the process by which research is transitioned from one entity and then developed and matured by another through testing and additional applied research until ultimately deployed. This report focuses on the mechanisms used to transfer research and technology between partner agencies and private industry and FAA, which can include the transfer of FAA and partner agency research to the private sector to develop a technology, or the transfer of research or technology developed by partner agencies or the private sector to FAA. Since the origination of the NextGen effort, several mechanisms intended to facilitate coordination and technology transfer among FAA and partner agencies have been established. Congress created JPDO within FAA as the primary mechanism for interagency and private-sector coordination for NextGen. JPDO’s enabling legislation states that JPDO’s responsibility with regard to technology transfer is “facilitating the transfer of technology from research programs such as the National Aeronautics and Space Administration program and the Department of Defense Advanced Research Projects Agency program to federal agencies with operational responsibilities and to the private sector.” JPDO developed an Integrated Work Plan that recommends primary and support responsibilities to partner agencies for research and development of various technological aspects of NextGen. (See fig. 1.) JPDO is also responsible for overseeing and coordinating NextGen research activities within the federal government and ensuring that new technologies are used to their fullest potential in aircraft and the air traffic control system. The memorandums of understanding among the partner agencies also require that the partner agencies have the mechanisms in place to coordinate and align their NextGen activities, including their NextGen-related budgets, acquisitions, and research and development. The legislation also directed the Secretary of Transportation to establish a Senior Policy Committee, to be chaired by the Secretary, to provide NextGen policy guidance and review, and to facilitate coordination and planning of NextGen by the partner agencies. To help implement the responsibilities described in the legislation, each partner agency assigned a liaison to JPDO—as well as staff to JPDO in some cases. In addition, several working groups were created to facilitate collaboration between partner agencies and the private sector, and the NextGen Institute was created to be a forum for private industry involvement in NextGen planning and other activities. As initial NextGen planning was completed, and the focus turned to implementation, JPDO’s role has changed to focus on long-term research past 2018. Furthermore, in 2010 a new JPDO Director was appointed (the office’s fourth Director in its 7 years of existence) and JPDO was moved organizationally within FAA to raise its prominence within FAA and enable it to better serve as a mechanism for interagency collaboration. Because NextGen implementation also requires expertise, research, and technology from the private sector, FAA has developed processes and mechanisms for interacting with the private sector. FAA views its Acquisition Management System (AMS) as the primary mechanism for transferring research and technology from the private sector. FAA’s AMS establishes policy and guidance for all aspects of the acquisition lifecycle, and the AMS contracting process is designed to help FAA procure products and services from sources offering the best value to satisfy FAA’s mission needs. election, assignment, nd chedling of ircrft to rnw to imltneously optimize opertion crossltiple irport. created four research transition teams as mechanisms to transition the complicated technologies that do not fit within a single FAA office’s purview under FAA’s structure. The teams cover approximately half of all research and development activities conducted by NASA’s Airspace Systems Program—a group assigned to directly address fundamental NextGen needs. Each team addresses a specific issue area that (1) is considered a high priority, (2) has defined projects and deliverables, and (3) requires the coordination of multiple offices within FAA or NASA. Involving planning and operational personnel early is meant to avoid making decisions in isolation that may waste resources and time. Consistent with key practices that can help enhance and sustain interagency collaboration, these teams identify common outcomes, establish a joint strategy to achieve that outcome, and define each agency’s role and responsibilities, allowing FAA and NASA to overcome differences in agency missions, cultures, and established ways of doing business. Each research transition team develops and documents a plan that defines the scope of its efforts and the products to be developed. The plans outline a delivery schedule and the maturity level to which products will be developed. They also identify how products will be used by FAA in its investment decision process, describe what NASA will provide to FAA, and what FAA’s involvement will be related to the conduct of research. For example, one team’s plan includes development of a decision support tool to help manage the assignment and scheduling of runways at multiple airports to optimize operations. For this product, NASA is scheduled to deliver technical papers in 2012 and a software prototype in 2013. At the time of the scheduled transition to FAA in 2014, the tool should be at a prescribed level of technical maturity and FAA will make an implementation decision later that year. Most of the four research transition teams have not yet delivered products and, while stakeholders are optimistic, whether technologies developed by these teams are ultimately implemented will largely depend on how well coordination occurs across multiple FAA offices involved in implementation. Research transition teams’ products identified for development are expected to be transferred to FAA predominantly from 2012 through 2015. As of April 2011, NASA has delivered two final products and several interim informational products to FAA—including concept feasibility papers, an algorithm related to efficient flow in congested airspace, and data from a joint simulation. Going forward, stakeholders and participants with whom we spoke generally expressed optimism about the research transition teams’ ability to transfer NASA work to FAA and into NAS. However, some stakeholders noted that success requires high-level commitment from each agency and effective team leads. Specifically, one NASA official noted that FAA’s research transition team leads do not have the authority to make final decisions about the implementation of a given technology. Therefore, the success of the team’s product will ultimately depend on that team lead’s ability to work across various FAA offices to negotiate and coordinate a solution. FAA and NASA also use other technology transfer mechanisms—including interagency agreements and test facility demonstrations—which have historically faced challenges at the point where the technology is handed off from NASA to FAA, but have nonetheless resulted in successful transfer and implementation of technology. Past technology transfer efforts between NASA and FAA faced challenges at the transfer point between invention and acquisition, referred to as the “valley of death.” At this point in the process, NASA has had limited funding at times to continue beyond fundamental research, but the technology was not matured to a level for FAA to assume the risks of investing in a technology that had not yet been demonstrated with a prototype or similar evidence. FAA and NASA officials have said the transition is still a challenge, but both are working to address this issue through interagency agreements that specify a commitment to a more advanced level of technological maturity of research than NASA has conducted at times in the past. Both interagency agreements and test facility demonstrations were used in the development and transfer of the Traffic Management Advisor, a program NASA developed, which uses graphical displays and alerts to increase situational awareness for air traffic controllers and traffic management coordinators. Through an interagency agreement, the two agencies established the necessary data feeds and two-way computer interfaces to support the program. NASA demonstrated the system’s capabilities at the NextGen test facility in North Texas where it also conducted operational evaluations. NASA successfully transferred the program to FAA, which, after reengineering it for operational use, deployed it throughout the United States. In some instances, the mechanisms FAA and NASA use to collaborate and transfer technologies have resulted in implementation of that technology in the NAS—as with Traffic Management Advisor; in others, the mechanisms have resulted in less tangible outcomes but nonetheless represent successful transfer in our view. For example, according to NASA officials, much of what is transferred between NASA and FAA is technical knowledge (e.g., an informational report or an algorithm) as opposed to a piece of hardware or new software. These products may not necessarily lead to immediate deployments, but the knowledge transferred may inform future decisions, lead to applied research, or be the precursors to future operational trials. In other instances, these mechanisms may produce a proven technology that is ultimately not implemented by FAA, but can be successfully transferred to the private sector. For example, NASA developed a decision support tool intended to assist controllers in identifying the most optimal route given wind conditions. Though operational evaluation testing was successful, FAA chose not to pursue full-scale development of the capability because it ultimately did not consider the capability to be a controller function. However, Boeing has since leveraged NASA’s work to develop Boeing Direct Routes, a service that uses advanced software algorithms to automatically alert an airline’s operations centers and flight crew when a simple, more fuel-efficient path is available, permitting the operations center to propose those routes to FAA controllers for approval. Boeing predicts that the service will result in measurable decreases in aircraft fuel usage and emissions. In this case, even though FAA—NASA’s intended customer—did not deploy the technology, it was successfully transferred to the private sector and will be used in the NAS to produce anticipated benefits consistent with NextGen goals. FAA primrily reponle for the ir trffic mgement-wether integrtion process nd for directing rerch nd development of vition-pecific wether informtion nd fnctionlity. Collaboration between FAA and Commerce, specifically the National Oceanic and Atmospheric Administration (NOAA), has been facilitated by the creation of the NextGen Executive Weather Panel (the Executive Panel). Weather has a tremendous impact on aviation operations and accounts for approximately 70 percent of all air traffic delays. Assimilating weather information into air-traffic management decisions so that decision-makers can better identify areas where and when aircraft can fly safely is a key goal of NextGen. It also requires significant collaboration and coordination across agencies and the private sector to transfer the data, knowledge, and technology necessary. (See sidebar and fig. 2.) NASA involved as jor developer of ir trffic mgement tool nd techniq, nd wether integrtion methodologie. Federal partner re o to involve the privte ector in deciion tht mffect them. In order to improve communication and coordination related to NextGen weather, the Senior Policy Committee approved the Executive Panel to act as the primary policy and decision-making body for NextGen weather issues. The Executive Panel is composed of high-level representatives from FAA, NOAA, DOD, NASA, and JPDO. According to one JPDO official, the Executive Panel is akin to the research transition team construct used by FAA and NASA in that it provides senior executive level oversight and coordination of interagency activities related to delivering NextGen weather capabilities. While the Executive Panel provides a forum for senior level direction, it has not connected researchers from NOAA with program and operation staff at FAA or identified specific technology development transition plans as the FAA and NASA teams have. Progress is also being made in defining each agency’s roles and responsibilities, though this task has not been completed. For instance, FAA and NOAA have a memorandum of understanding from 2004 that generally establishes the responsibilities of each agency for meeting aviation weather requirements, and in 2010, the agencies jointly completed an integrated management plan for NextGen Network-Enabled Weather and the NextGen 4-D Weather Data Cube. In addition, the two have come to agreements on financial responsibility for some weather projects. For example, FAA and Commerce have come to an overall agreement that the National Weather Service will fund the development of the NextGen 4-D Weather Data Cube and FAA will fund the development of the NextGen Network-Enabled Weather capability, which is expected to connect to the Cube for weather data. There is also agreement that funding for any research and development or capabilities that are aviation unique (e.g., turbulence forecasting) would need to be negotiated between the two agencies. However, FAA and Commerce have not developed an overarching strategy that would identify those specific capabilities in advance. Development of a research management plan is one step expected to facilitate the process to meet NextGen weather needs by the partner agencies, clarify roles and responsibilities, and improve the process for transitioning FAA weather research into National Weather Service operations. Similar to other agencies, any lack of coordination between FAA and Commerce could result in duplicative research and inefficient use of resources at both agencies. FAA and Commerce use additional mechanisms to coordinate their research and have transitioned some weather technology. For instance, FAA, NOAA, and NASA have held joint research program reviews in each of the last 2 years to enhance collaboration and identify duplications in efforts, according to FAA. Researchers from several of NOAA laboratories and forecast centers have also collaborated with FAA in research planning, development, and assessment as well as implementation of research results through interagency agreements. According to NOAA officials, it has worked with FAA to coordinate and align program goals and requirements to meet NextGen weather needs and in the last 2 years, FAA transitioned two weather technologies to NOAA’s National Weather Service. In addition, a team from FAA and NOAA’s National Weather Service, sponsored by JPDO, has begun to develop the functional requirements for NextGen aviation weather systems and continue to work together on additional weather-related planning efforts. DOD has not completed an inventory of its research and development portfolio related to NextGen, impeding FAA’s ability to identify and leverage potentially useful research, technology, or expertise from DOD. JPDO has recommended that DOD have primary responsibility for 6 research and development activities and provide support for an additional 47. In December 2007, DOD designated the Air Force as the lead service for the agency’s NextGen involvement, and, in the formal agreement that established roles and responsibilities for JPDO and the partner agencies, DOD agreed to develop mechanisms to align its NextGen-related research and development efforts with JPDO’s Integrated Work Plan. Air Force officials expected to have completed a comprehensive list of DOD’s NextGen-related research and development activities and programs, as well as a roadmap to facilitate technology transfer by November 2009. In June 2010, the DOT Office of the Inspector General recommended that FAA develop a plan to identify research and technologies from DOD’s research and development portfolio that could be used for NextGen and establish a mechanism to coordinate and transfer that information to the appropriate FAA program or development offices. According to JPDO, it has established contacts with various DOD organizations, but has only begun to develop a plan to review and identify DOD research and technologies potentially useful for NextGen. As of March 2011, DOD had compiled a preliminary but incomplete list of its NextGen-related research and development. According to DOD officials, the office underestimated the size and complexity of the task. As a result of progress made during 2010 and 2011, it has become clear that the original tasking was not the ideal approach. Instead, DOD plans to form technical teams with representatives from the research and development bodies within each agency to identify critical NextGen research and development needs and using that list of specific needs, identify programs that may address them. This process is currently being applied to the area of unmanned aircraft systems in an interagency effort led by JPDO. At the same time, DOD’s ability to identify potentially useful research and technology may be impeded by FAA’s inability to identify the scope of its needs. Though JPDO has identified the research and development activities needed to deliver NextGen, according to DOD officials, FAA has not provided, in some cases, enough specificity of its NextGen technological gaps, so that DOD can help identify where its research and development efforts and expertise may provide benefit. As we have previously reported, a key aspect of successful agency coordination is identifying and addressing needs by leveraging resources. Collaborating agencies can accomplish this by identifying the human, information technology, and physical and financial resources needed to initiate or sustain their collaborative effort. However, without an inventory, DOD, JPDO, and FAA have been unable to identify all the resources at DOD that may be useful for NextGen, or the budgetary resources that DOD puts toward NextGen-related activities. Lack of coordination between FAA and DOD could result in duplicative research and inefficient use of resources at both agencies. Although DOD has liaisons at FAA and JPDO, according to DOD and JPDO officials, communication challenges continue to impede coordination and collaboration between the agencies. DOD has assigned a liaison to JPDO with experience in net-centric operations, one of the areas in which stakeholders view DOD expertise as an important contribution to NextGen. DOD also co-chairs JPDO’s Net-Centric Operations Working Group and contributes as a member of various other JPDO committees, boards, and working groups. In addition, in 2010 DOD assigned a liaison from the Air Force Research Laboratory to FAA’s NextGen and Operations Planning, Research and Technology Development Office to act as a conduit into DOD’s research base. We have previously reported that as agencies bring diverse cultures to collaborative efforts, it is important to address those differences in a way that will enable a cohesive working relationship and create the mutual trust required to enhance and sustain such a collaborative effort. In particular, according to DOD officials, differences in terminology and culture across agencies create communication challenges between FAA and DOD. DOD research plans were developed according to DOD needs, using DOD’s terminology, not with potential connection to NextGen and civil aviation in mind. To understand the extent to which DOD research can address NextGen needs, DOD officials stated that subject matter experts from both FAA and DOD with extensive knowledge of DOD research and NextGen would need to review the existing research, determine what connections exist to NextGen plans, and develop a method of communicating and translating how DOD research supports NextGen activities. Existing mechanisms for collaboration between FAA and DOD are not currently designed or equipped to accomplish this task. DHS’s collaboration is important in several areas of NextGen research, particularly related to unmanned aircraft systems and cyber security; however, thus far, DHS’s participation has been limited in these key areas. DHS plans to use unmanned aircraft systems to monitor the nation’s borders and plays a key role in the initiative to safeguard federal government systems from cyber threats and attacks, including conducting and coordinating cyber security research and development. DHS has collaborated with the partner agencies on NextGen as the co-chair of JPDO’s Aviation Security Working Group, one of nine working groups that JPDO established to solve problems and make fact-based recommendations to be integrated into NextGen. According to DHS officials, it helped develop the security component of NextGen planning and has been an active participant, since JPDO’s inception, through the working group it co-chairs. DHS has also been involved in NextGen integrated surveillance planning and coordination efforts in collaboration with FAA and DOD. Though these are steps toward identifying common outcomes and joint strategies, in other important areas DHS has had limited participation in NextGen. JPDO has recommended that DHS be the agency with primary responsibility for 19 research and development activities and provide support for an additional 18. Many of the activities for which DHS is primarily responsible are related to baggage screening and other security functions, not air traffic management functions where FAA would be the implementer. However, like DOD, DHS has not identified and aligned its NextGen-related research and development activities as it agreed to do in the formal agreement that established the roles and responsibilities of JPDO and the partner agencies, and has not identified the budget figures associated with NextGen activities. In addition, according to DHS officials and other partner agencies, DHS was not involved in early planning for activities at JPDO specifically related to cyber security. DHS officials commented that sometimes DHS does not participate in events either because it is not invited or because it does not choose to participate. Limited collaboration between DHS and FAA could result in conflicts in NextGen priorities and needs in the future. As we have previously reported, that lack of collaboration can result in marginalizing NextGen areas that affect DHS. Further, given DHS’s responsibility for cyber security, lack of coordination in this area could result in FAA not fully leveraging technologies developed by DHS. DHS and JPDO collaboration efforts may improve with the assignment of a new executive representative. In October 2010 DHS’s executive representative to JPDO left the agency, and DHS did not initially identify a replacement. According to one JPDO official, participation in work on integrated surveillance began to lag at that point, although according to DHS, its efforts through JPDO’s Aviation Security Working Group continued. DHS assigned a new executive representative and back-up in January 2011 and integrated surveillance work has resumed. FAA and partner agencies are working to address previously identified research gaps, though coordination is an issue in some areas. In 2008 JPDO conducted a cross-agency gap analysis intended to identify major differences between NextGen planning documents and partner agency plans and budgets. JPDO identified gaps in key research and implementation focus areas that are critical to NextGen and involved joint agency missions and expenditures. The areas where gaps were identified included unmanned aircraft systems, human factors, and airspace security. According to FAA’s chief scientist for NextGen development, efforts are underway in each of these areas. For instance, FAA, in partnership with JPDO, and the partner agencies are defining the research and development needs for operating unmanned aircraft systems in domestic airspace and are developing a joint concept of operations and research roadmap. In late 2010, JPDO sponsored a workshop on unmanned aircraft systems that brought together subject-matter experts and executives from FAA, JPDO, DOD, and NASA. The workshop focused on critical and cross cutting long- term research and development issues and was a step toward JPDO’s goal of having the technologies, procedures, standards, and policies in place to achieve full integration of unmanned aircraft systems. However, DHS, which will be one of the primary operators of these systems in domestic airspace, did not participate. A lack of coordination could result in a duplication of research or an inefficient use of resources. With regard to human factors, as we have previously reported, FAA and NASA are coordinating their NextGen human factors research using a variety of mechanisms—including research advisory committees, interagency agreements, and research transition teams. In addition, FAA has also created a human factors portfolio to identify and address priority human factors issues. In addition, in February 2011, FAA and NASA completed a cross-agency human factors plan as JPDO and we recommended. Finally, with respect to airspace security, according to FAA, it is engaging with both DOD and DHS through JPDO sponsored events. However, FAA is unable to move forward with some of its airspace security research and development because DHS has not involved the appropriate personnel needed to move the issue area beyond the concept development phase. Broadly speaking, FAA’s Acquisition Management System (AMS) provides a framework for FAA to undertake research and development of concepts and technologies, progress that technology to a point where FAA can define the requirements to meet its needs, and then either identify existing technology that meets those needs or request proposals from industry to develop the technology. Within the AMS, FAA may use several mechanisms at various stages to conduct outreach, collaborate with private sector firms, and transfer technology. (See table 1.) In particular, FAA may use several types of research and development agreements between itself and the private sector as mechanisms to facilitate technology transfer. These agreements include cooperative research and development agreements, memorandums of agreement, memorandums of understanding, and other transaction authority. Cooperative research and development agreements allow FAA to share facilities, equipment, services, or other resources with private industry, academia, or state and local government agencies and are part of meeting FAA’s technology transfer program requirements. Within FAA’s Research and Technology Development Office, as of January 6, 2011, there are over 20 such agreements with industry or academia. Prior to pursuing an acquisition, the agency is required under the AMS to conduct a market analysis to determine if the needed capability exists in the marketplace or has to be obtained through the acquisition process. A market analysis may be conducted as FAA moves forward with an acquisition. FAA may publicly request proposals from private industry to develop the technology, and any private sector entity can submit its proposal for meeting FAA’s requirements and compete against other entities for the contract award. However, under some circumstances, stakeholders said that AMS can lack flexibility for FAA to consider alternative technologies or new ideas for certain technologies or sub-systems within an acquisition once the process is underway. According to several industry stakeholders we spoke with, if they have a technology they believe is worth considering to improve some aspect or meet some need of a system that is being developed at FAA— such as a piece of software or some data that may be relevant to improve decision-making—there is no clear entry gate for getting that technology considered. Other stakeholders said that FAA has difficulty considering technologies that cut across programs and offices, and one stakeholder said that such ideas may not be considered because there is no clear “home” or “champion” within FAA for the technology. Similar issues have been encountered for technologies that NASA developed, which resulted in the creation of the research transition teams discussed previously. In the past, we have recommended that FAA improve its ability to manage portfolios of capabilities across program offices. However, on the other hand, at a certain point, FAA must be able to commit resources, finalize plans, and stop considering alternatives in order to move forward with implementing a new system. Furthermore, according to these officials, once FAA makes a decision to pursue a particular technological path, it can become costly to change course; therefore, any benefits of changing course must be weighed against the costs. Nonetheless, industry stakeholders suggested that additional avenues to consider alternative technologies could be made available and could result in technologies that enable FAA to meet its mission more efficiently. We have made recommendations to FAA over the years to improve its AMS process. To address this issue at least in part, FAA has recently designed another contracting tool to provide it with research and development and systems engineering support to integrate NextGen concepts, procedures and technologies into the NAS, which may provide some additional flexibility for collaboration and technology transfer with industry. The Systems Engineering 2020 (SE 2020) contracts are a set of multiple award, up to 10- year umbrella contracts worth approximately $6.4 billion. Under SE 2020, FAA will be able to have participating firms support NextGen implementation activities such as concept exploration, modeling and simulation, and prototype development. By pooling engineering expertise under a single contracting vehicle, FAA believes it will be able to more quickly obligate funds and issue task orders, which is intended to result in implementing NextGen more quickly. FAA officials believe that this process, by structuring the umbrella contract to include small businesses, would encourage the participation of more small businesses in its efforts to implement NextGen. Firms that have not been selected will not be able to participate in the SE 2020 program. However, according to some industry officials, the program’s ability to more quickly obligate funds and issue and complete task orders has yet to be fully demonstrated, and stakeholders we spoke with expressed concerns about whether FAA’s efforts to expedite the work will mean missing out on the expertise of excluded companies. FAA also has an unsolicited proposal evaluation process that is designed as a mechanism for private industry to offer unique ideas or approaches outside FAA’s competitive procurement process; however, it has not proven to be a significant source of new technology for FAA. From 2008 to 2010, FAA received 56 unsolicited proposals from private industry and rejected all but one of them. The most common reasons for rejection, according to FAA, were that the proposals were not unique and innovative or that FAA already had an effort in place to meet that requirement. (See table 2.) In general, we found that FAA’s reasons for rejecting proposals met FAA’s established criteria for evaluating unsolicited proposals. However, FAA evaluators told us that FAA’s “unique and innovative” criterion for an unsolicited proposal was a difficult criterion to meet for proposals, because technologies often build on previous technologies. Furthermore, if a firm submitting an unsolicited proposal is to receive a sole source contract, competitive procurement principles require that it must be found that no other company can provide the technology but the company submitting the unsolicited proposal. If this is not the case, competitive proposals must be sought. Some participants told us that technologies should not be eliminated from consideration even if their application is not entirely unique and contracts to implement them might have to be awarded competitively. FAA evaluators commented that there was little guidance on how to interpret the criteria, including the unique and innovative criterion in particular, for evaluating unsolicited proposals. Some suggested that additional guidance on applying criteria or a review panel could be set up to assist in reviewing the ideas contained in these proposals. Participants also told us that the process, in some cases, is not collaborative, which may hinder FAA from leveraging potentially valuable technologies. Other participants explained that FAA’s written response sometimes did not reflect a full understanding of what a company was offering, so in these cases the companies would have liked an opportunity to clarify the merits of their proposal. Although FAA says that companies whose proposals are rejected can meet with the program offices to discuss reasons for rejection, some companies told us this opportunity was not always provided. Where there are disagreements between FAA and companies submitting unsolicited proposals over FAA’s stated reason for rejection of a proposal, FAA is not required to discuss why a submission was rejected or how it might be improved. FAA conducts various outreach events with its research stakeholders, including those in industry, to exchange information among stakeholders currently engaged in collaborative technology projects and to communicate NextGen’s direction to potential collaborators. From 2008 through 2010, over 300 outreach events were held during which FAA presented technical information focused on planned or on-going NextGen projects and programs. Seminars, conferences, and industry days are designed to inform industry about where FAA is headed with regard to NextGen and any changes that may have occurred in NextGen’s direction in the last year. The identification of technologies for use in NextGen is not necessarily a goal of many of these efforts. Although technology identification or transfer may not occur at these events, they can create and reinforce working and personal relationships between leading experts and researchers in the air traffic management research and development community, create opportunities to share available research results, and maintain consensus between FAA and industry on major issues. Some FAA and industry events, however, have had more of a collaborative purpose, creating opportunities for information and technical exchanges. Technical interchange meetings, workshops, and demos are designed to address select technical issues and have been used to try and identify existing technologies or to communicate to private sector stakeholders specific technological or research needs that they can address. These meetings can result in the identification of existing technologies that can be used by FAA to meet a specific need. For example, FAA’s Global Navigation Satellite System Program Office recently sponsored a workshop for a broad range of industry and partner agency stakeholders to come together to discuss needs and potential solutions for a back-up system that could support the Global Positioning System if satellites became unavailable. The purpose of the workshop was to collaboratively work with partner agencies and industry to identify existing technologies and systems that can be modified to provide a viable backup system. One industry participant we spoke with told us that the workshop was highly collaborative and had positive results in terms of focusing on technology that could be leveraged by FAA. However, according to participants in other events, it is often unclear what happens after these events in terms of taking the next steps to transfer knowledge or technology or working with FAA to develop solutions. FAA keeps documentation of what occurs at these meetings, including information on outcomes from the event. Our review of this documentation found that few events documented concrete outcomes or identified next steps to further develop ideas or technologies identified and discussed at an event. JPDO is reassessing the role and structure of the NextGen Institute as a mechanism for collaboration and technology transfer with industry. The DOT Inspector General recommended in June 2010 that JPDO determine whether there is a continued need for the Institute and, if there is, to redefine its roles and responsibilities to avoid duplication with other private-sector organizations. The NextGen Institute was established in March 2005 as the mechanism through which JPDO would access private- sector expertise in a fair and balanced framework that embraces all individuals, industry, and user segments for application to NextGen activities and tasks. However, participation in the Institute diminished over time as funding was uncertain. Recently, a new Executive Director was named for the Institute, and the JPDO is working closely with the new Executive Director and the Institute Management Council—which oversees the policy, recommendations, and products of the NextGen Institute—to identify a course of action that is embraced by industry stakeholders. According to several private-sector stakeholders we spoke with, the NextGen Institute could serve as a valuable mechanism for FAA and industry collaboration if properly designed and structured. While not necessarily a technology transfer mechanism, RTCA—a private, not-for-profit corporation that develops consensus-based recommendations within the aviation community on communications, navigation, surveillance, and air traffic management system issues—is a key source of FAA and industry collaboration. For example, in 2009 RTCA convened the NextGen Midterm Implementation Task Force at the request of FAA, which brought together key stakeholders in the aviation community. The Task Force reached a consensus within the aviation community to focus on implementing capabilities in the NAS that take advantage of existing technologies and capabilities aboard aircraft. In addition, RTCA has recently created the NextGen Advisory Committee, which is comprised of top-level executives representing various parts of the aviation and aerospace industries, as well as airports, air traffic management, and various other public and private stakeholder groups. Some NextGen test facilities serve as a forum in which private companies may learn and partner with each other, and eventually, enter into technology acquisition agreements with FAA with reduced risk. The FAA Technical Center test facility in Atlantic City, New Jersey, and the Embry Riddle test facility in Daytona, Florida, provide places where integration and testing with industry can take place without affecting day-to-day air traffic operations. They also enable industry and government to ensure that new technologies will integrate with systems currently in the NAS and, according to a senior FAA official, allows FAA to leverage private sector funding, expertise, and technologies. For example, in November 2008, several companies, including Lockheed Martin and Boeing, were involved in an FAA demonstration at Embry Riddle on how current and forecasted weather information can be integrated into FAA’s traffic management and en route automation systems. Also at Embry Riddle, Lockheed Martin is funding some work in conjunction with US Airways on a new time-based traffic flow management system designed to provide increased gate-to-gate air traffic predictability. The success of these test facilities as opportunities to leverage private- sector resources depends in large part on the extent to which the private sector perceives benefits to their participation. Representatives of firms participating in test facility activities told us that tangible results in terms of implementation of technologies developed were important to maintain private sector interest and that it was not always clear what happened to technologies that were successfully tested at these sites. In June 2010, the DOT Inspector General also reported that demonstrations may not provide a clear path to implementation and are sometimes not outcome-focused. We have also reported that FAA should increase its focus on performance and outcomes. One of the difficulties cited by officials at these test facilities was that if a technology being tested did not have a place in one of the NAS Enterprise Architecture Infrastructure Roadmaps, then there was no implementation plan for that technology and no next steps to get that technology into the NAS. For example, NASA was developing the Precision Departure Release Capability, a software technology that links Traffic Management Advisor to other information to better plan flight departures by minimizing delays once passengers have boarded the plane. This technology, however, was not a capability or technology that was a part of the Enterprise Architecture Roadmap, and NASA had difficulty finding support for it, its merit and FAA’s interest in pursuing it notwithstanding. According to NASA officials that worked on the capability, the process for getting a technology into a roadmap was not transparent to participants at the test facilities and it took considerable time and effort to eventually get the capability included in the roadmap and garner support. To advance aviation partnerships and the development and transfer of aviation technologies, the concept for a Next Generation Aviation Research and Technology Park was developed through a collaborative effort by local, county, state, and federal agencies; academia; and private sector interests. As a result of this effort, the FAA entered into a lease and memorandum of understanding with the South Jersey Economic Development District to build a Next Generation Research and Technology Park adjacent to the William J. Hughes Technical Center near Atlantic City, N.J. The lease transfers control of 58 acres of FAA property for construction of the complex. The Park is a partnership that is intended to engage industry in a broad spectrum of research projects, with access to state-of-the-art federal laboratories. The establishment of this park will help encourage the transfer of scientific and technical information, data, and know-how to the private sector and is consistent with FAA’s technology transfer program order. The park will offer a central location for the FAA’s industry partners to perform research, development, testing, integration and verification of the technologies, concepts, and procedures required by NextGen. According to FAA, this private-sector engagement in research has the potential to save significant time and expense in bringing new products to market and reducing the time to deliver NextGen components. The Park is intended to complement the NextGen demonstration capabilities at Embry Riddle Aeronautics University in Daytona, Florida. Advanced NextGen technologies developed and tested at the Technical Center will be demonstrated in an operational environment at Daytona then returned to the Technical Center for integration with the current NAS and other components of NextGen. Transforming the nation’s air transportation system is a technically complex undertaking that will affect FAA’s activities and missions, and those of federal partner agencies and the private sector. NextGen’s success is dependent, in significant part, on FAA’s ability to leverage the research and technology efforts of these agencies and firms. While much has been done to develop mechanisms for effective research and technology transfer, some mechanisms have not been successful in ensuring that FAA is leveraging the research and technologies of its partners. In particular, FAA and DOD have yet to completely identify DOD’s potentially beneficial research and technology. In addition, FAA and DHS’s collaboration in identifying areas for joint research and technology development is limited. Effective transfer of research and technology requires effective collaboration, and we have previously found that interagency collaboration is enhanced when agencies, among other things, define common outcomes, identify and address needs, establish joint strategies, agree on roles and responsibilities, and establish compatible policies, procedures and other means to operate across agency boundaries. FAA’s collaborative mechanisms with DOD and DHS fall short of fulfilling these criteria. FAA’s ability to identify potentially useful DOD and DHS research and technology has been impeded because DOD and DHS have not completely identified research and development in their portfolios that is applicable to NextGen, while DOD’s ability to identify potentially useful research and technology may be impeded because FAA has not made clear the scope of its needs with enough specificity. Further, communication between DOD and FAA has been hampered by differing vocabularies and terms, and mechanisms have not yet been developed to help the agencies work across agency boundaries. While we have noted these issues in several reports over the years and the DOT Inspector General has made recommendations for FAA to develop a plan to review DOD’s research, we find that much remains to be done in this area to improve the communication and collaboration between the agencies. Unless FAA and its partner agencies communicate and jointly identify ongoing research and technology development that is relevant to NextGen efforts, FAA will not be able to fully leverage the potential of its partner agencies’ research and technology development efforts. In this report, as well as in a previous report, we note that FAA and its partner agencies have struggled to develop an integrated budget document that tracks partner agencies’ involvement in NextGen, determines whether funding is adequate for specific efforts, and tracks the overall cost of NextGen. Failure to complete this effort makes it difficult for FAA and the Congress to understand the extent to which FAA is leveraging the research efforts of its partners to achieve the NextGen vision. We have an open recommendation to FAA with regard to developing this integrated budget and are monitoring actions related to our recommendation. We are therefore not making recommendations in this report about this issue. We also discuss several issues throughout the report with respect to how FAA collaborates with the private sector to transfer research and technology. For example, while FAA conducts market analysis, holds numerous events with industry, enters into various collaborative agreements, and has numerous mechanisms—such as the NextGen Institute, demonstrations, and testing facilities—to collaborate with industry and provide opportunities for technology transfer, it is not always clear what comes out of these mechanisms, and some in industry have indicated that, despite all of these collaborative activities, it is not always evident what are the “entry points” to FAA for getting technologies or ideas considered. Nonetheless, numerous mechanisms exist, and additional mechanisms are being reconsidered, or are still under development, such as the NextGen Institute and the Research and Technology Park. We also found that FAA’s AMS process can limit FAA’s ability to consider alternatives in some cases, and that FAA has difficulty considering technology solutions that cut across several programs or offices at FAA. We have made several recommendations to FAA over the years to address these issues. We have recommended that FAA improve its AMS process, improve its ability to manage portfolios of capabilities across program offices, and increase its focus on performance and outcomes, which FAA has begun to implement Moreover, the DOT Inspector General made a recommendation in 2010 for FAA to reassess the current role and continued need for the NextGen Institute and to ensure that it is a useful resource and not duplicative with other mechanisms designed to work with private industry. We are therefore not making any further recommendations to FAA in these areas, but encourage FAA to continue its efforts to address existing recommendations. To more fully leverage the potential of NextGen partner agencies’ research and technology development efforts, we recommend that the Secretary of Transportation direct the Administrator of the FAA to work with the Secretaries of Defense and Homeland Security to develop mechanisms that will further clarify NextGen interagency collaborative priorities and enhance technology transfer between the agencies. These mechanisms should focus on improving interagency communication about the specific needs, outcomes, and existing research that FAA has for NextGen, and the existing research and technology development portfolios that may be applicable to NextGen within DOD and DHS. These mechanisms should aim to improve the ability of the agencies to leverage resources or transfer knowledge or technology among each other consistent with the key practices for successful collaboration that we lay out in this report. We provided a draft of this report to the Departments of Transportation, Defense, Homeland Security, and Commerce, NASA, and the Office of Science and Technology Policy. The Department of Transportation provided technical comments by e-mail, which we incorporated as appropriate, but did not comment whether or not it agreed with our recommendation. The Department of Defense provided written comments, which are reproduced in appendix I. DOD concurred with our recommendation and highlighted the existing mechanisms it has that support agency collaboration and technology transfer. The Department of Homeland Security provided written comments, which are reproduced in appendix II. DHS also concurred with our recommendation and mentioned a newly formed mechanism—the Air Domain Awareness Board—that will support technology transfer discussions among DHS, FAA, JPDO, and other stakeholders in relation to NextGen. These mechanisms are positive steps toward NextGen technology transfer among the partner agencies. However, as our recommendation further states, DOD and DHS should ensure that relevant research and development activities that could support NextGen are identified within these or other mechanisms, and that appropriate steps are taken to develop mechanisms to effectively transfer any identified research and technology. Because the mechanisms DOD and DHS identified have not yet demonstrated these results, we believe that fully implementing the recommendation is still important beyond the existing mechanisms used by DOD and DHS. The Office of Science and Technology Policy provided one technical comment by e-mail, which we incorporated. The Department of Commerce and NASA had no comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies of this report to interested congressional committees, the Secretary of Transportation, the Administrator of the Federal Aviation Administration, NASA, DOD, DHS, Commerce, the Office of Science and Technology Policy, and other 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) 512-2834 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 major contributions to this report are listed in appendix III. In addition to the contact named above, individuals making key contributions to this report include Andrew Von Ah (Assistant Director), Richard Hung, Bert Japikse, Delwen Jones, Kieran McCarthy, Josh Ormond, Taylor Reeves, Richard Scott, Maria Stattel, and Jessica Wintfeld. | The Federal Aviation Administration (FAA) is developing and implementing a broad transformation of the national airspace system known as the Next Generation Air Transportation System (NextGen). NextGen is a complex undertaking that requires new technologies and supporting infrastructure and involves the activities of several agencies as well as private industry. This report provides information on the effectiveness of (1) FAA's and the federal partner agencies' mechanisms for collaborating and leveraging resources to develop and implement NextGen, and (2) FAA's mechanisms for working with and transferring technology to or from private industry. To do this, we assessed FAA and partner agency mechanisms against applicable agreements, the agencies' own guidance for these activities, as well as applicable key practices that GAO has reported can enhance federal collaborative efforts. Some mechanisms for FAA and partner agency collaboration are effective, though others fail to ensure research and technology from the partner agencies and industry are fully used by FAA. Some mechanisms used by FAA and the National Aeronautics and Space Administration (NASA) for coordinating research and transferring technology are consistent with several key practices in interagency coordination. For instance, FAA and NASA use research transition teams to coordinate research and transfer technologies from NASA to FAA. The design of these teams is consistent with several key practices GAO has identified in previous work that can enhance interagency coordination, such as identifying common outcomes, establishing a joint strategy to achieve that outcome, and defining each agency's role and responsibilities. This allows the agencies to overcome differences in mission, culture, and ways of doing business. However mechanisms for collaborating with other partner agencies do not always ensure that FAA effectively leverages agency resources. For example, the mechanisms used by FAA, DOD, and DHS have not yet resulted in a full determination of what research, technology, or expertise FAA can leverage to benefit NextGen. Further, collaboration between FAA, DOD, and DHS may be limited by differing priorities. Finally, FAA and the Joint Planning and Development Office--an interagency organization created to plan and coordinate research for NextGen--have not fully coordinated the partner agencies' research efforts, though they are working to address research gaps. A lack of coordination could result in a duplication of research or an inefficient use of resources. Numerous mechanisms are available to FAA to collaborate with industry to identify and transfer technology to advance NextGen, but some lack flexibility and outcomes can be unclear. Within its Acquisition Management System (AMS), FAA may use several mechanisms at various stages to conduct outreach, collaborate with private-sector firms, or transfer technology. In particular, FAA may use several types of research and development agreements between itself and the private sector as mechanisms to facilitate technology transfer. However, stakeholders said that the system can lack flexibility, in some circumstances, to consider alternative technologies or new ideas once the process is underway. GAO has made recommendations in the past to improve FAA's AMS system. FAA has begun to implement these recommendations. FAA is beginning to use a new, possibly more flexible, contracting vehicle--Systems Engineering 2020--to acquire the research, development, and systems engineering support to integrate NextGen concepts. FAA also reviews unsolicited proposals as a mechanism for private industry to offer unique ideas or approaches outside of the competitive procurement process. However, FAA's unsolicited proposal process is not a significant source of new technology for FAA. Other mechanisms such as outreach events with private industry and NextGen test facilities might enhance knowledge and result in technology transfer, but outcomes, such as specific benefits, from some of these mechanisms can be unclear. GAO recommends that FAA and the Departments of Defense (DOD) and Homeland Security (DHS) work together to develop mechanisms that will enhance collaboration and technology transfer between the agencies. GAO and others have outstanding recommendations related to interaction with industry that FAA has begun to address and GAO makes no further recommendations in this report. DOD and DHS concurred with the recommendation, while FAA did not comment on whether or not it agreed. |
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The multibillion dollar AIP provides grant funds for capital development projects at airports included in the National Plan of Integrated Airport Systems (NPIAS). In administering AIP, FAA must comply with various statutory formulas and set-asides established by law, which specify how AIP grant funds are to be distributed among airports (see app. II for a list of airports that are eligible to receive AIP grant funds). FAA groups the proposed projects into one of the following seven development categories, according to each project’s principal purpose: Safety and security includes development that is required by federal regulation and is intended primarily to protect human life. This category includes obstruction lighting and removal; fire and rescue equipment; fencing; security devices; and the construction, expansion, or improvement of a runway area. Capacity includes development that will improve an airport for the primary purpose of reducing delay and/or accommodating more passengers, cargo, aircraft operations, or based aircraft. This category includes construction of new airports; construction or extension of a runway, taxiway, or apron; and construction or expansion of a terminal building. Environment includes development to achieve an acceptable balance between airport operational requirements and the expectations of the residents of the surrounding area for a quiet and wholesome environment. This category includes noise mitigation measures for residences or public buildings, environmental mitigation projects, and the installation of noise- monitoring equipment. Planning includes development needed to identify and prioritize specific airport development needs. This category includes the airport master plan, airport layout plan, a state system plan study, or an airport feasibility study. Standards include development to bring existing airports up to FAA’s design criteria. This category includes the construction, rehabilitation, or expansion of runways, taxiways, or aprons; the installation of runway or taxiway lighting; the improvement of airport drainage; and the installation of weather reporting equipment. Reconstruction includes development to replace or rehabilitate airport facilities, primarily pavement and lighting systems that have deteriorated due to weather or use. This category includes the rehabilitation or reconstruction of runways, taxiways, apron pavement, and airfield lighting. Other includes all other development necessary for improving airport capacity and the safe and efficient operations. This category includes people movers, airport ground access projects, parking lots, fuel farms, and training systems. It also includes development for converting military airfields to civilian use, such as those authorized by the military airport program. FAA has traditionally assigned the highest priority to safety and security projects that are mandated by law or regulation. Shortly after September 11, in response to increased security requirements and in exercising the authority granted under the Federal Aviation Reauthorization Act of 1996, FAA reviewed its AIP eligibility requirements and made several changes to permit the funding of more security projects that previously had not been funded by AIP. For example, FAA broadened the list of eligible projects to include explosives detection canines, cameras in terminals, and blast proofing of terminals. According to officials in FAA’s Airport Planning and Programming Division, the types of security projects eligible for AIP funding were expanded because the perceived threat area at an airport grew from those areas immediately surrounding an aircraft to terminal areas where large numbers of people congregated. Table 1 summarizes significant eligibility changes since September 11, 2001. In November 2001, eligibility for AIP funding was further broadened by the passage of ATSA, P.L. 107-71. The act amended 49 U.S.C. Section 47102(3) to extend eligibility for AIP funding to any additional security-related activity required by law or the Secretary of Transportation after September 11, 2001, and before October 1, 2002. ATSA also created the Transportation Security Administration (TSA) within the Department of Transportation (DOT), and assigned it primary responsibility for ensuring security in all modes of transportation. As such, TSA is now responsible for funding some airport security-related projects, a limited number of which FAA had previously funded through AIP grant funds. These projects include preboard screening devices and baggage screening equipment, such as explosives detection systems. In fiscal year 2002, FAA awarded a total of $561 million in AIP grant funds for airport security projects, which represents about 17 percent of the $3.3 billion available for obligation. As illustrated in figure 1, the $561 million is the largest amount awarded for security projects in a single year and contrasts sharply with past funding trends. Since the program’s inception in 1982, security projects have accounted for an average of less than 2 percent of the total AIP grant funds awarded each year. During fiscal years 1982 through 2001, AIP grant funds awarded to airports for security projects ranged from $2 million in fiscal year 1982 to $122 million in fiscal year 1991, when airports implemented new security requirements governing access controls. The $561 million FAA awarded to airports for security projects in fiscal year 2002 represents more than 800-percent increase over the $57 million for security projects awarded in fiscal year 2001. As shown in table 2, among airport types, nearly all of the $561 million awarded in fiscal year 2002 for security projects was awarded to large, medium, small, and nonhub airports, which is consistent with where FAA has received the largest number of requests for AIP grants for security projects. General aviation and reliever airports received about 1 percent of the $561 million awarded in fiscal year 2002. Based on data provided by FAA, all security projects awarded AIP grants since September 11, 2001, have met legislative and program eligibility requirements. Most of these projects would have qualified for AIP funding under eligibility requirements in place prior to September 11, 2001. For example, as shown in table 3, perimeter fencing, surveillance and fingerprinting equipment, and access control systems, which together accounted for almost half of AIP funding for security projects, qualified under traditional eligibility regulations. Other projects that would not have qualified for AIP funding prior to September 11, 2001, such as explosives detection canines and kennels, are now eligible under legislative and administrative changes implemented since then. Section 119(a) of ATSA amended 49 U.S.C. Section 47102(3) to permit funding of any security-related activity required by law or the Secretary of Transportation after September 11, 2001, and before October 1, 2002. In addition, ATSA also amended 49 U.S.C. Section 47102(3) to make the replacement of baggage conveyor systems and terminal modifications that the Secretary determines are necessary to install explosives detection systems eligible for AIP grants. In addition to the AIP eligibility changes in ATSA, FAA issued a series of program guidance letters in the winter of 2002 that either restated or clarified project eligibility requirements as defined under 49 U.S.C. Section 47102(3). Under FAA’s Program Guidance Letter 02-2, requests for AIP grant funds for security projects after September 11, 2001, are divided into the following three categories: Unquestionably eligible projects include those that are intended to prevent unauthorized individuals from accessing the aircraft when it is parked on aprons, taxiways, runways, or any other part of the airport’s operations area. Projects eligible with additional justification include automated security announcements over public address systems and terminal improvements for checked baggage or passenger screening. Projects that appear to exceed known requirements include those related to areas of a police facility, command and control or communications centers that support general law enforcement duties, and equipment federal screeners use to screen passengers and baggage. The unprecedented increase in AIP grant funds awarded to airports for security projects in fiscal year 2002 has affected the amount of funding available for some airport development projects, in comparison with fiscal year 2001. FAA Airport Planning and Programming officials stated that they were able to fully fund many program priorities, including: all set-aside requirements, such as the noise mitigation and reduction program and the military airport program; all safety projects, including those related to FAA’s initiatives to improve runway safety and reduce runway incursions; all phased projects that had been previously funded with AIP grant funds, including the 10 runway projects which are being built at primary airports. According to FAA Planning and Programming officials, a variety of factors enabled them to reduce the impact of awarding $561 million in AIP grant funds for security projects. Most notable was the record level of carryover apportionments, which totaled $355 million, and the $84 million in grant funds that FAA recovered from prior-year projects. FAA subsequently converted these funds into discretionary funds and used $333 of the $439 million to offset the discretionary funds that were provided for security projects. The remaining $106 million was used to fund other airport development projects, such as some new capacity, standards, and reconstruction projects, which FAA initially believed it would not be able to fund because of the need to ensure that security projects were given the highest priority for AIP funding. However, when comparing grant award amounts for fiscal years 2001 and 2002, the $504-million increase in AIP grant funds for security projects in fiscal year 2002 contributed to a decrease in the amount of funding available for nonsecurity development projects. For example, as shown in table 4, the greatest reduction occurred in standards, which decreased by $156 million, from almost 30 percent of AIP funding in fiscal year 2001 to 25 percent of AIP funding in fiscal year 2002. The next largest reduction occurred in reconstruction, which decreased by $148 million, from almost 23 percent of AIP funding in fiscal year 2001 to 18 percent in fiscal year 2002. Environment, safety, and capacity projects also decreased by $97 million, $66 million, and $40 million, respectively. Airport Council International also stated that the increase in AIP funding for security has affected other airport development projects. It reported that airports have delayed almost $3 billion in airport capital development, most of which dealt with terminal developments, because of new security requirements. According to FAA Airport Planning and Programming officials, the decreases in AIP funding for the nonsecurity categories cannot be attributed solely to the increase in funding for security. For example, they stated that the decrease in the safety category occurred because the types of projects identified as necessary to comply with Part 139 safety regulations vary from year to year based on a number of factors, including the results of airport certification inspections and individual airports’ equipment retirement policies. The decline in the environment category, which includes noise mitigation, occurred, in part, because the amount of discretionary funds available in fiscal year 2002 was lower than in fiscal year 2001, according to FAA Airport Planning and Programming officials. The noise mitigation and reduction program is required by statute to receive 34 percent of available discretionary funds. The increase in AIP funding for security also affected the distribution of AIP grant funds by airport type. As shown in table 5, in comparison with fiscal year 2001, large and small hub airports received increases in AIP funding, while all other airports experienced decreases in fiscal year 2002. AIP funding to large hub airports increased by almost $111 million, or almost 4 percent of total AIP funding, while funding to small hub airports increased by almost $32 million, or 1 percent, in fiscal year 2002. In contrast, the greatest reductions in AIP funding were among nonhub airports, which decreased from almost $650 million in fiscal year 2001 to almost $510 million in fiscal year 2002, followed by reliever airports, which decreased from $213 million in fiscal year 2001 to almost $164 million in fiscal year 2002. The increase in AIP funding for security projects contributed to the decreases in the amount of funding available for some airports. For example, the increase in AIP funding to large hub airports can be attributed to their proportionally higher security needs. In the case of the decrease in AIP funding to nonhub airports, FAA Airport Planning and Programming officials said that their security needs were much lower than those of large hub airports, accounting for only $44 million, or 8 percent, of the $561 million awarded in fiscal year 2002. The unprecedented $504 million increase in funding for security also affected the LOI payment schedules that FAA planned to issue in fiscal year 2002. FAA deferred three LOI payments that were under consideration prior to September 11, 2001, that totaled $28 million, until fiscal year 2003 or later. Letters of intent are an important source of long- term funding for capacity projects at large airports. These letters represent a nonbinding commitment from FAA to provide multiyear funding to airports beyond the current authorization period. As a result, airports are able to proceed with projects without waiting for future AIP grant funds with the understanding that allowable costs will be reimbursed. The following three airports did not have discretionary funds included in their scheduled LOI payments for fiscal year 2002: Hartsfield International Airport in Atlanta, Georgia, which is the busiest airport in the country, with almost 40 million enplanements per year. It also was one of the most delayed airports in 2000 and 2001, and had $10 million for a runway extension deferred. Cincinnati/Northern Kentucky Airport in Covington, Kentucky, a large airport with 11 million enplanements per year, had $10 million deferred. Indianapolis Airport in Indianapolis, Indiana, a medium-sized airport with almost 4 million enplanements per year, had $7.5 million for a new apron and taxiway deferred. According to FAA Airport Planning and Programming officials, prior to September 11, 2001, the agency had planned to include discretionary funding in fiscal year 2002 for the LOI payments scheduled to these three airports. However, their funding has been deferred until fiscal year 2003 or later because of the need to ensure that adequate funds would be available for security projects. Nontheless, these officials stated that for each of these three airports, the letters of intent were adjusted upward to compensate the airports for the additional carrying costs they incurred because the payments were deferred. Moreover, FAA Airport Planning and Programming officials believe that reduced funding for capacity projects in fiscal year 2002 will not have dramatic consequences in the immediate future because of the current decline in passenger traffic. However, they stated that if capacity projects continue to be underfunded, the congestion and delay problems that plagued the system in 2000 and 2001 could return when the economy recovers. Similarly, FAA officials stated that although a 1-year reduction in AIP funding for reconstruction projects would not have a dramatic impact on runway pavement conditions, a sustained reduction could cause significant deterioration in pavement conditions. Finally, the effect of increasing AIP grant funds for security projects in fiscal years 2003 and beyond cannot currently be estimated with any certainty. Nonetheless, preliminary indications suggest that the total amount of funding needed for security projects in fiscal years 2003 and beyond could be substantially higher than in fiscal year 2002 and previous years. For example, security projects in the 1998 through 2002 NPIAS report to Congress totaled $143 million, while security requests in the current NPIAS, 2001 through 2005, have increased to $1.6 billion. Most of the uncertainty over how much funding is needed is dependent on pending decisions by Congress in conjunction with DOT, TSA, and FAA regarding how TSA plans to fund the terminal modifications needed to install and deploy explosives detection systems and the extent to which AIP grant funds might be needed to help cover these costs. DOT’s Inspector General testified that capital costs associated with deploying the new explosives detection systems alone could exceed $2.3 billion. Representatives of Airport Council International and the American Association of Airport Executives stated that the costs for modifying terminals and baggage conveyor system to accommodate explosives detection systems could be as high as $7 billion. In P. L. 107-206, Congress appropriated $738 million to the Transportation Security Administration for terminal modifications to install explosives detection systems. To determine how the amount of AIP grant funds awarded to airports for security projects before September 11, 2001, compared with funds awarded after September 11, we obtained AIP expenditure data for fiscal years 1982 through 2002 from FAA’s AIP database that showed the amounts of AIP grant funds awarded, the types of projects funded, and the types of airports that received the funds. To identify funding trends, we compared the amount of AIP funding awarded for security-related projects with other airport development projects for fiscal years 1998 through 2002. To develop a more realistic comparison of how much AIP funding has increased over time, we converted nominal dollar figures into constant 2002 dollars, using fiscal year price indexes constructed from gross domestic product price indexes prepared by the U.S. Department of Commerce. We subsequently discussed the data and our findings with FAA Airport Planning and Programming officials. While we verified the accuracy of the AIP expenditure data, we did not independently review the validity of FAA’s AIP database, from which the data were derived. To determine whether the new security projects met legislative and program eligibility requirements, we reviewed title 49 of U.S.C., ATSA, and FAA’s regulations and recently issued program guidance for eligibility requirements. We also interviewed FAA Airport Planning and Programming officials to clarify questions regarding eligibility requirements and to obtain additional information on the distribution of AIP grant funds. To assess how the use of AIP grant funds for security projects affected other airport development projects, we compared the amount of AIP grant funds awarded in fiscal years 2001 and 2002 by development category and airport type. We also interviewed FAA, TSA, and Airport Council International officials and reviewed the preliminary results of the Council’s survey of its members regarding changes to the status of their capital development projects due to the events of September 11, 2001. We provided the Department of Transportation with a copy of the draft report for its review and comment. FAA and TSA officials agreed with information contained in this report and provided some clarifying and technical comments that we made where appropriate. We performed our work from June through October 2002 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 the date of this letter. At that time, we will send copies to interested congressional committees; the Secretary of Transportation; the Administrator, FAA; and the Administrator, TSA. We will also make copies available to others upon request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me or Tammy Conquest at (202) 512-2834 if you have any questions. In addition, Jean Brady, Jay Cherlow, David Hooper, Nancy Lueke, and Richard Swayze made key contributions to this report. Statutory provisions require that AIP funds be apportioned by formula each year to specific airports or types of airports. Such funds are available to airports in the year they are first apportioned and they remain available for the 2 fiscal years immediately following (or 3 fiscal years for nonhub airports). Recipients of apportioned funds are primary airports, cargo service airports, states and insular areas, and Alaska. The paved part of an airport’s airfield immediately adjacent to terminal areas and hangars. Grants that are to be used for preserving or enhancing the capacity, safety, security, and carrying out noise compatibility planning and programs at primary and reliever airports. Airports that, in addition to any other air transportation services that may be available, are served by aircraft providing air transportation only of cargo with a total annual landing weight (the weight of aircraft transporting only cargo) of more than 100 million pounds. Funds apportioned for primary or cargo service airports, states, and Alaskan airports remain available for obligation during the fiscal year for which the amount was apportioned and the 2 fiscal years immediately after that year (or the 3 fiscal years immediately following that year in the case of nonhub airports). When such funds are not used in the fiscal year of the apportionment, they are carried over to following year(s). Airports that handle regularly scheduled commercial airline traffic and have at least 2,500 annual passenger enplanements. Those funds generally remaining after apportionment funds are allocated, but a number of statutory set-asides are established to achieve specified funding minimums. Passenger boardings. Airports that have no scheduled commercial passenger service. Primary airports that have at least 1 percent of all annual enplanements. A letter FAA issues to airports stating that it will reimburse them for the costs associated with an airport development project according to a defined schedule when funds become available. FAA uses this letter when its current obligating authority is not timely or adequate to meet an airport’s planned schedule for a project. Primary airports that have between .25 percent and 1 percent of all annual enplanements. Under this program, a special set-aside of the discretionary portion of AIP is to be used for capacity and/or conversion-related projects at up to 15 current and former military airports. Such airports are eligible to participate in the program for 5 fiscal years and may be extended for 5 more years if approved by the Secretary of Transportation. The airports are designated as a civil commercial service or reliever airport in the national airport system. Approved projects must be able to reduce delays at an existing commercial service airport that has more than 20,000 hours of annual delays in commercial passenger aircraft takeoffs and landings. The set of airports designated by FAA as providing an extensive network of air transportation to all parts of the country. It is comprised of commercial service airports and general aviation airports. AIP projects that reduce airport-related noise or mitigate its effects. Eligible noise projects generally fall into the following categories: land acquisition, noise insulation, runway and taxiway construction (including associated land acquisition, lighting, and navigational aids), noise- monitoring equipment, noise barriers, and miscellaneous. Primary airports that have over 10,000 annual enplanements, but less than .05 percent of all annual enplanements. An obligation occurs when FAA makes an award to an airport sponsor, thereby obligating FAA to fund a project under AIP. Airports that have between 2,500 and 10,000 annual passenger enplanements from scheduled commercial service. Airports that have 10,000 or more annual passenger enplanements from scheduled commercial service. Airports designated by FAA to relieve congestion at a commercial service airport and to provide improved general aviation access to the overall community. Only general aviation airports have been designated as reliever airports. The portion of discretionary funds set-aside designed to achieve specified funding minimums established by Congress. The passenger facility charge program requires large and medium hub airports participating in the program to return a portion of their AIP apportionment funds. Airports charging a passenger facility charge of $3.00 or less must return up to one-half of their AIP apportionment funds, and airports charging over a $3.00 passenger facility charge must return up to 75 percent of their AIP apportionment fund’s. Congress requires most of the returned AIP funds to be put in the small airport fund, which FAA redistributes to small airports. Primary airports that have from .05 percent to .25 percent of all annual enplanements. States assume responsibility for administration of AIP grants at airports classified as other than primary (other commercial service, reliever, and general aviation airports). Each state is responsible for determining which locations within its jurisdiction will receive funds and for ongoing project administration. This program is available only to selected states. AIP grants for the purpose of studying aspects of a regional or statewide airport system. These studies usually include primary and nonprimary airports. Most system planning grants are issued to metropolitan planning organizations or state aviation agencies. Paved sections of an airport’s airfield that connect runways with aprons. | The events of September 11, 2001 created several new challenges for the aviation industry in ensuring the safety and security of the national airport system. Chief among them is deciding to what extent Airport Improvement Program (AIP) grant funds should be used to finance the new security requirements at the nation's airports. Although many in the aviation industry believe that funding security projects has become even more important in the aftermath of September 11, they also recognize the need to continue funding other airport development projects, such as those designed to enhance capacity in the national airport system. During fiscal year 2002, the Federal Aviation Association (FAA) awarded a total of $561 million, 17 percent of the $3.3 billion available for grants, in AIP grant funds to airports for security projects related to the events of September 11, 2001. This amount is the largest amount awarded to airports for security projects in a single year since the program began in 1982. Based on data provided by FAA, all of the security projects funded with AIP grants since the events of September 11, 2001, met the legislative and program eligibility requirements. The projects, which range from access control systems to terminal modifications, qualified for AIP funding either under eligibility requirements in effect before September 11, 2001, or under subsequent statutory and administrative changes. Although FAA Airport Planning and Programming officials stated that they were able to comply with statutory requirements, set-asides, and other program priorities, the $504 million increase in AIP grand funds for new security projects in fiscal year 2002 has affected the amount of funds available for some airport development projects in comparison with the distribution of AIP grand funds awarded in fiscal year 2001. FAA was able to fully fund these projects, in part, because of a record level of carryover apportionments, which totaled $355 million, and the $84 million in grant funds that were recovered from prior-year projects. However, there were reductions in AIP funding awarded to nonsecurity projects in fiscal year 2002, as compared with fiscal year 2001. |
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With the passage of ATSA in November 2001, TSA assumed from the Federal Aviation Administration (FAA) the majority of the responsibility for securing the commercial aviation system. Under ATSA, TSA is responsible for ensuring that all baggage is properly screened for explosives at airports in the United States where screening is required, and for the procurement, installation, and maintenance of explosive detection systems used to screen checked baggage for explosives. ATSA required that TSA screen 100 percent of checked baggage using explosive detection systems by December 31, 2002. As it became apparent that certain airports would not meet the December 2002 deadline to screen 100 percent of checked baggage for explosives, the Homeland Security Act of 2002 in effect extended the deadline to December 31, 2003, for noncompliant airports. Prior to the passage of ATSA in November 2001, only limited screening of checked baggage for explosives occurred. When this screening took place, air carriers had operational responsibility for conducting the screening, while FAA maintained oversight responsibility. With the passage of ATSA, TSA assumed operational responsibility from air carriers for screening checked baggage for explosives. Airport operators and air carriers continued to be responsible for processing and transporting passenger checked baggage from the check-in counter to the airplane. Explosive detection systems include EDS and ETD machines. EDS machines, which cost approximately $1 million each, use computer-aided tomography X-rays adapted from the medical field to automatically recognize the characteristic signatures of threat explosives. By taking the equivalent of hundreds of X-ray pictures of a bag from different angles, the EDS machine examines the objects inside of the baggage to identify characteristic signatures of threat explosives. TSA certified, procured, and deployed EDS machines manufactured by two companies, and has recently certified a smaller, less costly EDS machine, which is currently being operationally tested. ETD machines, which cost approximately $40,000 each, work by detecting vapors and residues of explosives. Because human operators collect samples by rubbing bags with swabs, which are then chemically analyzed in the ETD machines to identify any traces of explosive materials, the use of ETD is more labor-intensive and subject to more human error than the automated process of using EDS machines. ETD is used both for primary, or the initial, screening of checked baggage, as well as secondary screening, which resolves alarms from EDS machines that indicate the possible presence of explosives inside a bag. TSA has certified, procured, and deployed ETD machines from three manufacturers. As we reported in February 2004, to initially deploy EDS and ETD equipment to screen 100 percent of checked baggage for explosives, TSA implemented interim airport lobby solutions and in-line EDS baggage screening systems. The interim lobby solutions involved placing stand- alone EDS and ETD machines in the nation’s airports, most often in airport lobbies or baggage makeup areas where baggage is sorted for loading onto aircraft. For EDS in a stand-alone mode (not integrated with airport’s or air carrier’s baggage conveyor system) and ETD, TSA screeners are responsible for obtaining the passengers’ checked baggage from either the passenger or the air carrier, lifting the bags onto and off of EDS machines or ETD tables, using TSA protocols to appropriately screen the bags, and returning the cleared bags to the air carriers to be loaded onto departing aircraft. In addition to installing stand-alone EDS and ETD machines in airport lobbies and baggage makeup areas, TSA collaborated with some airport operators and air carriers to install integrated in-line EDS baggage screening systems within their baggage conveyor systems. Since its inception in November 2001 through September 2004, TSA used its funds to procure and install about 1,200 EDS machines and about 6,000 ETD machines to screen checked baggage for explosives at over 400 airports and to modify airport facilities to accommodate this equipment. For the most part, TSA deployed EDS machines at larger airports and ETD machines at smaller airports, resulting in primary screening being conducted solely with ETD machines at over 300 airports. Table 1 summarizes the location of EDS and ETD equipment at the nation’s airports by airport category, based on a June 2004 TSA inventory listing. The number of machines shown in table 1 includes EDS and ETD machines procured by both TSA and FAA prior to and during the establishment of TSA. Although TSA made significant progress in fielding this equipment, TSA used most of its fiscal years 2002 through 2004 funds for its checked baggage screening program to design, develop, and deploy interim lobby screening solutions rather than install more permanent in-line EDS baggage screening systems. During our site visits to 22 category X, I, and II airports, we observed that in most cases, TSA used stand-alone EDS machines and ETD machines as the primary method for screening checked baggage. Generally, this equipment was located in airport lobbies and in baggage makeup areas. In addition, in our survey of 155 federal security directors, we asked the directors to estimate, for the 263 airports included in the survey, the approximate percentage of checked baggage that was screened on or around February 29, 2004, using EDS, ETD, or other approved alternatives for screening baggage such as positive passenger bag match or canine searches. As shown in table 2, the directors reported that for 130 large to medium-sized airports in our survey (21, 60, and 49 category X, I, and II airports, respectively), most of the checked baggage was screened using stand-alone EDS or ETD machines. The average percentage of checked baggage reported as screened using EDS machines at airports with partial or full in-line EDS capability ranged from 4 percent for category II airports to 11 percent for category X airports. In addition, the directors reported that ETD machines were used to screen checked baggage 93 to 99 percent of the time at category III and IV airports, respectively. Stand-alone EDS and ETD machines are both labor- and time-intensive to operate since each bag must be physically carried to an EDS or ETD machine for screening and then moved back to the baggage conveyor system prior to being loaded onto an aircraft. With an in-line EDS system, checked baggage is screened within an airport’s baggage conveyor system, eliminating the need for a baggage screener or other personnel to physically transport the baggage from the check-in point to the EDS machine for screening and then to the airport baggage conveyor system. Further, according to TSA officials, ETD machines and stand-alone EDS machines are less efficient in the number of checked bags that can be screened per hour per machine than are EDS machines that are integrated in-line with the airport baggage conveyor systems. As shown in table 3, as of October 2003, TSA estimated that the number of checked bags screened per hour could more than double when EDS machines were placed in-line versus being used in a stand-alone mode. In January 2004, TSA, in support of its planning, budgeting, and acquisition of security screening equipment, reported to the Office of Management and Budget (OMB) that the efficiency benefits of in-line rather than stand- alone EDS are significant, particularly with regard to bags per hour screened and the number of TSA screeners required to operate the equipment. According to TSA officials, at that time, a typical lobby-based screening unit consisting of a stand-alone EDS machine with three ETD machines had a baggage throughput of 376 bags per hour with a staffing requirement of 19 screeners. In contrast, TSA estimated that approximately 425 bags per hour could be screened by in-line EDS machines with a staffing requirement of 4.25 screeners. In order to achieve the higher throughput rates and reduce the number of screener staff needed to operate in-line baggage screening systems, TSA (1) uses a screening procedure known as “on-screen alarm resolution” and (2) networks multiple in-line EDS machines together, referred to as “multiplexing,” so that the computer-generated images of bags from these machines are sent to a central location where TSA screeners can monitor the images of suspect bags centrally from several machines using the on- screen alarm resolution procedure. When an EDS machine alarms, indicating the possibility that explosive material may be contained in the bag, the on-screen alarm resolution procedure allows screeners to examine computer-generated images of the inside of a bag to determine if suspect items identified by the EDS machines are in fact suspicious. If a screener, by viewing these images, is able to determine that the suspect item or items identified by the EDS machine are in fact harmless, the screener is allowed to clear the bag, and it is sent to the airline baggage makeup area for loading onto the aircraft. If the screener is not able to make the determination that the bag does not contain suspicious objects, the bag is sent to a secondary screening room where the bag is further examined by a screener. In secondary screening, the screener opens the bag and examines the suspect item or items, and usually swabs the items to collect a sample for analysis using an ETD machine. TSA also uses this on-screen alarm resolution procedure with stand-alone EDS machines. A TSA official estimated that the on-screen alarm resolution procedure with in-line EDS baggage screening systems will enable TSA to reduce by 40 to 60 percent the number of bags requiring the more labor-intensive secondary screening using ETD machines. In estimating the potential savings in staffing requirements, TSA officials stated that they expect to achieve a 20 to 25 percent savings because of reductions in the number of staff needed to screen bags using ETD to resolve alarms from in-line EDS machines. TSA also reported that because procedures for using stand-alone EDS and ETD machines require screeners to lift heavy baggage onto and off of the machines, the interim lobby screening solutions used by TSA led to significant numbers of on-the-job injuries. In addition, in responding to our survey about 263 airports, numerous federal security directors reported that on-the-job injuries related to lifting heavy baggage onto or off the EDS and ETD machines were a significant concern at the airports for which they were responsible. Specifically, these federal security directors reported that on-the-job injuries caused by lifting heavy bags onto and off of EDS machines were a significant concern at 65 airports, and were a significant concern with the use of ETD machines at 110 airports. To reduce on-the-job injuries, TSA has provided training to screeners on proper lifting procedures. However, according to TSA officials, in-line EDS screening systems would significantly reduce the need for screeners to handle baggage, thus further reducing the number of on-the-job injuries being experienced by TSA baggage screeners. In addition, during our site visits to 22 large and medium-sized airports, several TSA, airport, and airline officials expressed concern regarding the security risks caused by overcrowding due to ETD and stand-alone EDS machines being located in airport lobbies. The location of the equipment resulted in less space available to accommodate passenger movement and caused congestion due to passengers having to wait in lines in public areas to have their checked baggage screened. TSA headquarters officials also reported that large groups of people congregating in crowded airport lobbies increases security risks by creating a potential target for terrorists. The TSA officials noted that crowded airport lobbies have been the scenes of terrorist attacks in the past. For example, in December 1985, four terrorists walked to the El Al ticket counter at Rome’s Leonardo DaVinci Airport and opened fire with assault rifles and grenades, killing 13 and wounding 75. On that same day, three terrorists killed three people and wounded 30 others at Vienna International Airport. Airport operators and TSA are taking actions to install in-line EDS baggage screening systems because of the expected benefits of these systems. Our survey of federal security directors and interviews with airport officials revealed that 86 of 130 category X, I, and II airports (66 percent) included in our survey either have, are planning to have, or are considering installing in-line EDS baggage screening systems throughout or at a portion of their airports. As of July 2004, 12 airports had operational in-line systems airportwide or at a particular terminal or terminals, and an additional 45 airports were actively planning or constructing in-line systems. Our survey of federal security directors further revealed that an additional 33 of the 130 category X, I, and II airports we surveyed were considering developing in-line systems. While in-line EDS baggage screening systems have a number of potential benefits, the total cost to install these systems is unknown, and limited federal resources have been made available to fund these systems on a large-scale basis. In-line baggage screening systems are capital-intensive because they often require significant airport modifications, including terminal reconfigurations, new conveyor belt systems, and electrical upgrades. TSA has not determined the total cost of installing in-line EDS baggage screening systems at airports that it had determined need these systems to maintain compliance with the congressional mandate to screen all checked baggage for explosives using explosive detection systems, or to achieve more efficient and streamlined checked baggage screening operations. However, TSA and airport industry association officials have estimated that the total cost of installing in-line systems is—a rough order- of-magnitude estimate—from $3 billion to more than $5 billion. TSA officials stated that they have not conducted a detailed analysis of the costs required to install in-line EDS systems at airports because most of their efforts have been focused on deploying and maintaining a sufficient number of EDS and ETD machines to screen all checked baggage for explosives. TSA officials further stated that the estimated costs to install in-line baggage screening systems would vary greatly from airport to airport depending on the size of the airport and the extent of airport modifications that would be required to install the system. While we did not independently verify the estimates, officials from the Airports Council International-North America and American Association of Airport Executives estimated that project costs for in-line systems could range from about $2 million for a category III airport to $250 million for a category X airport. TSA and airport operators are relying on LOI agreements as their principal method for funding the modification of airport facilities to incorporate in- line baggage screening systems. As of January 2005, TSA had issued eight LOIs to reimburse nine airports for the installation of in-line EDS baggage screening systems for a total cost of $957.1 million to the federal government over 4 years. In addition, TSA officials stated that as of July 2004, they had identified 27 additional airports that they believe would benefit from receiving LOIs for in-line systems because such systems are needed to screen an increasing number of bags due to current or projected growth in passenger traffic. TSA officials stated that without such systems, these airports would not remain in compliance with the congressional mandate to screen all checked baggage using EDS and ETD. However, because TSA would not identify these 27 airports, we were unable to determine whether these airports are among the 45 airports we identified as in the process of planning or constructing in-line systems. TSA officials stated that they also use other transaction agreements as an administrative vehicle to directly fund, with no long-term commitments, airport operators for smaller in-line airport modification projects. Under these agreements, as implemented by TSA, the airport operator also provides a portion of the funding required for the modification. As of September 30, 2004, TSA had negotiated arrangements with eight airports to fund small permanent in-line projects or portions of large permanent in- line projects using other transaction agreements. These other transaction agreements range from about $640,000 to help fund the conceptual design of an in-line system for one terminal at the Dallas Fort-Worth airport to $37.5 million to help fund the design and construction of in-line systems and modification of the baggage handling systems for two terminals at the Chicago O’Hare International Airport. TSA officials stated that they would continue to use other transaction agreements to help fund smaller in-line projects. Airport operators also used the FAA’s Airport Improvement Program— grants to maintain safe and efficient airports—in fiscal years 2002 and 2003 to help fund facility modifications needed to accommodate installing in-line systems. Twenty-eight of 53 airports that reported either having constructed or planning to construct in-line systems relied on the Airport Improvement Program as their sole source of federal funding. Airport officials at over half of the 45 airports that we identified are in the process of planning or constructing in-line systems stated that they will require federal funding in order to complete the planning and construction of these in-line systems. TSA officials also reported that additional airports will require in-line systems to maintain compliance with the congressional mandate to screen 100 percent of checked baggage for explosives. Despite this reported need, TSA officials stated that they do not have sufficient resources in their budget to fund additional LOIs beyond the eight LOIs that have already been issued. The Vision 100—Century of Aviation Reauthorization Act (Vision 100) provided for the creation of the Aviation Security Capital Fund to help pay for, among other things, placing EDS machines in line with airport baggage handling systems. However, according to OMB officials, the President’s fiscal year 2005 budget request, which included the Aviation Security Capital Fund’s mandatory appropriation of $250 million, only supported continued funding for the eight LOIs that have already been issued and did not provide resources to support new LOIs for funding the installation of in-line systems at additional airports. Further, while the fiscal year 2005 Department of Homeland Security (DHS) Appropriations Act provided $45 million for installing explosive detection systems in addition to the $250 million from the Aviation Security Capital Fund, Congress directed, in the accompanying conference report, that the $45 million be used to assist in the continued funding of the existing eight LOIs. Further, the President’s fiscal year 2006 budget request for TSA provides approximately $240.5 million for the continued funding of the eight existing LOIs and does not allocate any funding for new LOI agreements for in-line system integration activities. The fiscal year 2006 Department of Homeland Security appropriations bill passed by the House on May 17, 2005, and the appropriations bill pending before the Senate include, among other things $75 million and $14 million for installation of checked baggage explosive detection systems, respectively. The committee reports accompanying the House and Senate appropriations bills state that the amounts included for installation are in addition to the $250 million mandatory appropriation of the Aviation Security Capital Fund but do not earmark these funds specifically for the installation of in-line EDS systems. In addition, perspectives differ regarding the appropriate role of the federal government, airport operators, and air carriers in funding these capital-intensive in-line EDS systems. Airport operators and TSA have shared in the total costs—25 percent and 75 percent respectively under LOI agreements, which have been TSA’s primary method for funding in- line EDS systems. A 75 percent federal cost-share will apply to any project under an LOI for fiscal year 2005. Further, the President’s fiscal year 2006 budget request for TSA requests to maintain the 75 percent federal government cost share for projects funded by LOIs at large and medium airports. For fiscal year 2006 appropriations for DHS, both the Senate, in its pending appropriations bill, and the House, in its committee report, also propose to maintain the 75 percent federal cost share for LOIs. However, in testimony before Congress, an aviation industry official expressed a different perspective regarding the cost sharing between the federal government and the aviation industry for installing in-line checked baggage screening systems. Testifying in July 2004, the official said that airports contend that the cost of installing in-line systems should be met entirely by the federal government, given its direct responsibility for screening checked baggage, as established by law, in light of the national security imperative for doing so, and because of the economic efficiencies of this strategy. Although the official stated that airports have agreed to provide a local match of 10 percent of the cost of installing in-line systems at medium and large airports, as stipulated by Vision 100, he expressed opposition to the administration’s proposal, which was subsequently adopted by Congress for fiscal year 2005, to reestablish the airport’s cost- share at 25 percent. In July 2004, the National Commission on Terrorist Attacks upon the United States (the 9/11 Commission) also addressed the issue of the federal government/airport cost-share for installing EDS in-line baggage screening systems. Specifically, the commission recommended that TSA expedite the installation of in-line systems and that the aviation industry should pay its fair share of the costs associated with installing these systems, since the industry will derive many benefits from the systems. Although the 9/11 Commission recommended that the aviation industry should pay its fair share of the costs of installing in-line systems, the commission did not report what it believed the fair share to be. At the time of our March 2005 report, TSA has not completed a systematic, prospective analysis of individual airports or groups of airports to determine at which airports installing in-line EDS systems would be cost-effective in terms of reducing long-term screening costs for the government and would improve security. Such an analysis would enable TSA to determine at which airports it would be most beneficial to invest limited federal resources for in-line systems rather than continue to rely on the stand-alone EDS and ETD machines to screen checked baggage for explosives, and it would be consistent with best practices for preparing benefit-cost analysis of government programs or projects called for by OMB Circular A-94. TSA officials stated that they had not conducted the analyses related to the installation of in-line systems at individual airports or groups of airports because they have used available staff and funding to ensure all airports have a sufficient number of EDS or ETD machines to meet the congressional mandate to screen all checked baggage with explosive detection systems. During the course of our review, in September 2004, TSA contracted for services to develop methodologies and criteria for assessing the effectiveness and suitability of airport screening solutions requiring significant capital investment, such as those projects associated with the LOI program. In July 2005, TSA officials stated that TSA and DHS are reviewing a draft report from the study. According to these officials, the study will provide TSA with a strategic plan for its checked baggage screening program, including the best screening solution for airports processing most of the airlines’ baggage volume, and the capital costs and staffing requirements for each solution. Although TSA had not conducted a systematic analysis of cost savings and other benefits that could be derived from the installation of in-line baggage screening systems, TSA’s limited, retrospective cost-benefit analysis of in- line projects at the nine airports with signed LOI agreements found that significant savings and other benefits may be achieved through the installation of these systems. This analysis was conducted in May 2004— after the eight LOI agreements for the nine airports were signed in July and September 2003 and February 2004—to estimate potential future cost savings and other benefits that could be achieved from installing in-line systems instead of using stand-alone EDS systems. TSA estimated that in- line baggage screening systems at these airports would save the federal government about $1 billion compared with stand-alone EDS systems and that TSA would recover its initial investment in a little over 1 year. TSA’s analysis also provided data to estimate the cost savings for each airport over the 7-year period. According to TSA’s data, federal cost savings varied from about $50 million to over $250 million at eight of the nine airports, while at one airport, there was an estimated $90 million loss. According to TSA’s analysis of the nine LOI airports, in-line cost savings critically depend on how much an airport’s facilities have to be modified to accommodate the in-line configuration. Savings also depend on TSA’s costs to buy, install, and network the EDS machines; subsequent maintenance cost; and the number of screeners needed to operate the machines in-line instead of using stand-alone EDS systems. In its analysis, TSA also found that a key factor driving many of these costs is throughput—how many bags an in-line EDS system can screen per hour compared with the rate for a stand-alone system. TSA used this factor to determine how many stand-alone EDS machines could be replaced by a single in-line EDS machine while achieving the same throughput. According to TSA’s analysis, in-line EDS would reduce by 78 percent the number of TSA baggage screeners and supervisors required to screen checked baggage at these nine airports, from 6,645 to 1,477 screeners and supervisors. However, the actual number of TSA screeners and supervisor positions that could be eliminated would be dependent on the individual design and operating conditions at each airport. TSA also reported that aside from increased efficiency and lower overall costs, there were a number of qualitative benefits that in-line systems would provide over stand-alone systems, including: fewer on-the-job injuries, since there is less lifting of baggage when EDS machines are integrated into the airport’s baggage conveyor system; less lobby disruption because the stand-alone EDS and ETD machines would be removed from airport lobbies; and unbroken chain of custody of baggage because in-line systems are more secure, since the baggage handling is performed away from passengers. TSA’s retrospective analysis of these nine airports indicates the potential for cost savings through the installation of in-line EDS baggage screening systems at other airports, and it provides insights about key factors likely to influence potential cost savings from using in-line systems at other airports. This analysis also indicates the merit of conducting prospective analyses of other airports to provide information for future federal government funding decisions as required by the OMB guidance on cost- benefit analyses. This guidance describes best practices for preparing benefit-cost analysis of government programs or projects, one of which involves analyzing uncertainty. Given the diversity of airport designs and operations, TSA’s analysis could be modified to account for uncertainties in the values of some of the key factors, such as how much it will cost to modify an airport to install an in-line system. Analyzing uncertainty in this manner is consistent with OMB guidance. TSA also has not systematically analyzed which airports could benefit from the implementation of additional stand-alone EDS systems in lieu of labor-intensive ETD systems at more than 300 airports that rely on ETD machines, and where in-line EDS systems may not be appropriate or cost- effective. More specifically, TSA has not prepared a plan that prioritizes which airports should receive EDS machines (including machines that become surplus because of the installation of in-line systems) to balance short-term installation costs with future operational savings. Furthermore, TSA has not yet determined the potential long-term operating cost savings and the short-term costs of installing the systems, which are important factors to consider in conducting analyses to determine whether airports would benefit from the installation of EDS machines. TSA officials said that they had not yet had the opportunity to develop such analyses or plans, and they did not believe that such an exercise would necessarily be an efficient use of their resources, given the fluidity of baggage screening at various airports. There is potential for TSA to benefit from the introduction of smaller stand-alone EDS machines—in terms of labor savings and added efficiencies—at some of the more than 300 airports where TSA relies on the use of ETD machines to screen checked baggage. Stand-alone EDS machines are able to screen a greater number of bags in an hour than the ETD used for primary screening while lessening reliance on screeners during the screening process. For example, TSA’s analysis showed that an ETD machine can screen 36 bags per hour, while the stand-alone EDS machines can screen 120 to 180 bags per hour. As a result, it would take three to five ETD machines to screen the same number of bags that one stand-alone EDS machine could process. In addition, greater use of the stand-alone EDS machines could reduce staffing requirements. For example, one stand-alone EDS machine would potentially require 6 to 14 fewer screeners than would be required to screen the same number of bags at a screening station with three to five ETD machines. This calculation is based on TSA estimates that 4.1 screeners are required to support each primary screening ETD machine, while one stand-alone EDS machine requires 6.75 screeners—including staff needed to operate ETD machines required to provide secondary screening. Without a plan for installing in-line EDS baggage screening systems, and for using additional stand-alone EDS systems in place of ETD machines at the nation’s airports, it is unclear how TSA will make use of new technologies for screening checked baggage for explosives, such as the smaller and faster EDS machines that may become available through TSA’s research and development programs. For example, TSA is working with private sector firms to enhance existing EDS systems and develop new screening technologies through its research and development (R&D) efforts. As part of these efforts, in fiscal year 2003, TSA spent almost $2.4 million to develop a new computer-aided tomography explosives detection system that is smaller and lighter than systems currently deployed in airport lobbies. The new system is intended to replace systems currently in use, including larger and heavier EDS machines and ETD equipment. The smaller size of the system creates opportunities for TSA to transfer screening operations to other locations such as airport check-in counters. TSA certified this equipment in December 2004 and is operationally testing the machine at three airports to evaluate its operational efficiency. GAO, Transportation Security R&D: TSA and DHS Are Researching and Developing Technologies, but Need to Improve R&D Management, GAO-04-890 (Washington, D.C.: Sept. 30, 2004). GAO, Homeland Security: Key Elements of a Risk Management Approach, GAO-02-150T (Washington, D.C.: Oct. 12, 2001). development, the agency had not estimated deployment dates, without which managers do not have information needed to plan, budget, and track the progress of projects. We also found that TSA and DHS did not have adequate databases to monitor and manage the spending of the hundreds of millions of dollars that Congress had appropriated for R&D. In moving forward, it will be important for DHS to resolve the these challenges to help ensure that limited R&D recourses are focused on the areas of greatest need. TSA has made substantial progress in installing EDS and ETD systems at the nation’s airports—mainly as part of interim lobby screening solutions—to provide the capability to screen all checked baggage for explosives, as mandated by Congress. With the objective of initially fielding this equipment largely accomplished, TSA needs to shift its focus from equipping airports with interim screening solutions to systematically planning for the more optimal deployment of checked baggage screening systems. Part of such planning should include analyzing which airports should receive federal support for in-line EDS baggage screening systems based on cost savings that could be achieved from more effective and efficient baggage screening operations and on other factors, including enhanced security. Also, for airports, where in-line systems may not be economically justified because of high investment costs, a cost effectiveness analysis could be used to determine the benefits of additional stand-alone EDS machines to screen checked baggage in place of the more labor-intensive ETD machines that are currently being used at the more than 300 airports. In addition, TSA should consider the costs and benefits of the new technologies being developed through its research and development efforts, which could provide smaller EDS machines that have the potential to reduce the costs associated with installing in-line EDS baggage screening systems or to replace ETD machines currently used as the primary method for screening. An analysis of airport baggage screening needs would also help enable TSA to determine whether expected reduced staffing costs, higher baggage throughput, and increased security would justify the significant up-front investment required to install in-line baggage screening. TSA’s retrospective analysis of nine airports installing in-line baggage screening systems with LOI funds, while limited, demonstrated that cost savings could be achieved through reduced staffing requirements for screeners and increased baggage throughput. In fact, the analysis showed that using in-line systems instead of stand-alone systems at these nine airports would save the federal government about $1 billion over 7 years and that TSA’s initial investment would be recovered in a little over 1 year. However, this analysis also showed that a cost savings may not be achieved for all airports. In considering airports for in-line baggage screening systems or the continued use of stand-alone EDS and ETD machines, a systematic analysis of the costs and benefits of these systems would help TSA justify the appropriate screening for a particular airport, and such planning would help support funding requests by demonstrating enhanced security, improved operational efficiencies, and cost savings to both TSA and the affected airport. To assist TSA in planning for the optimal deployment of checked baggage screening systems, we recommended in our March 2005 report that TSA systematically evaluate baggage screening needs at airports, including the costs and benefits of installing in-line baggage screening systems at airports that do not yet have in-line systems installed. DHS agreed with our recommendation, stating that TSA has initiated an analysis of deploying in- line EDS machines and is in the process of formulating criteria to identify those airports that would benefit from an in-line EDS system. DHS also stated that TSA has begun conducting an analysis of the airports that rely heavily on ETD machines as the primary checked baggage screening technology to identify those airports that would benefit from augmenting ETDs with stand-alone EDS equipment. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee have. For further information on this testimony, please contact Cathleen A. Berrick at (202) 512-3404. Individuals making key contributions to this testimony included Charles Bausell, Amy Bernstein, Kevin Copping, Christine Fossett, David Hooper, Noel Lance, Thomas Lombardi, and Alper Tunca. 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. | Mandated to screen all checked baggage using explosive detection systems at airports by December 31, 2003, the Transportation Security Administration (TSA) deployed two types of screening equipment: explosives detection systems (EDS), which use computer-aided tomography X-rays to recognize the characteristics of explosives, and explosives trace detection (ETD) systems, which use chemical analysis to detect traces of explosive material vapors or residues. This testimony discusses (1) TSA's deployment of EDS and ETD systems and the impact of initially deploying these systems, (2) TSA and airport actions to install EDS machines in-line with baggage conveyor systems, and the federal resources made available for this purpose, and (3) actions taken by TSA to optimally deploy checked baggage screening systems. TSA has made substantial progress in installing EDS and ETD systems at the nation's more than 400 airports to provide the capability to screen all checked baggage using explosive detection systems, as mandated by Congress. However, in initially deploying EDS and ETD equipment, TSA placed stand-alone ETD and the minivan-sized EDS machines--mainly in airport lobbies--that were not integrated in-line with airport baggage conveyor systems. TSA officials stated that the agency's ability to initially install in-line systems was limited because of the high costs and the time required for airport modifications. These interim lobby solutions resulted in operational inefficiencies, including requiring a greater number of screeners, as compared with using EDS machines in-line with baggage conveyor systems. TSA and airport operators are taking actions to install in-line baggage screening systems to streamline airport and TSA operations, reduce screening costs, and enhance security. Eighty-six of the 130 airports we surveyed either have, are planning to have, or are considering installing full or partial in-line systems. However, resources have not been made available to fund these capital-intensive systems on a large-scale basis. Also, the overall costs of installing in-line baggage screening systems at each airport are unknown, the availability of future federal funding is uncertain, and perspectives differ regarding the appropriate role of the federal government, airport operators, and air carriers in funding these systems. TSA has not conducted a systematic, prospective analysis to determine at which airports it could achieve long-term savings and enhanced efficiencies and security by installing in-line systems or, where in-line systems may not be economically justified, by making greater use of stand-alone EDS systems rather than relying on the labor-intensive and less efficient ETD screening process. However, at nine airports where TSA has agreed to help fund the installation of in-line baggage screening systems, TSA conducted a retrospective cost-benefit analysis which showed that these in-line systems could save the federal government about $1 billion over 7 years. TSA further estimated that it could recover its initial investment in the in-line systems at these airports in a little over 1 year. |
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The Secretary of the Interior is responsible for administering the government's trust responsibilities to tribes and Indians, including managing about $3 billion in Indian trust funds and administering about 54 million acres of Indian land. Management of the Indian trust funds and assets has long been characterized by inadequate accounting and information systems; untrained and inexperienced staff; backlogs in appraisals, ownership determinations, and recordkeeping; the lack of a master lease file and an accounts receivable system; inadequate written policies and procedures; and poor internal controls. To address these long-standing problems, the Congress created the Office of the Special Trustee for American Indians (OST) and required the Special Trustee to develop a comprehensive strategic plan for trust fund management. In April 1997, the Special Trustee submitted a strategic plan to the Congress, but Interior did not fully support the plan. At this Committee’s July 1997 hearing on the Special Trustee’s strategic plan, we testified on the results of our analysis of the strategic plan and provided our assessment of needed actions related to implementation issues that we had identified during that analysis. On August 22, 1997, the Secretary of the Interior indicated that he and the Special Trustee for American Indians had agreed on the problems that needed to be solved immediately and called for the development of a high level implementation plan within 60 days. The High Level Plan was issued about 11 months later on July 31, 1998. In developing the High Level Plan, Interior did not prepare a documented analysis of its mission-related and administrative processes. Rather, it took the problems identified in the Secretary’s memorandum one by one and proposed separate projects to address each. Later, at the Secretary’s direction, an additional project was added. The 13 separate projects are shown in table 1. The projects are directed at improving systems, enhancing the accuracy and completeness of Interior’s data regarding the ownership and lease of Indian lands, and correcting deficiencies with respect to records management, training, policy and procedures, and internal controls within 3 years. For each project, the plan assigns management responsibility and identifies some supporting tasks, critical milestones, and resource estimates. Some of the projects are already being implemented. For example, a new Trust Funds Accounting System has already been deployed at several Interior sites. We did not assess the status or effectiveness of this project or other individual projects. Instead, we focused on whether Interior has assurance that the information technology aspects of the plan, which are essential to the success of the majority of the projects and therefore the overall plan, were properly planned and executed. Interior estimates that it will spend $147.4 million from fiscal years 1997 through 2000 on this effort. About $60 million of this amount is to be spent on developing and improving information systems, $54 million on data cleanup, $17 million on records management, $8 million on training, and $8 million on all other activities. The objectives of our review were to assess whether Interior has reasonable assurance that (1) the High Level Plan provides an effective solution for addressing long-standing problems with Interior’s Indian trust responsibilities and (2) its acquisition of a new asset and land records management service will cost effectively satisfy trust management needs. To determine whether Interior has reasonable assurance that the High Level Plan provides an effective solution for addressing Interior’s long- standing problems with its Indian trust responsibilities, we reviewed the Clinger-Cohen Act of 1996 and current technical literature as a basis for assessing the information technology aspects of the High-Level Plan; reviewed the process that was used to develop the plan; reviewed the Strategic Plan that was produced by Interior’s Special Trustee for American Indians; met with senior Interior officials responsible for developing the plan, including Interior’s Chief Information Officer, Chief Financial Officer, Deputy Special Trustee, and the Interior contractor who assisted in the development of the plan; and analyzed the High Level Plan for internal consistency and compliance with generally accepted best practices. We focused on the information technology aspects of the plan because they are essential to its success. To determine whether Interior has reasonable assurance that its acquisition of a new asset and land records management service will cost effectively satisfy trust management needs, we reviewed the Clinger-Cohen Act of 1996; federal policy governing acquisition efforts including Office of Management and Budget guidance and Federal Information Processing Standards; and other current literature to determine the statutory and administrative requirements and best practices that should be used in acquiring software-intensive services such as the asset and land records service; reviewed Interior documents relating to this acquisition, including the Request for Information, vendor responses, and the Request for Proposals. We did not review the selection process or documents produced as part of this process subsequent to the issuance of the Request for Proposals; and met with senior Interior officials responsible for acquiring the service, including Interior’s Chief Information Officer, Chief Financial Officer, Special Trustee, and the Interior contractor who assisted in the acquisition of the new service. We performed our work at the Department of the Interior, Office of the Special Trustee, and Bureau of Indian Affairs in Washington, D.C., from July 1998 through November 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of the Interior. On March 19, 1999, the Assistant Secretary for Policy, Management and Budget provided us with written comments, which are discussed in the “Agency Comments and Our Evaluation” section of this report and reprinted in appendix I. Despite the fact that Interior plans for its components to independently improve information systems or acquire information management services, at a cost of about $60 million, it has not yet defined an integrated architecture for Indian trust operations. The Clinger-Cohen Act requires the Chief Information Officer to develop and maintain an information systems architecture. Without a target architecture, agencies are at risk of building and buying systems that are duplicative, incompatible, and unnecessarily costly to maintain and interface. In 1992, we issued a report defining a comprehensive framework for designing and developing system architectures. This framework specifies (1) the logical or business component of an architecture which serves as the basis for (2) the technical or systems component. The logical component ensures that the systems meet the business needs of the organization. It provides a high-level description of the organization’s mission and target concept of operations; the business functions being performed and the relationships among functions; the information needed to perform the functions; the users and locations of the functions and information; and the information systems needed to support the agency’s business needs. The technical component ensures that the systems are interoperable, function together efficiently and are cost-effective over their life cycles. The technical component details specific standards and approaches that will be used to build systems, including hardware, software, communications, data management, security, and performance characteristics. Experience shows that without a target architecture, agencies risk building and buying systems that are duplicative, incompatible, and unnecessarily costly to maintain and interface. For example: In February 1997, we reported that the Federal Aviation Administration’s (FAA) lack of a complete architecture resulted in incompatibilities among its air traffic control systems that (1) required higher-than-need-be system development, integration, and maintenance costs and (2) reduced overall system performance. Without having architecturally defined requirements and standards governing information and data structures and communications, FAA was forced to spend an additional $38 million to acquire a system dedicated to overcoming incompatibilities between systems. In May 1998, we reported that the Customs Service’s architecture was incomplete and ineffectively enforced, and that, according to a contractor, Customs components had developed and implemented incompatible systems, which increased modernization risks and implementation costs. In July 1997, we reported that because it lacked a system architecture, the Department of Education had made limited progress in integrating its National Student Loan Data System with other student financial aid databases. Moreover, without an architecture, the department could not correct long-standing problems resulting from a lack of integration across its student financial aid systems. In July 1995, we reported that because its architecture was incomplete and did not define the interfaces and standards needed to ensure the successful integration of its Tax System Modernization projects, IRS was at increased risk of developing unreliable systems that would not work together effectively and would require costly redesign. Without an architecture for Indian trust operations, Interior has no assurance that the 13 projects delineated in the High Level Plan and the systems supporting them are cost-effective and are not duplicative, inconsistent, and incompatible. In fact, in reviewing the High Level Plan, we found indications that Interior was already encountering these problems. For example: Three weeks after the plan was issued, Interior recognized that TAAMS and LRIS were so closely related that they should be merged into a single project. The BIA Probate Backlog project and the OHA Probate Backlog project also appear to be closely related; however, Interior did not thoroughly analyze the relationship between these two efforts in formulating the High Level Plan and did not determine whether, like TAAMS and LRIS, they should be combined. The High Level Plan shows that the BIA Probate Backlog and the OHA projects depend on the TAAMS project to provide them with a case tracking system by the end of 1998. This system is to manage the flow of probate cases through BIA and OHA and enable management to identify resources needed to eliminate the backlog. However, in describing TAAMS, the High Level Plan does not mention the case management system. Further, according to Interior officials, development of the case tracking system under TAAMS is not scheduled to be funded until fiscal year 2000, and delivery is not planned before September 2000. Although Interior has already initiated several projects to “clean” data that will be used by TAAMS, it has not yet defined the data elements that this project needs. Until Interior defines the logical characteristics of its business environment and uses them to establish technical standards and approaches, it will remain at risk of investing in projects that are redundant and incompatible, and do not satisfy Indian trust management requirements cost effectively. In undertaking its effort to acquire a new asset and land record management service, Interior failed to follow a sound process for ensuring that the most cost-effective technical alternative was selected and reducing acquisition risks. Specifically, Interior did not adequately define important service requirements or sufficiently analyze technical alternatives. Further, Interior did not develop an overall risk management plan, require the contractor to demonstrate its system could work with Interior’s data and systems, or establish realistic project time frames. Interior intended to acquire TAAMS as a commercial-off-the-shelf (COTS) system. With this goal in mind, in May 1998, Interior issued a Request for Information. The responses from vendors were evaluated using a 15- category form. After this survey was completed, Interior decided to combine the TAAMS project with the LRIS project and to obtain the needed functionality of these combined projects by acquiring a trust asset information management service using a COTS system. Under this approach, a contractor would manage Interior-provided land and trust account data in a contractor-owned and maintained data center while Interior would perform its trust management functions by remotely accessing contractor-provided applications that run in the data center. To help ensure successful acquisition of a software-intensive service, information technology experts recommend that organizations establish and maintain a common and unambiguous definition of requirements (e.g., function, performance, help desk operations, data characteristics, security, etc.) among the acquisition team, the service users, and the contractor. The requirements must be consistent with one another, verifiable, and traceable to higher level business or functional requirements. Poorly defined, vague or conflicting requirements can result in a service which does not meet business needs or which cannot be delivered on schedule and within budget. Interior did not follow a sound process for defining requirements. First, Interior did not define high-level functional requirements for projects contained in the High Level Plan to help guide the requirements development process for each of the individual projects. For this effort, such high-level functional requirements might have included the following. The contractor’s system will contain the necessary data to support the financial information needs of the probate function. Records management policies and procedures will be consistent with departmental guidelines. Sensitive but unclassified data, such as data covered by the Privacy Act, will be encrypted in accordance with Federal Information Processing Standards whenever they are transmitted outside of the facility that generated the data. Data elements must conform to applicable departmental naming conventions and formats specified in the data dictionary. Automated records must be maintained in a form that ensures land ownership records can be traced back to the original source of the ownership. By not defining high-level functional requirements, Interior lacks assurance that the projects it develops and acquires will meet its business needs. Second, while Interior specified general service requirements in its request for proposal such as the need for the contractor to (1) administer all databases, (2) perform maintenance operations outside BIA’s normal working hours, (3) provide configuration management of data center hardware and software, and (4) perform daily, weekly, and monthly backup of operational data and archiving, it did not clearly specify all of BIA’s requirements, including its functional, security, and data management requirements. For example: While Interior stated that the system “shall include safeguards against conflicts of interest, abuse, or self-dealing,” it did not define these terms. A definition of these terms in the context of Indian trust operations is necessary to design and determine the adequacy of proposed system safeguards and approaches. In discussing system security, Interior (1) specified an inappropriate technology for encrypting data, (2) did not specify how long system passwords should be, and (3) did not require password verification features. Interior did not define key data management requirements, including what data elements were needed to meet Interior’s information requirements and whether existing systems contained the necessary data elements. The Clinger-Cohen Act requires agencies to establish a process to assess the value and risks of information technology investments, including consideration of quantitatively expressed projected net, risk-adjusted return-on-investment, and specific quantitative and qualitative criteria for comparing and prioritizing alternative information technology projects. Only by comparing the costs, benefits, and risks of a full range of technical options can agencies ensure that the best approaches are selected. Interior did not thoroughly analyze technical alternatives before choosing a vendor to provide the asset and land records management service. First, Interior did not assess the desirability of satisfying its requirements by (1) modifying existing legacy systems, (2) acquiring a COTS product and using existing Interior infrastructure resources, (3) building a system that would provide the necessary capability, or (4) acquiring a service. Second, in surveying the availability of COTS products, Interior did not perform a gap analysis which would systematically and quantitatively compare and contrast these products against Interior’s requirements based on functional, technical, and cost differences. Specifically, although Interior concluded based on the results of its Request for Information that none of the COTS products available from responding vendors would meet all its requirements, Interior did not determine, for each COTS product, which requirements could not be satisfied and how difficult and expensive it would be to make the needed modifications. For example, Interior did not determine whether all needed data elements could be represented conveniently and manipulated effectively by each COTS product. Third, in acquiring a service, Interior did not consider how its information, once it had been loaded into a contractor’s system, would be retrieved by Interior for subsequent use when the contract was terminated. Because Interior did not compare the costs and benefits of a full range of technical options, it has no assurance that it selected the most cost-effective alternative. According to information technology experts, a key practice associated with successful information technology service acquisitions is to formally identify risks as early as possible and adjust the acquisition to mitigate those risks. An effective risk management process, among other things, includes (1) developing an acquisition risk management plan to document the procedures that will be used to manage risk throughout the project, (2) conducting risk management activities in accordance with the plan (e.g., identifying risks, taking mitigation actions, and tracking actions to completion), and (3) preparing realistic cost and schedule estimates for the services being acquired. In acquiring its new TAAMS service, Interior did not carry out critical risk management steps. First, Interior did not develop a risk management plan. Without this plan, Interior has no disciplined means to predict and mitigate risks, such as the risk that the service will not (1) meet performance and business requirements, (2) work with Interior’s systems, and/or (3) be delivered on schedule and within budget. Second, in structuring a capabilities demonstration for the contractor’s system, Interior did not require the contractor to use Interior-provided data. Ensuring that the contractor’s system can work with data unique to Interior is important since some data elements, such as fractionated ownership interests, are not commonly used in the private sector. Third, in structuring the capabilities demonstration, Interior did not require the contractor to demonstrate that its system could interface with Interior’s Trust Fund Accounting System and a Mineral Management Service system. As a result, Interior will not know whether the contractor’s system can interoperate with its legacy systems. Fourth, Interior did not prepare a realistic project management schedule. Organizations following sound software acquisition practices would typically (1) identify the specific activities that must be performed to produce the various project deliverables, (2) identify and document dependencies, (3) estimate the amount of time needed to complete the activities, and (4) analyze the activity sequences, durations, and resource requirements. By contrast, Interior used the Secretary’s stated expectation that all Indian trust fund-related improvements should occur within a 3- year period beginning in 1998 as a starting point for developing the TAAMS project schedule. Because it did not establish clear requirements and did not take critical steps to manage risk effectively, Interior has no assurance that the new asset and land records management service will meet its specific performance, security, and data management needs or that the service can be delivered on schedule and within budget. Interior cannot realistically expect to develop compatible and optimal information systems without first developing an information systems architecture for Indian trust operations. If it proceeds to implement the projects outlined in the High Level Plan without taking these steps, individual improvement efforts such as the initiative to acquire a service for managing assets and land records may well incur cost and schedule overruns and fail to satisfy Interior’s trust management needs. To ensure that Interior’s information systems are compatible and effectively satisfy Interior’s business needs, we recommend that, before making major investments in information technology systems to support trust operations, the Secretary direct the Chief Information Officer to develop an information systems architecture for Indian trust operations that (1) provides a high-level description of Interior’s mission and target concept of operations, (2) defines the business functions to be performed and the relationships among functions; the information needed to perform the functions; the users and locations of the functions and information; and the information systems needed to support the department’s business needs, (3) identifies the improvement projects to be undertaken, specifying what they will do, how they are interrelated, what data they will exchange, and what their relative priorities are, and (4) details specific standards and approaches that will be used to build or acquire systems, including hardware, software, communications, data management, security, and performance characteristics. To reduce the risks we identified with the effort to acquire a service for managing assets and land records, we recommend that the Secretary of the Interior direct the Chief Information Officer to (1) clearly define and validate functional requirements, security requirements, and data management requirements, (2) develop and implement an effective risk management plan, and (3) ensure that all project decisions are based on objective data and demonstrated project accomplishments, and are not schedule driven. In its written comments on a draft of this report, Interior states that our oversight provides a valuable perspective and allows Interior to benefit from our experience in dealing with similar issues at other agencies. However, Interior disagrees with the report’s conclusions and does not indicate whether it will implement the recommendations. In disagreeing with the report’s first conclusion (that Interior does not have reasonable assurance that its High Level Plan for improving Indian trust operations provides an effective solution for addressing long-standing management weaknesses), Interior states that although it recognizes the importance of a formal architecture and does not yet have one, the “lack of a formal architecture is not a significant impediment to success in this case, given the use of proven COTS products.” Interior also expresses confidence because this effort is smaller than the modernization efforts that have failed at other agencies like FAA. This position is not valid. The decision to use COTS products does not compensate for the lack of an integrated information system architecture for Indian trust operations. Such an architecture would have identified and preferably reengineered the business functions of trust operations, and then mapped these into information systems to support the business functions. Just choosing COTS products from the marketplace does not accomplish the same purpose. In fact, the close relationship between business functions and IT is the reason we focus on all 13 projects in the High Level Plan as a whole, even though, as Interior points out in its comments, only 4 of the projects are information technology systems projects. Further, small efforts, like IRS’ $17 million Cyberfile project, as well as large ones, like FAA’s modernization, have failed due to poor program management, including lack of an architecture. With an estimated cost of $60 million for IT systems and an additional $54 million for data cleanup, the information systems supporting the 13 projects will have to be effectively managed if they are to succeed. Interior bases its decision to proceed with its IT acquisitions without a formal architecture (and without an estimated date for completing one) on the “pressing need for more responsive Indian trust systems.” However, moving to implement complex systems before developing an architecture does not expedite solutions. Instead, it greatly increases the chance of building duplicative systems, introducing potential integration problems, and perpetuating inefficient and overlapping business processes that currently exist in Indian trust operations. This is especially true in the case of TAAMS as Interior does not yet know whether the COTS product can effectively work with other Interior systems or with Interior-provided data. Also, as Interior notes in its comments, it consolidated TAAMS and LRIS from two separate projects into one because the “consolidation eliminated duplication within each system (80% of the data is shared), made better use of limited resources, and eliminated potential integration issues.” Similarly, Interior states that it is now considering streamlining the probate process and consolidating the BIA and OHA probate projects. Had Interior developed a sound architecture, it would have systematically identified the shared data and overlapping business processes before proposing either TAAMS and LRIS or BIA probate and OHA probate as separate projects in the High Level Plan. Moreover, it would have done the analysis needed to know whether other duplications and/or inconsistencies exist among its projects. Interior also disagrees with the report’s second conclusion that Interior does not have reasonable assurance that its acquisition of the new asset and land records management (TAAMS/LRIS) service will cost effectively satisfy trust management needs. Our report bases this conclusion on findings that Interior did not follow sound processes for defining TAAMS/ LRIS requirements, thoroughly analyzing technical alternatives before selecting an approach, or managing technical risk. Interior states that its requirements were adequately defined and that its requirements definition process consisted of conducting several requirements reviews with the end-user community and deciding “early on to adopt the business processes afforded through implementation of the COTS product.” Just as deciding to use COTS products does not compensate for the lack of an integrated system architecture for Indian trust operations, selecting a COTS product before thoroughly analyzing requirements does not constitute an effective requirements definition process. Further, while Interior says that it will adopt the business processes afforded through implementation of the COTS product, it has at the same time recognized that the COTS product does not meet all of its requirements and will have to be modified. For example, Interior must modify the COTS product to handle fractionated interests and title requirements that are unique to Indian ownership. Interior does not directly address the finding that it did not thoroughly analyze technical alternatives before choosing a vendor and a COTS product to provide asset and land records management services. As discussed in the report, these technical alternatives include (1) modifying existing legacy systems, (2) acquiring a COTS product and using existing Interior infrastructure resources, (3) building a system to provide the necessary capability, or (4) acquiring a service. Instead, Interior dismisses any use of the legacy systems, stating that the systems “. . . employ both outdated software products and processing techniques . . . ,” and “. . . would require a virtual rewrite;” does not address the second and third alternative at all; and states once again, without having performed a gap analysis, that “the use of COTS product, combined with a service bureau approach, does provide the Department an economical and timely solution.” Because it has not thoroughly analyzed all technical alternatives and does not have convincing, objective evidence to support its decision, there is no assurance that Interior has selected the most cost-effective alternative. Interior then describes several actions which it feels minimizes acquisition risk. Specifically, it “. . . established a risk management plan shortly after awarding the TAAMS contract”; will have other contractors review the work of the TAAMS contractor; and will evaluate the results of pilot testing. Because all of these actions occur after the vendor was selected and the contract awarded, they are not relevant to our finding that Interior did not follow a sound process for selecting an approach and, therefore, does not have reasonable assurance that its trust management needs will be met cost effectively. In its comments, Interior says “. . . a rigorous, standard approach was not used in identifying the requirements for TAAMS . . .”; and “. . . we would have preferred to use actual BIA data [in Operational Capabilities Demonstrations], but given the time constraints, we decided to use scripts . . .”. Further, Interior recognizes that it had to correct resulting errors identified in our report. Specifically, the Request for Proposal and/or the contract for TAAMS had to be changed to clarify terms such as “conflicts of interest, abuse, and self-dealing”; to correct the mistaken reference to Public Key encryption; and to require monthly delivery to the government of all data to facilitate import into other applications. However, because Interior does not explicitly recognize the flaws in its processes and does not acknowledge the relationship between these weaknesses and the errors that have already occurred, it has not committed to correcting these weaknesses and it is likely to repeat similar errors in the future. Interior also raises several subsidiary issues. It asserts that our review was incomplete because we did not assess the TAAMS vendor selection process, which, in Interior’s opinion, was necessary to determine if the TAAMS acquisition was cost effective. The objective of our audit was not to determine how Interior selected its vendor; it was to determine whether Interior had done the analysis needed to determine what was required and to select an approach to the project that would be cost-beneficial. How Interior selected its vendor is not relevant to that objective and was therefore not within the scope of our audit. Interior claims that we stopped the audit work “prematurely.” However, Interior does not cite any significant events that occurred or critical corrections made since the audit ended that would alter our conclusions. In fact, during the review, we evaluated every document provided by Interior. Moreover, this review was initiated, performed, and concluded after its objectives were completed according to its established schedule. The only deviation from schedule was made to accommodate Interior’s request for an additional 6 business days to comment on this report. Interior is concerned that we focused only on the TAAMS/LRIS project and therefore, were not in a position to make broad statements about the High Level Plan. In focusing on all IT aspects of the plan, we assessed the interrelationships of the individual 13 projects as well as the overall process for developing the plan. This enabled us to determine that Interior did not have reasonable assurance that the High Level Plan provides an effective solution for addressing its long-standing management weaknesses. We assessed the TAAMS/LRIS project because it was ongoing during our review, is one of the major IT projects in the High Level Plan, and illustrates fundamental problems with Interior’s approach. Finally, Interior states that once it deploys TAAMS, it will have the means to reengineer its business processes to the “industry standard.” This runs counter to the basic tenets of reengineering, that is, organizations should first reengineer business processes and then assess and acquire or build systems necessary to support those processes. This enables organizations to ensure that they implement optimal technical solutions and that they do not limit their business process alternatives or entrench themselves in ineffective ways of doing business. Interior needs to implement our recommendations to substantially reduce the risk to key IT systems in trust management operations. Interior’s comments are provided in their entirety in appendix I along with our detailed evaluation of them. We are sending copies of this report to Senator Daniel K. Inouye, Vice Chairman, Senate Committee on Indian Affairs and to Senator Robert C. Byrd, Senator Joseph I. Lieberman, Senator Ted Stevens, and Senator Fred Thompson, and to Representative Dan Burton, Representative George Miller, Representative David Obey, Representative Henry A. Waxman, Representative C.W. Bill Young, and Representative Don Young, in their capacities as Chairmen and Ranking Minority Members of the Senate Committee on Appropriations, Senate Committee on Governmental Affairs, House Committee on Appropriations, House Committee on Resources, and House Committee on Government Reform. We are also sending copies of this report to the Honorable Jacob J. Lew, Director, Office of Management and Budget, and to other interested congressional committees and Members of Congress. Copies will also be made available to others upon request. If you have any questions about this report, please call me at (202) 512- 6415. Other major contributors to this report are listed in appendix II. The following are GAO’s comments on Interior’s March 19, 1999, letter responding to a draft of this report. 1. According to Interior’s High Level Plan (page 70), five projects are classified as data cleanup projects: OST data cleanup, BIA data cleanup, BIA probate backlog, OHA probate backlog, and BIA appraisal program. According to the schedules provided in the High Level Plan (pages 64 through 67) OST data cleanup was initiated in January 1998 and BIA data cleanup project began in August 1998. 2. Our intent was to present the sequence of events chronologically, not to imply that there was a change in direction in the middle of the TAAMS acquisition. We clarified the language in the report to reflect this more precisely. 3. The report does not state that the High Level Plan should include all high-level requirements. Our report makes the point that the high-level requirements for all 13 projects were not defined anywhere. 4. Although Interior’s letter indicates otherwise, neither the RFP nor the amendment included any definitions for the terms “conflicts of interest, abuse and self-dealing.” In subsequent correspondence to us, Interior officials told us that they believe these terms are commonly used and do not require additional definition. However, Interior requires that TAAMS implement safeguards to identify incidents of conflicts of interest, abuse, and self-dealing. Precise definition of requirements, not assumptions about “common usage” for terms that by their nature are subject to broad interpretation, is needed to implement systems features effectively. 5. The TAAMS RFP states this requirement as follows: “Access to the system shall at a minimum require unique user IDs with passwords. The system shall record unsuccessful attempts . . .” The parenthetical phrase discussing password length does not appear. After receiving a draft of this report, Interior issued an amendment to the contract containing the phrase. This is another example of inadequate requirement definition that Interior is addressing piecemeal and ad hoc, without correcting the fundamental process weaknesses that caused the problem. 6. Section J of the RFP contains a collection of data elements from different legacy systems, but it is not a data dictionary for TAAMS. Because the data elements required by TAAMS were not defined prior to asking vendors to respond to the TAAMS RFP, Interior has no assurance that the vendor’s product can handle all data elements crucial to Indian trust operations. 7. We are not suggesting a priori that the legacy system is a viable solution. Neither we nor Interior can make informed decisions without analyzing relevant data. We are pointing out that, consistent with the Clinger-Cohen Act and good IT investment practices, Interior should have evaluated all technical alternatives before selecting one. 8. Interior has quoted this statement out of context. The full sentence from our draft report states: “Specifically, although Interior concluded based on the results of its Request for Information that none of the COTS products available from responding vendors would meet all its requirements, Interior did not determine, for each COTS product, which requirements could not be satisfied and how difficult and expensive it would be to make the needed modifications." Our point is that Interior did not perform a gap analysis on products available in the marketplace to determine whether the COTS approach was optimum. According to a Mitretek official, the Mitretek study was completed after the Request for Proposal was issued and was intended to serve as the government’s independent cost estimate for use in source selection. 9. Interior is in error. While all projects do, indeed, contain some elements of risk, our point was that Interior was incurring and not mitigating unnecessarily high levels of risk because it does not have an integrated architecture for Indian trust operations and has not corrected fundamental weaknesses in its IT management processes. 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. | Pursuant to a congressional request, GAO evaluated the Department of the Interior's High-Level Implementation Plan for improving its management of the Indian trust funds and resources under its control, focusing on whether the Interior has reasonable assurance that: (1) the High-Level Plan provides an effective solution for addressing its long-standing problems; and (2) its acquisition of a new asset and land records management service will cost effectively satisfy trust management needs. GAO noted that: (1) Interior does not have reasonable assurance that its High-Level Plan for improving Indian trust operations provides an effective solution for addressing long-standing management weaknesses; (2) the plan: (a) recognizes the severity of long-standing weaknesses in managing trust fund assets; (b) identifies 13 projects intended to improve information systems, enhance the accuracy and completeness of its data regarding the ownership and lease of Indian lands, and address deficiencies with respect to records management, training, policy and procedures, and internal controls; and (c) assigns responsibility for oversight and management of the 13 projects; (3) however, Interior has not properly analyzed its information technology needs which are essential to the overall success of the plan; (4) until Interior develops an information systems architecture addressing all of its trust management functions, it cannot ensure that its information systems will not be duplicative or incompatible or will optimally support its needs across all business areas; (5) Interior also does not know whether its acquisition of a new service for managing Indian assets and land records will cost-effectively meet trust management needs; (6) before deciding to contract with a service vendor, Interior did not adequately define important service requirements or sufficiently analyze technical alternatives; (7) Interior also did not take the steps needed to minimize acquisition risks; (8) in particular, it did not develop a risk management plan, ensure that the vendor's system could work with Interior's data and systems, or establish realistic project timeframes; and (9) thus, Interior faces an unnecessarily high risk that the service will not meet its general business and specific performance needs, and it lacks the means for dealing with this risk. |
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The process for importing products into the United States involves several different private parties, as well as the U.S. government. These private parties include exporters, carriers, and importers, among others. Exporters are companies that sell goods manufactured or produced in foreign countries to the United States. Carriers are companies that transport the goods to the United States. Importers may be companies that purchase the goods from exporters or simply may be responsible for facilitating the importation of the goods. The importer of record is responsible for paying all estimated duties, taxes, and fees on those products when they are brought into the United States. Importers of record are also required to obtain a general bond to secure the payment of their financial obligations. CBP is responsible for, among other things, managing the import process (see fig. 1); collecting the duties, taxes, and fees assessed on those products; and setting the formula for establishing importers’ general bond amounts. The United States and many of its trading partners have established laws to remedy the unfair trade practices of other countries and foreign companies that cause injury to domestic industries. U.S. laws authorize the imposition of AD duties on imports that were “dumped” (i.e., sold at less than normal value) and CV duties on imports subsidized by foreign governments. As we reported in March 2008, the U.S. AD/CV duty system is retrospective, in that importers initially pay estimated AD/CV duties at the time of importation, but the final amount of duties, reflecting the actual amount of dumping or subsidization, is not determined until later. Commerce is responsible for calculating the appropriate AD/CV duty rate. CBP is then responsible for collecting the estimated AD/CV duties when goods enter the United States, and subsequently processing the final AD/CV duties (called “liquidation”) when instructed by Commerce. Liquidation may result in providing importers with a refund or sending an additional bill. A wide range of imported goods are subject to AD/CV duties, such as agricultural, chemical, steel, paper, and wooden products. Each set of AD/CV duties—detailed in an AD/CV duty order—is for a type of product from a specified country. The written “scope” of each AD/CV duty order describes the specific type of product that is subject to the duties. The duty order also lists one or more Harmonized Tariff Schedule codes associated with the product. There are duty orders in place for some types of products from several countries. For example, there are currently AD duty orders on frozen warmwater shrimp from five countries—Brazil, China, India, Thailand, and Vietnam. For some other types of products, there is a duty order in place on only one country, such as saccharin from China. As of March 2012, there were 283 AD/CV duty orders in effect, with more duty orders on products from China than from any other country (see table 1). Importers that seek to avoid paying appropriate AD/CV duties may attempt to evade them by using a variety of techniques. These techniques include illegal transshipment to disguise a product’s true country of origin, undervaluation to falsify the price of an import to reduce the amount of AD/CV duties owed, and misclassification of merchandise such that it falls outside the scope of an AD/CV duty order, among others (see fig. 2). According to CBP, importers sometimes use more than one evasion method at a time to further disguise the fact that they are importing goods subject to AD/CV duties. Because the techniques used to evade AD/CV duties are clandestine, the amount of revenue lost as a result is unknown. CBP detects and deters AD/CV duty evasion through a three-part process that involves (1) identifying potential cases of evasion, (2) attempting to verify if evasion is occurring, and (3) taking enforcement action. CBP begins its detection of AD/CV duty evasion by identifying potential instances of evasion, using two primary sources of information: import data and allegations from external sources. Import data is generated from the documents submitted by importers as part of the import process. Allegations are collected electronically through e-Allegations, an online system created by CBP in 2008. CBP also collects allegations via other means (such as telephone and e-mail, among others) and stores them in the e-Allegations system. As of September 2011, there were almost 400 allegations related to AD/CV duty evasion in the e-Allegations system, mostly from sources associated with affected industries. To look for anomalies that may be indicators of evasion, CBP personnel at both the local and national levels conduct targeting, analyze trends in Local import data, and follow up on allegations from external sources. targeting and analysis is conducted by CBP personnel stationed at more than 300 ports of entry, while national targeting and analysis is conducted by officials at CBP headquarters and its National Targeting and Analysis Group (NTAG) for AD/CV duty issues located in Plantation, FL. CBP officials explained that most of their targeting involves identifying entries filed under the Harmonized Tariff Schedule codes associated with a given product that is subject to AD/CV duties and then examining the import documentation for those entries for anomalies that may suggest evasion is occurring. Examples of such anomalies in import documents include, but are not limited to being filed under the same tariff code as a product that is subject to AD/CV duties but not being declared as subject to such duties, listing a country of origin that is not capable of producing the goods (or the quantity of the goods) imported—a potential indicator of illegal transshipment, and showing a monetary value for the goods imported that appears to be too low for the quantity or weight of goods imported—a possible sign of undervaluation. Once CBP identifies a potential instance of evasion, it can use a variety of techniques at different points in the import process to attempt to verify if evasion is occurring. These include, but are not limited to, the following: targeting additional shipments made by the importer of record and conducting further data analysis to look for other anomalies that may be evidence of evasion; requesting that the importer provide further information, such as product invoices and other documents that can help CBP understand the transactions involved in producing and importing a good and ascertain if evasion occurred; sending referrals to ICE to initiate criminal investigations and gather evidence of evasion from foreign countries, such as by visiting production facilities overseas and collecting customs documents from foreign counterparts; performing cargo exams to inspect shipments arriving at ports of collecting samples of products potentially brought in through evasion and conducting laboratory analysis of these samples to attempt to identify their true country of origin and other technical details that can help CBP determine if the products should be subject to AD/CV duties; and auditing importers suspected of evading AD/CV duties by collecting company records (such as purchase orders, shipping documents, and payment records) and examining them for discrepancies. Figure 3 shows where in the import process CBP typically uses these techniques. In cases where CBP is able to verify evasion, its options for taking enforcement action to deter evasion include (1) pursuing the collection of evaded duties, (2) imposing civil penalties, (3) conducting seizures, and (4) referring cases to ICE for criminal investigation. As we discuss later in this report, CBP lacks complete data on the amount of evaded duties it has pursued and collected in cases of evasion. From fiscal years 2007 to 2011, CBP assessed 252 civil penalties totaling about $208 million against 237 importers that evaded AD/CV duties. Over the same period, CBP also made 33 seizures related to AD/CV duty evasion, with a total domestic value of nearly $4 million. In instances where CBP suspects that criminal laws may have been violated, it can refer cases to ICE for criminal investigation. Between fiscal years 2007 and 2011, ICE investigations of AD/CV duty evasion led to 28 criminal arrests, 85 indictments, and 37 criminal convictions. As discussed later in this report, some products that are subject to AD/CV duties fall under the same tariff codes as other products that are not subject to AD/CV duties. Consequently, the tariff code for an entry may be insufficient for CBP to determine whether or not the entry is subject to AD/CV duties; additional information may be needed. wood flooring and were also preparing to assess civil penalties on 14 importers. At another port we visited, CBP officials described a case that began with an anonymous fax alleging evasion of the AD duties on steel nails from China. After reviewing import data, the officials were able to confirm that the importer named in the allegation had brought an entry of steel nails into their port and that the importer’s broker had filed the entry as not subject to AD duties. Because the AD duty order on steel nails from China provides an exemption for roofing nails, the port officials then sent a formal request for information to the importer to ask for a sample of the The port officials sent steel nails imported, which the importer provided.the sample to a CBP laboratory to determine if the nails provided were roofing nails or not. After the laboratory determined that the sample nails were not roofing nails, the port officials concluded that the steel nails were subject to the AD duty order and, consequently, should have been declared as such. The officials subsequently told us that this would result in a penalty against the importer and that 34 additional entries by the importer at six ports were also under review for evasion. Two types of factors affect CBP’s efforts to detect and deter AD/CV duty evasion. First, CBP faces several external challenges in attempting to gather conclusive evidence of evasion and deter parties from evading duties. Second, although interagency communication has improved, and CBP has encouraged the use of higher bonding requirements to protect revenue, gaps in information sharing with Commerce and within CBP may limit the effectiveness of these initiatives. Several challenges mostly outside of CBP’s control impede its efforts to prove that evasion has occurred and deter parties from evading AD/CV duties. These challenges include (1) the inherent difficulty of verifying evasion conducted through clandestine means; (2) limited access to evidence of evasion located in foreign countries; (3) the highly specific and sometimes complex nature of products subject to AD/CV duties; (4) the ease of becoming an importer of record, which evaders can exploit; and (5) the limited circumstances under which CBP can seize goods brought in through evasion. CBP officials we met with stated that verifying evasion of AD/CV duties is one of the agency’s most challenging and time-consuming trade enforcement responsibilities. As these officials emphasized, proving that evasion is occurring is a key precondition for taking enforcement action against importers evading AD/CV duties. However, because AD/CV duty evasion is inherently deceptive and clandestine in nature, it can be extremely difficult for CBP to gather conclusive evidence to prove that evasion is occurring. According to CBP, not only can different methods of evasion be employed at once—often involving the collusion of several parties, including the manufacturer, shippers, and importer— but entities engaging in evasion are using increasingly complex schemes. In particular, CBP officials identified the growing use of illegal transshipment as a key concern, noting that the Internet has made it very easy for importers to find companies willing to transship goods subject to AD/CV duties through third countries to mask the goods’ true country of origin. Because such schemes often involve adding false markings and packaging designed to mimic legitimate production in other countries, it can be very difficult for CBP to determine a product’s country of origin through visual inspection or through reviews of shipping documents. Undervaluation can be similarly difficult to prove, according to CBP, especially if the producer and importer collude to create false values. In addition to being inherently difficult, verifying evasion of AD/CV duties can also be very time-consuming. According to CBP, it can easily take over a year or more to collect the evidence needed to verify a potential case of evasion. For example, CBP’s ability to target additional shipments from an importer suspected of evading duties hinges on whether or not importation is ongoing. However, CBP documentation notes that shipments of some goods may be seasonal in nature, resulting in months of inactivity until the next shipment can be targeted. Additionally, in cases where CBP requests additional information from the importer, the importer has 30 days in which to respond to the request, but CBP can extend the deadline in additional 30-day increments if the importer fails to respond or needs more time to gather the required information. Similarly, according to CBP, it typically takes up to 30 days to conduct a laboratory analysis of a product sample, but it can take up to 120 days if, for instance, new analytical methods need to be developed. CBP officials stated that their audits of importers suspected of evading AD/CV duties are also time-consuming in nature, taking nearly 8 months to complete on average. Given these timelines— and the fact that CBP may need to use several such verification techniques to successfully prove a single case of evasion—the process of proving evasion may become quite lengthy. According to CBP and ICE officials, they have limited access to evidence located in foreign countries that can be vital to proving that evasion has occurred, particularly in cases of illegal transshipment. These officials explained that collecting customs documents from foreign counterparts or gaining access to facilities in a foreign country listed as the country of origin for a suspicious entry can help them prove that the goods in question originated elsewhere. For example, ICE officials investigating a case concerning Chinese honey suspected of being illegally transshipped through Thailand helped determine that evasion occurred, in part by visiting the sites in Thailand where the honey was allegedly produced and determining that the facilities were not honey manufacturing plants (see fig. 5). Similarly, CBP laboratory scientists explained that their ability to use chemical analysis to determine whether an importer falsely declared a good’s country of origin is contingent on gathering reference samples from as many countries as possible for comparison purposes. To collect information located outside of U.S. jurisdiction, CBP and ICE need to obtain the permission of host nation governments. However, both CBP and ICE explained that the level of host nation cooperation varies. According to ICE, even when the United States has bilateral agreements in place to share customs information, the extent of information shared by foreign counterparts varies by country. For example, ICE officials stated that although most of their investigations of evasion involve goods from China—with which the United States has a customs cooperation agreement in place—they have never received permission to visit facilities in China as part of their investigations. Similarly, according to ICE officials, although the United States has bilateral agreements with several countries that are thought to be common transshipment points— such as Indonesia, India, and the Philippines—ICE’s ability to visit these and other countries during the course of investigations depends on factors such as each country’s political climate, the nature of its bilateral relationship with the United States, and the extent to which the host nation government has ties to the company or industry under investigation. CBP laboratory scientists have also had mixed results in gaining access overseas. They noted that the Indonesian government recently allowed them access to collect samples of shrimp from Indonesian producers. However, the Malaysian government initially gave them approval to visit honey and shrimp producers in their country but ultimately rescinded its approval without explanation. CBP officials also noted that although the U.S. free trade agreement with Singapore— another country thought to be a common transshipment point—allows for cooperation on customs issues, the agreement explicitly excludes matters related to AD/CV duties. According to CBP officials, the highly specific and complex nature of some products subject to AD/CV duties can make it extremely difficult to identify evasion. As noted earlier, most of CBP’s targeting for potential evasion involves examining entries that have the same Harmonized Tariff Schedule codes as products subject to AD/CV duties in order to look for any not filed as subject to AD/CV duties. For example, to target potential evasion of the AD duties on saccharin from China, CBP can examine entries from China that have the tariff code for saccharin and determine if any have been filed as not subject to AD/CV duties. However, in some cases, no unique tariff code exists for the specific products that Commerce investigated and issued a duty order for; rather, these products fall under the same tariff code as a broader category of products that are not subject to AD/CV duties. Consequently, the tariff codes listed on a given entry may be insufficient for CBP to determine if goods imported as part of that shipment are subject to AD/CV duties; additional information may be needed. An example is petroleum wax candles from China, which are subject to AD duties. Because there is no specific tariff code for petroleum wax candles—only one for candles—CBP cannot conclude, absent other evidence, that an entry from China under the tariff code for candles is petroleum wax candles, as it may be another type of candle that is not subject to AD duties. Instead, CBP has to turn to other means of verification to attempt to gather conclusive evidence that the entry is petroleum wax candles and, therefore, subject to AD duties. For example, CBP may decide to ask the importer for additional information, such as product invoices containing further details on the type of candles imported. CBP may also target additional shipments of candles and potentially collect a sample for laboratory analysis. However, as described earlier, each of these steps would take additional time, lengthening the verification process. According to CBP officials, the complex nature of some products covered by AD/CV duty orders can also make it difficult for CBP personnel to visually identify the products during cargo exams. For instance, CBP officials stated that AD/CV duty orders on steel typically cover steel products with a certain chemical composition—an aspect that cannot be determined through visual inspection. Another example is the AD/CV duty order on honey, which applies not only to natural honey and flavored honey, but also to honey blends that contain more than 50 percent natural honey by weight—a characteristic that cannot be ascertained by sight alone. In such cases, CBP personnel can extract a sample from the shipment and send it for laboratory analysis. However, CBP laboratory scientists stated that chemical analysis does not always return a definitive judgment of whether or not a product sample analyzed should fall within the scope of an AD/CV duty order. For example, chemical analysis of a honey blend can return inconclusive results if certain additives are present in the blend. CBP officials stated that CBP cannot take enforcement action without conclusive proof of evasion. Entities engaging in evasion can exploit the ease of becoming an importer of record, impeding CBP’s ability to target and take deterrent action against them. As noted earlier, importers of record are responsible for paying all estimated duties, taxes, and fees on products when they are brought into the United States. However, importers seeking to evade AD/CV duties can exploit the ease of becoming an importer of record in several ways. First, according to CBP officials, companies can easily adopt new importer names and identification numbers, making it difficult for CBP to track their importing activity and gather evidence needed to prove that they are engaging in evasion. CBP officials stated that they suspect some importers evading AD/CV duties set up new names and identification numbers in advance to have ready for use in anticipation of CBP targeting efforts. Second, as our prior work has noted, CBP collects a minimal amount of information from companies applying to be importers of record, which evaders can take advantage of to elude CBP efforts to For instance, companies are not locate and collect revenues from them.subject to any credit or background checks before being allowed to import products into the United States. Third, foreign companies and individuals are allowed to import products into the United States, but CBP can have difficulty collecting duties and penalties from foreign importers—especially illegitimate ones—when the importers have no attachable assets in the United States. For example, as of February 2012, CBP had collected about $5 million, or about 2 percent, of the approximately $208 million it assessed in civil penalties between fiscal years 2007 and 2011. CBP attributed its collection difficulties, in part, to challenges experienced in collecting from foreign importers of record. CBP officials stated that, due to this risk of noncollection, a factor they consider when deciding whether or not to impose a penalty against a confirmed evader is whether or not it has assets in the United States. As we have previously reported, CBP or Congress could heighten the requirements for becoming an importer of record; however, such action could lead to unintended consequences.could include mandatory financial or background checks. However, performing these checks would create a significant new burden on CBP, which would need to conduct or oversee these financial or background checks. Additionally, it is possible that, to ensure fairness, the heightened requirements would be imposed on all importers. Given that the vast majority of importers comply with customs laws and pay their duty liabilities, such a broad approach may not be cost-effective and could potentially restrict trade. CBP is able to seize goods imported through evasion under limited circumstances. CBP officials explained that unlike goods that are illegal to import, such as those violating import safety or intellectual property laws, goods imported through evasion are not necessarily illegal to import. Specifically, according to CBP, although misclassification and undervaluation are commonly used evasion schemes, U.S. trade law limits the seizure of shipments that are misclassified or undervalued. By contrast, CBP is permitted to seize shipments brought in through other forms of evasion, such as through falsifying the country of origin of goods (illegal transshipment) or failing to declare goods on entry documents (smuggling).and 2011, at least 28 were related to false country of origin or smuggling. For instance, CBP officials at one port seized a shipment of plastic bags following a cargo exam that revealed the shipment’s country of origin had been falsified. However, as CBP has testified before Congress, entities engaging in evasion often use false markings and packaging that make it very difficult to determine country of origin through visual examination alone, complicating the task of establishing grounds for seizure. Moreover, as noted earlier, verifying evasion is an inherently difficult and time-consuming process. CBP officials stated that, by the time CBP is able to verify an instance of evasion, the associated goods typically have already entered the United States and cannot be seized. Communication between Commerce and CBP has improved since our 2008 report on AD/CV duties, and CBP has encouraged port officials to use higher bonding requirements to protect AD/CV duty revenue when they suspect incoming shipments of evasion. However, CBP lacks information from Commerce that would enable it to better plan its workload and minimize the burden of the U.S. retrospective system on its efforts to address evasion. Additionally, CBP has neither a policy nor a mechanism in place for a port requiring a higher bond to share this information with other ports in case an importer attempts to “port-shop,” i.e., chooses to withdraw its shipment and attempts to make entry at another port in an attempt to avoid the larger bond requirement. CBP officials cited the administrative burden of the U.S. retrospective system as a factor that diminishes the resources they have available for detecting and deterring evasion of AD/CV duties. Under the U.S. retrospective system, importers that properly declare their products as subject to AD/CV duties (i.e., do not evade) pay the estimated amount of duties when products enter the United States, but the final amount of duties owed is not determined until later. The documentation for the entries remains at the ports while CBP awaits liquidation instructions conveying the final duty rate from Commerce. Commerce’s review to determine the final duty rate—a process that culminates with the issuance of liquidation instructions—typically takes up to 18 months to complete and can take months or years longer if litigation is involved. At one port we visited, CBP officials stated that they had approximately 20,000 entries awaiting instructions to liquidate for food-related products alone. At another port, officials showed us the file room where they store entries awaiting liquidation instructions (see fig. 6). Moreover, each of the thousands of entries subject to AD/CV duties must be liquidated through manual data entry, which is resource- and time-intensive and diverts CBP personnel from their efforts to detect and deter evasion. Under U.S. law, CBP has 6 months to liquidate entries from the time that According to it receives notice of the lifting of suspension of liquidation.CBP officials, this 6-month deadline can be very difficult to meet, especially when a large volume of imports needs to be liquidated.order to begin liquidating entries, CBP must first receive liquidation instructions from Commerce. Since our 2008 report, Commerce has taken steps to improve the transmission of its liquidation instructions to CBP. We found in 2008 that, about 80 percent of the time, Commerce failed to send liquidation instructions within its self-imposed deadline of 15 days after the publication of the Federal Register notice. Furthermore, we reported that the instructions were sometimes unclear, thereby causing CBP to take extra time to obtain clarification. Consequently, we identified untimely and unclear liquidation instructions from Commerce as an impediment to CBP’s ability to liquidate entries. In response to our recommendation to identify opportunities to improve liquidation instructions, Commerce took steps to improve the transmission of liquidation instructions to CBP. For instance, Commerce deployed a system for tracking when it sends liquidation instructions, which according to Commerce, has greatly improved its timeliness. Documentation from Commerce indicates that, in the first half of fiscal year 2012, Commerce sent liquidation instructions on a timely basis more than 90 percent of the time. In addition, Commerce and CBP jointly established a mechanism for CBP port personnel to submit questions directly to Commerce regarding liquidation issues. According to CBP officials, these steps have improved the ability of port personnel to ask Commerce to clarify its liquidation instructions. GAO-08-391. in May 2011 that, without advance notice from Commerce on upcoming liquidation instructions, it can be very difficult for CBP to make workforce planning and staffing decisions. CBP officials at headquarters and at ports we visited stated that liquidation instructions arrive with little warning but need to be acted on immediately due to the 6-month deadline for liquidating entries. They said that this sudden shift in workload diverts key personnel from efforts to address evasion to focus on manually liquidating thousands of entries instead. In the absence of advance notice from Commerce on upcoming liquidation instructions, CBP attempts to roughly estimate where its workload peaks will occur on the basis of the 18-month time frame within which Commerce typically completes liquidation instructions. However, CBP officials stated that no such estimation is possible in cases involving litigation, which are not subject to time frames. According to CBP, cases involving litigation are particularly burdensome because of the considerable length of time it can take to resolve some cases, during which an extremely large number of entries can accumulate at the ports—all of which CBP eventually has to attempt to liquidate within the 6-month deadline. However, Commerce does not currently inform CBP when a court reaches a decision on a case in litigation—information that would enable CBP to conduct some workload planning. According to CBP officials, since CBP is not a party to such cases, it would be helpful if Commerce provided them with some notification once decisions are reached. Commerce officials stated that they do not know when courts will reach decisions on cases in litigation, but said that they could work with CBP to identify opportunities to share information regarding the status of litigation. In response to a CBP request, Commerce recently provided CBP some information for the first time to help with workload planning. In June 2011, Commerce officials provided their counterparts in CBP headquarters with a list of instructions planned for issuance over the next 6 months. CBP officials at headquarters acknowledged receiving the list from Commerce, stating that, although the list did not address their need to know when courts reach decisions on cases involving litigation, they found it useful for general workload planning purposes. They noted that they would like to receive this type of list from Commerce on a quarterly basis to have more up-to-date information on hand to incorporate into their workload planning decisions. Commerce officials stated that they would be willing to work with CBP to develop a schedule for sharing this list on a regular basis. CBP has encouraged the use of higher bonding requirements, called single transaction bonds (STB), to protect AD/CV duty revenue from the risk of evasion; however, it has not ensured that a port requiring an STB shares this information with other ports in case an importer withdraws its shipment and attempts to make entry at another port to avoid the STB. As noted earlier, all importers are required to post a security, usually a general obligation bond, when they import products into the United States. This bond is an insurance policy protecting the U.S. government against revenue loss if an importer defaults on its financial obligations as well as ensuring compliance with the law. However, given CBP’s concerns that this general bond inadequately protects AD/CV duty revenue, CBP has encouraged port officials to protect additional revenue by requiring STBs for individual shipments they suspect of evasion. The amount of the STB is generally one to three times the total entered value of the merchandise plus duties, taxes, and fees, depending on the revenue risk. According to CBP officials, STBs serve as additional insurance in cases where CBP has not been able to collect enough evidence before a shipment’s arrival to prove that evasion is occurring, but where enough suspicion exists about the shipment to warrant protection of the anticipated AD/CV duty revenue. An importer that is required to obtain an STB can either choose to post the bond in order to enter its shipment, or can opt against obtaining the bond and withdraw its shipment. If an importer decides to post the STB, and CBP later confirms that AD/CV duties are indeed owed, CBP first tries to collect from the importer. However, if CBP is unable to collect from the importer, it can collect significantly more money from the surety (insurance) company that underwrote the STB than it would typically be able to collect from the surety on a general bond, given the larger amount of revenue protected by the STB. While CBP has encouraged the use of STBs to protect revenue related to imports suspected of AD/CV duty evasion, vulnerabilities exist due to gaps in port-level information sharing. CBP gives each port the discretion to decide when to require an STB. However, CBP has no policy or mechanism in place for ports requiring such a bond to share this information with other ports in case an importer attempts to port-shop, i.e., chooses to withdraw its shipment and attempts to make entry at another port in an attempt to avoid the larger bond requirement. Instead, CBP port officials currently rely on informal e-mail and telephone communication to notify other port officials of importers potentially seeking to port-shop. Officials we met with cited specific instances where this informal approach had been ineffective in notifying other ports of suspected evasion before the importer could enter the goods at another port. For example, CBP officials at one port described a case where an importer that decided against posting an STB at their port was able to make entry in another port before they were able to e-mail a warning about that particular importer to other ports. In another case, an importer succeeded in entering a shipment of furniture in Newark after officials at the initial port of entry on the West Coast failed to notify other ports that the importer had decided to withdraw its entry instead of posting an STB. In both cases, CBP port officials suspected evasion but did not take additional action in time to warn other ports of entry about the potential for port-shopping. Although CBP is currently formulating policy to guide the use of STBs, the policy may not fully address the risk of port-shopping. In February 2012, CBP officials stated that they were in the process of completing a policy that will further encourage port officials to use STBs and provide them with guidance on circumstances under which the use of STBs is Officials stated that the policy will also instruct officials at a appropriate.port requiring an STB to review any other shipments from the importer in question before releasing them. They added that they had not yet decided whether or not to automatically instruct ports nationwide to conduct the same level of review. While CBP has improved its performance measures for addressing AD/CV duty evasion and enhanced its monitoring of STBs, it does not systematically track or report key outcome information that CBP leadership and Congress could use to assess and improve CBP’s efforts to detect and deter AD/CV duty evasion. First, CBP cannot readily produce key data on AD/CV duty evasion, such as the number of confirmed cases of evasion, which it could use to better inform and manage its efforts. Second, CBP does not consistently track or report on the outcomes of allegations of evasion it receives from third parties. As we have previously reported, internal control is a major part of managing an organization and should be generally designed to assure that ongoing monitoring occurs in the course of normal operations. Furthermore, our prior work has noted the need for agencies to consider the differing information needs of various users, such as agency top leadership and Congress. Specifically, as we reported in March 2011, the Government Performance and Results Modernization Act of 2010 underscores the importance of ensuring that performance information will be both useful and used in decision making. In the past year, CBP has made enhancements in the following two areas to track its efforts related to combating AD/CV duty evasion: CBP has taken steps to improve the performance measures for its efforts to detect and deter AD/CV duty evasion. CBP told us that in fiscal years 2010 and 2011, a majority of the performance measures for AD/CV duty enforcement either lacked sufficient data or were declared to be “not measurable.” For example, CBP considered one measure for fiscal year 2011—”analysis completed and enforcement alternatives concurred”— too broad to collect data and report on, given the large number of CBP offices that conduct analysis and enforcement. In another example, CBP did not provide a response to the fiscal year 2011 performance measure related to the results of cargo exams because, according to CBP officials, cargo exams are conducted at the local level and not tracked, creating a dearth of reportable data. In addition, CBP was unable to track and assess its efforts over time because its measures were inconsistent from year to year. By contrast, CBP’s fiscal year 2012 action plan includes a new set of performance metrics with measurable targets consistent from fiscal years 2012 through 2017. For example, the performance measure for penalties issued has targets to increase the amount of penalties issued each year by 10 or 15 percent. There are similar measures with targets for increasing the percentage of AD/CV duties collected and the number of audits related to AD/CV duties. CBP is working to improve its ability to track and report on the use of STBs. In June 2011, after finding that CBP could not determine the total number of STBs used at the ports, the Department of Homeland Security Inspector General recommended that CBP appoint a centralized office responsible for reporting STB-related activities and monitoring results. The Inspector General’s report also recommended that CBP automate the STB process to provide enhanced tracking ability. CBP concurred with these recommendations, stating that it had begun the process of centralizing STB-related roles and responsibilities and developing a system to automate the STB process. Moreover, one of the new measures in the fiscal year 2012 action plan tracks the number of STBs used for AD/CV duty evasion. While CBP has reported anecdotes about its successes in addressing AD/CV duty evasion and collects some statistics on its efforts, it lacks key data that it could use to assess and improve its management practices and that could enhance congressional oversight. Over the past year, CBP has publicly reported anecdotes of successful efforts to detect and deter AD/CV duty evasion. For example, in testimony before Congress in May 2011, the Assistant Commissioner for CBP’s Office of International Trade described five recent cases where CBP and ICE uncovered instances of evasion and penalized those responsible. Similarly, in a report to Congress on fiscal year 2010 efforts to enforce AD/CV duties, CBP cited eight cases that led to enforcement action against parties engaging in evasion. CBP has also produced publicly available videos illustrating a successful case where CBP worked with ICE to arrest and convict an importer who evaded the AD/CV duties on wire hangers. CBP collects some statistics on its efforts to detect and deter AD/CV duty evasion but lacks other key data on these efforts. For example, CBP provided us with statistics on civil penalties and seizures related to AD/CV duty evasion. However, CBP lacks data on the total number of confirmed cases of AD/CV duty evasion; the total amount of duties assessed and collected for confirmed cases of evasion; the country of origin, product type, and method of evasion for each confirmed case of evasion; and the number of confirmed cases of evasion involving a foreign importer of record. CBP attributed this lack of data to the absence of a policy requiring officials to record confirmed cases of AD/CV duty evasion. CBP officials explained that although CBP has a database in which instances of evasion could be recorded, current policy does not require officials to record such instances. Consequently, CBP cannot conduct a simple data query to identify all confirmed cases of evasion. Without the ability to identify cases of evasion, CBP cannot easily access other related data on AD/CV evasion that could help improve management decisions and oversight. For example, CBP is currently unable to produce data on the total amount of duties assessed and collected for confirmed cases of evasion—figures that would provide CBP leadership and Congress visibility over some of the results of CBP’s efforts to address evasion. Similarly, comprehensive data on the country of origin, product type, and method of evasion for each confirmed case of evasion could potentially help CBP identify trends and shifts in evasive activity and make adjustments accordingly. CBP also lacks complete data on the country of origin and product type associated with the 252 civil penalties it imposed for AD/CV duty evasion between fiscal years 2007 and 2011 (see fig. 7). CBP attributed these missing data items to CBP personnel not recording them in CBP’s automated system for tracking penalties. Due to these missing data items, CBP lacks a complete picture of the countries and commodities involved in its penalty cases—information it could use to guide and improve its efforts. For example, CBP could identify which types of commodities have led to penalties most often and decide whether or not to focus more resources and detection efforts on those types of commodities. According to CBP officials, CBP addresses all allegations of AD/CV duty evasion it receives, including e-Allegations received online, but it does not routinely track or report on the outcomes of these allegations. As a result, Congress and industry stakeholders lack information about the outcomes of the allegations, which both parties have cited as a cause of concern. Data from CBP indicate that it generally assigns allegations to its national targeting staff for AD/CV duty issues (i.e., the NTAG) within 2 days of receipt. The NTAG then assesses the validity of the allegation using targeting and other analytical tools. If the NTAG determines that the allegation may be valid, it will typically refer the allegation to the appropriate port or to ICE for further investigation and possible enforcement action. As of September 2011, CBP had confirmed or referred nearly one-quarter of the approximately 400 allegations it received from 2008 to August 2011. About half could not be validated, and another one-quarter were still under analysis. Although CBP has stated that it addresses all allegations of AD/CV duty evasion it receives, it has reported little information to date on the outcomes of its efforts to follow up on these allegations. For instance, CBP’s report to Congress on AD/CV duty enforcement efforts in fiscal year 2010 mentions that CBP has received hundreds of allegations from the trade community, but the report includes no information on the outcomes of those allegations. In January 2011, in response to a congressional request, CBP produced a spreadsheet of the allegations it had received since June 2008. CBP officials told us that this spreadsheet was created upon request and is not something CBP updates or uses for management or policy purposes. While this document lists certain details, such as the source of each allegation, and identifies allegations of evasion that CBP confirmed as valid, it does not include any information on the associated enforcement outcomes. During the course of our review, CBP provided us with expanded versions of the spreadsheet in response to our request for details on the results of the allegations. However, these expanded versions provide little insight into the results of the allegations. For instance, the most recent version of the spreadsheet that we received, from September 2011, documents the enforcement outcome for only one of the 24 allegations labeled as “allegation confirmed.” CBP was also unable to determine if the allegations referred to ports and ICE by the NTAG were subsequently confirmed as valid or resulted in enforcement outcomes. CBP’s limited reporting on the outcomes of allegations is due, in part, to inconsistent, decentralized tracking of such information. CBP officials stated that once the NTAG has referred an allegation to a port or to ICE for further action, CBP considers the allegation to be closed and may or may not follow up to track its outcome. While CBP creates a record within its Commercial Allegation and Reporting System for each allegation it receives, there is no requirement for either the NTAG or the entity receiving the allegation referral to update these records with details on its enforcement outcomes. Instead, port officials and ICE store information on enforcement outcomes in other data systems that are not linked to the Commercial Allegation and Reporting System. CBP officials at headquarters told us that aggregating data from these various systems to link allegations with their associated outcomes would be difficult and time- consuming. Additionally, according to ICE, it does not specifically track cases generated as a result of allegations referred by CBP. Consequently, since ICE cannot identify which of its cases involve allegations referred from CBP, it also cannot identify the associated outcomes. An additional cause of CBP’s limited reporting on the outcomes of allegations is legal restrictions on the types of information it can share. During our review, we met with representatives of a coalition of domestic industries affected by AD/CV duty evasion. Some of these representatives stated that they had submitted allegations of evasion to CBP and expressed frustration that although they had requested updates from CBP on the outcomes of the allegations they submitted, CBP had not provided them with the information requested. CBP officials attributed this, in part, to the Trade Secrets Act, which they said restricts their ability to disclose the specific kinds of information requested. Additionally, CBP officials stated that they cannot disclose information about allegations involving active ICE investigations. Furthermore, CBP does not report on the results of its efforts at an aggregate level, which would avoid divulging restricted information while keeping key stakeholders informed. CBP officials stated that they are currently exploring ways to legally share what information they can on allegations with the parties that filed them. Evasion of AD/CV duties undermines U.S. AD/CV duty laws—the intent of which is to level the economic playing field for U.S. industry—and deprives the U.S. government of revenues it is due. While CBP employs a variety of techniques to detect and deter such evasion, its efforts are significantly hampered by a number of factors primarily beyond its control. These include the inherently difficult and time-consuming process of uncovering evasive activity conducted through clandestine means, inconsistent access to foreign countries that limits CBP’s ability (as well as ICE’s) to gather necessary evidence, and the ease with which importers attempting to evade duties can change names and identification numbers to elude detection. Nonetheless, some improvements have been made since we last reported, including better communication between Commerce and CBP and CBP’s encouragement of the use of higher bonding requirements to protect additional AD/CV duty revenue in instances where it suspects evasion. However, CBP lacks information from Commerce that it needs to better plan its workload and mitigate the impact of the time- and resource-intensive liquidation process on its efforts to address evasion. Further, CBP has no policy or mechanism for port officials to minimize the risk of port-shopping by notifying other ports about their use of higher bonding requirements. Unless these gaps in information sharing are closed, these recent initiatives may be compromised, thereby limiting the effectiveness of CBP’s efforts to address AD/CV duty evasion. CBP has also made some improvements in managing its efforts to address AD/CV duty evasion, including by developing better performance measures and monitoring its use of higher bonding requirements. However, it lacks key data on AD/CV duty evasion, including on confirmed cases of evasion and penalties, which could help it assess and improve its approach to addressing evasion and also inform agency and congressional decision makers about its efforts. Moreover, CBP has neither tracked nor reported the outcomes of the allegations of evasion it has received from third parties. Without improved tracking and reporting, agency leadership, Congress, and industry stakeholders will continue to have insufficient information with which to oversee and evaluate CBP’s efforts. To enhance CBP’s efforts to address AD/CV duty evasion and facilitate oversight of these efforts, we make the following recommendations: First, to help ensure that CBP receives the information it needs from Commerce to plan its workload and mitigate the impact of the liquidation process on its efforts to address evasion, the Secretary of Commerce should work with the Secretary of Homeland Security to identify opportunities for Commerce to regularly provide CBP advance notice on liquidation instructions, and notify CBP when courts reach decisions on AD/CV duty cases in litigation. Second, to help minimize the risk of port-shopping by importers seeking to avoid higher bond requirements, the Secretary of Homeland Security should direct CBP to create a policy and a mechanism for information sharing among ports regarding the use of higher bond requirements. Third, to inform CBP management and to enable congressional oversight, the Secretary of Homeland Security should ensure that CBP develop and implement a plan to systematically track and report on instances of AD/CV duty evasion and associated data—such as the duties assessed and collected, penalties assessed and collected, and the country of origin, product type, and method of evasion for each instance of evasion—and the results, such as enforcement outcomes, of allegations of evasion received from third parties. We provided a draft of this report to the Secretary of the Department of Homeland Security, the Secretary of Commerce, and the Secretary of the Treasury for their review and comment. We received technical comments from the Departments of Homeland Security, Commerce, and Treasury, which we incorporated where appropriate. We also received written comments from the Departments of Homeland Security and Commerce, which are reprinted in appendixes II and III, respectively. The Department of the Treasury did not provide written comments. In commenting on a draft of this report, the Department of Homeland Security concurred with our recommendations addressed to the department that CBP (1) create a policy and a mechanism for information sharing among ports regarding the use of higher bond requirements and (2) develop and implement a plan to track and report systematically instances of AD/CV duty evasion and the results of CBP’s enforcement actions. The Department of Commerce generally concurred with the recommendation addressed to the department to work with CBP to identify opportunities for Commerce to (1) regularly provide CBP with advance notice of liquidation instructions and (2) notify CBP when courts reach decisions on AD/CV duty cases in litigation. In its response, Commerce stated that both CBP and Commerce receive copies of injunctions from the U.S. Court of International Trade and attached a copy of a preliminary injunction to demonstrate how both agencies are generally served copies of the injunctions. However, when a court orders an injunction, such as the one Commerce provided, Commerce and CBP are enjoined from issuing liquidation instructions or otherwise causing or permitting liquidation of the entries that are the subject of the litigation. As a result, the injunction does not provide CBP with the information it needs to help with workload planning because it is not a court action that constitutes notice of the lifting of a suspension of liquidation, which would start the 6-month period in which CBP must liquidate entries. While an injunction can provide CBP information to help with workforce planning, it does not address CBP’s concern for regular advance notice of forthcoming liquidation instructions. CBP needs information from Commerce on when final court decisions are reached to help enable the agency to better plan its workload and help mitigate the administrative burden it faces in processing AD/CV duties—an effort that diminishes the resources it has available to address evasion. We are sending copies of this report to the appropriate congressional committees, the Departments of Homeland Security, Commerce, the Treasury, 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) 512-4101 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. To examine how the Department of Homeland Security’s U.S. Customs and Border Protection (CBP) detects and deters the evasion of antidumping and countervailing (AD/CV) duties, we examined agency documents that outline CBP’s process and methods for identifying evasion of AD/CV duties; reviewed laws and other documents that identify the enforcement options CBP uses to deter evasion; and analyzed data from CBP and U.S. Immigration and Customs Enforcement (ICE) on deterrence activities such as civil penalties, seizures, criminal arrests, indictments, and criminal convictions. To identify factors that affect CBP’s efforts to detect and deter AD/CV duty evasion, we examined CBP documents that highlight the challenges and the timeline associated with verifying evasion; analyzed data on the amount of civil penalties CBP has collected from importers evading AD/CV duties; and reviewed legislation governing CBP’s use of seizures, internal memos on the use of single transaction bonds, and previous GAO reports on AD/CV duties. To assess the extent to which CBP tracks and reports on its efforts to detect and deter AD/CV duty evasion, we reviewed CBP annual plans that identify its performance measures for addressing AD/CV duty evasion; documents that show CBP’s performance against these measures; CBP testimony and videos publicizing successful efforts to address evasion; a CBP report to Congress on fiscal year 2010 efforts to enforce AD/CV duties; and a report by the Department of Homeland Security Inspector General on CBP’s bonding process, including its use and tracking of single transaction bonds. Additionally, we analyzed data on civil penalties CBP has imposed for AD/CV evasion and allegations of evasion received from third parties. Additionally, in the Washington, D.C., area, we discussed our objectives with officials in CBP’s Offices of International Trade, Field Operations, and Intelligence and Investigative Liaison; ICE; and the Departments of Commerce and the Treasury, as well as a coalition of U.S. industries affected by AD/CV duty evasion. To obtain a more in-depth understanding of U.S. efforts to detect and deter AD/CV duty evasion, we conducted fieldwork at the ports of Miami, FL; Seattle, WA; and Los Angeles, CA. We selected the port of Miami due, in part, to its proximity to CBP’s National Targeting and Analysis Group (NTAG) for AD/CV duty issues; the port of Seattle due, in part, to the high number of civil penalties it imposed for AD/CV duty evasion over the last 5 years; and the port of Los Angeles because it processed the most imports subject to AD/CV duties, by value, of any U.S. port. At each port, we met with officials from CBP and ICE to discuss the efforts they undertake to detect and deter AD/CV duty evasion at their port, the challenges they face in detecting and deterring evasion, and the process they use to track and report the results of these efforts. We also met with representatives of the NTAG for AD/CV duty issues in Plantation, FL, to discuss their methods for detecting evasion, both through their own targeting efforts and through analyzing allegations of evasion they receive from third parties. To determine the reliability of the data we collected on AD/CV duty orders, civil penalties, seizures, ICE enforcement outcomes (i.e., arrests, indictments, and criminal convictions), and allegations received from third parties, we compared and corroborated information from different sources; checked the data for reasonableness and completeness; and asked agency officials how the data are collected, tracked, and reviewed for accuracy. Based on the checks we performed, our discussions with agency officials, and the documentation the agencies provided to us, we determined that the data we collected were sufficiently reliable for the purposes of this engagement. We conducted this performance audit from June 2011 to May 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Christine Broderick (Assistant Director), Aniruddha Dasgupta, Julia Jebo, Diahanna Post, Loren Yager, Ken Bombara, Debbie Chung, Martin De Alteriis, Etana Finkler, and Grace Lui made key contributions to this report. Joyce Evans, Jeremy Latimer, Alana Miller, Theresa Perkins, Jena Sinkfield, Sushmita Srikanth, Cynthia S. Taylor, and Brian Tremblay provided technical assistance. | The United States imposes AD/CV duties to remedy unfair foreign trade practices, such as unfairly low prices or subsidies that cause injury to domestic industries. Examples of products subject to AD/CV duties include honey from China and certain steel products from South Korea. Importers that seek to avoid paying appropriate AD/CV duties may employ methods of evasion such as illegally transshipping an import through a third country to disguise its true country of origin or falsifying the value of an import to reduce the amount of duties owed, among others. AD/CV duty evasion can harm U.S. companies and reduces U.S. revenues. CBP, within the Department of Homeland Security, leads efforts to detect and deter AD/CV duty evasion. GAO was asked to examine (1) how CBP detects and deters AD/CV duty evasion, (2) factors that affect CBPs efforts, and (3) the extent to which CBP tracks and reports on its efforts. To address these objectives, GAO reviewed CBP data and documents; met with government and private sector representatives in Washington, D.C.; and conducted fieldwork at three domestic ports. U.S. Customs and Border Protection (CBP) detects and deters evasion of antidumping and countervailing (AD/CV) duties through a three-part process that involves (1) identifying potential cases of evasion, (2) attempting to verify if evasion is occurring, and (3) taking enforcement action. To identify potential cases of evasion, CBP targets suspicious import activity, analyzes trends in import data, and follows up on allegations from external sources. If CBP identifies a potential case of evasion, it can use various techniques to attempt to verify whether evasion is occurring, such as asking importers for further information, auditing the records of importers suspected of evasion, and inspecting shipments arriving at ports of entry. If CBP is able to verify evasion, its options for taking enforcement action include (1) pursuing the collection of evaded duties, (2) imposing civil penalties, (3) conducting seizures, and (4) referring cases for criminal investigation. For example, between fiscal years 2007 to 2011, CBP assessed civil penalties totaling about $208 million against importers evading AD/CV duties. Two types of factors affect CBPs efforts to detect and deter AD/CV duty evasion. First, CBP faces several external challenges in attempting to gather conclusive evidence of evasion and take enforcement action against parties evading duties. These challenges include (1) the inherent difficulty of verifying evasion conducted through clandestine means; (2) limited access to evidence of evasion located in foreign countries; (3) the highly specific and sometimes complex nature of products subject to AD/CV duties; (4) the ease of becoming an importer of record, which evaders can exploit; and (5) the limited circumstances under which CBP can seize goods evading AD/CV duties. Second, gaps in information sharing also affect CBP efforts. Although communication between CBP and the Department of Commerce (Commerce) has improved, CBP lacks information from Commerce that would enable it to better plan its workload and help mitigate the administrative burden it faces in processing AD/CV dutiesan effort that diminishes its resources available to address evasion. Additionally, CBP has encouraged the use of larger bond amounts to protect AD/CV duty revenue from the risk of evasion, but CBP has neither a policy nor a mechanism in place for a port requiring a larger bond to share this information with other ports in case an importer withdraws its shipment and attempts to make entry at another port to avoid the higher bond amount. While CBP has made some performance management improvements, it does not systematically track or report key outcome information that CBP leadership and Congress could use to assess and improve CBPs efforts to deter and detect AC/CV duty evasion. First, CBP cannot readily produce key data, such as the number of confirmed cases of evasion, which it could use to better inform and manage its efforts. Second, CBP does not consistently track or report on the outcomes of allegations of evasion it receives from third parties. As GAO reported in March 2011, the Government Performance and Results Modernization Act of 2010 underscores the importance of ensuring that performance information will be both useful and used in decision making. Without improved tracking and reporting, agency leadership, Congress, and industry stakeholders will continue to have little information with which to oversee and evaluate CBPs efforts to detect and deter evasion of AD/CV duties.. To enhance CBPs efforts to address AD/CV duty evasion and facilitate oversight of these efforts, GAO makes several recommendations, including that CBP create a policy and a mechanism for information sharing among ports regarding the use of higher bond amounts and develop and implement a plan to track and report on these efforts. CBP and the Department of Commerce generally concurred with GAOs recommendations. |
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With the completion of the Uruguay Round of multilateral trade negotiations in 1994, member countries of the General Agreement on Tariffs and Trade (GATT) agreed to a variety of disciplines for international trade in agricultural products. Nonetheless, according to GATT/World Trade Organization (WTO) and member country officials, state trading enterprises (STE) were not a major issue during the Uruguay Round. Since the start of GATT, member countries have noted STEs’ unique role and potential to distort world trade and have thus required them to operate in accordance with commercial considerations. STEs have been important players in the world agriculture market, particularly in wheat and dairy products. Since 1980, 16 GATT member countries have reported to the GATT secretariat that they operate STEs in their wheat sector, while 14 countries have reported STEs in their dairy sector. With the volume of trade in agricultural goods expected to expand, understanding the role and operations of STEs is likely to be an important component in understanding the nature of international trade. The Final Act resulting from the GATT Uruguay Round negotiations was signed by more than 117 countries on April 15, 1994. The intent of the Uruguay Round was to further open markets among GATT countries. Under the Uruguay Round agreement, member countries committed to reductions in tariffs worldwide by one-third; strengthened GATT through the creation of WTO and a revised multilateral dispute settlement mechanism; improved disciplines over unfair trade practices; broadened GATT coverage by including areas of trade in services, intellectual property rights, and trade-related investment that previously were not covered; and provided increased coverage to the areas of agriculture, textiles and clothing, government procurement, and trade and the environment. Since GATT was first drafted in 1947, STEs have been recognized as legitimate trading partners in world markets. However, the original drafters of GATT also understood how governments with a dual role as market regulator and market participant can engage in activities that protect domestic producers and place foreign producers at a disadvantage. A separate GATT article was established to monitor STEs and ensure they operate within GATT disciplines. Article XVII establishes a number of guidelines and requirements with respect to the activities of STEs and the obligations of member countries. In addition to holding STEs to the same disciplines as other trading entities, such as making purchases or sales in accordance with commercial considerations and allowing enterprises from other countries the opportunity to compete, the article requires periodic reporting by member countries to the GATT/WTO secretariat. In an August 1995 report, we commented on the disciplines placed on STEs by both article XVII and other GATT provisions. Among other things, our report noted that GATT member countries’ compliance with the article XVII reporting requirement between 1980 and 1994 had been poor. In addition, although state trading was not a major issue during the Uruguay Round negotiations, members established a definition of STEs and new measures to improve reporting compliance. Our report also highlighted the Uruguay Round’s Agreement on Agriculture, which requires all countries trading in agricultural goods, including those with STEs, to observe new trade-liberalizing disciplines (the agreement is defined in the next section). Finally, our report emphasized that the effectiveness of article XVII is especially important given the potential for increases in STEs if countries such as the People’s Republic of China (China), Russia, and Ukraine join GATT/WTO. Attempts to understand the role of STEs are complicated by the various measures that STEs use to control either a country’s production, imports, and/or exports. As we reported in August 1995, STEs’ practices to control commodities have included placing levies on production and/or imports, requiring licenses for exports, giving government guarantees, and providing export subsidies. Some STEs have justified their controls by emphasizing the needs for such things as protection against low-priced imports and safeguarding national security. governmental and nongovernmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports. As we stated in our 1995 report, it is still too early to determine the impact of the STE definition and additional measures to improve the reporting compliance of member countries. These new measures include the creation of a working party to review STE notifications. Although some GATT/WTO member countries have stated that article XVII should require that STEs report more information, such as detailed data about transaction prices, other member countries consider this information to be confidential and related to an STE’s commercial interests. The absence of this information is expected to hinder those member countries concerned about the role of STEs from obtaining the type of information they say is needed to fully determine whether STEs are adhering to GATT disciplines. According to U.S. Department of Agriculture (USDA) officials, the working group on STEs has met twice since August 1995. Members of this working group are reviewing each others’ notifications for completeness. Additionally, the United States has proposed improvements to the existing questionnaire on state trading and is seeking disciplines on STE activities through a working group on credit guarantee disciplines. The Agreement on Agriculture, resulting from the Uruguay Round, requires member countries to make specific reductions in three areas—market access restrictions, export subsidies, and internal support—over a 6-year period beginning in 1995. Under the market access commitment, countries are required to convert all nontariff barriers, such as quotas, to tariff equivalents and reduce the resulting tariff equivalents (as well as old tariffs) during the implementation period. Under the export subsidy commitment, countries are required to reduce their budgetary expenditures on export subsidies and their quantity of subsidized exports. Member countries are also expected to reduce their aggregate measure of selected internal support policies. These internal support policies include budgetary expenditures and revenue forgone by governments or their agents. These reductions are expected to have the effect of liberalizing trade in agricultural products, thereby increasing the flow of these products between GATT/WTO member countries. STEs are subject to these reductions. The United States is expected to experience economic benefits as a result of the new trade discipline in agriculture. As we reported in 1994, USDA estimated that as a result of the Uruguay Round, U.S. annual agricultural exports are likely to increase between $1.6 billion and $4.7 billion by 2000, and between $4.7 billion and $8.7 billion by 2005. Higher world income, as well as reduced tariffs and export subsidies among U.S. trade partners, is also expected to raise U.S. exports of coarse grains, cotton, dairy, meat, oilseeds and oilseed products, rice, specialty crops such as fruits and nuts, and wheat.U.S. subsidies on some agricultural products will also be reduced, most likely shrinking government support for dairy, coarse grains, meat, oilseed products, and wheat. Nonetheless, even with projected gains for U.S. agriculture, some U.S. producers are concerned that countries with STEs have not taken the same steps to reduce trade-distorting activities. For example, the United States developed its agricultural export subsidies to counteract those of other countries, such as members of the European Union (EU). These export subsidies were subsequently used to counteract STE practices as well. U.S. producers are now concerned that under the Uruguay Round the United States has committed to reduce those subsidies without a corresponding reduction in other countries’ state trading activities. The majority of STEs reported to the GATT secretariat between 1980 and 1995 involved trade in agricultural products. Although the reporting represented only a portion of GATT member countries, the largest number of STEs were found to be trading in either grains and cereals or dairy products. As shown in table 1.1, 16 member countries have reported state trading in their grain and cereals sector, while 14 have reported state trading in their dairy sector. Countries support their agricultural producers through both direct and indirect assistance. One way of measuring the flow of direct and indirect government assistance to producers is by using the “producer subsidy equivalent” (PSE). The Organization for Economic Cooperation and Development (OECD) uses PSEs to compare levels of assistance among countries. PSE is an internationally recognized measure of government assistance. It represents the value of the monetary transfers to agricultural production from consumers of agricultural products and from taxpayers resulting from a given set of agricultural policies in a given year. A relatively high PSE means that the government provides a larger amount of production assistance than do governments in countries with a lower PSE. Table 1.2 presents the PSEs for wheat in Australia, Canada, the EU, and the United States from 1979 to 1994. Table 1.3 presents the PSEs for milk in Australia, the EU, New Zealand, and the United States during the same period. As indicated in both tables, in recent years both the EU and the United States have subsidized their wheat and milk production to a greater extent than Australia, Canada, or New Zealand. Members of Congress’ concerns about STEs, further informed by reports of the USDA’s Foreign Agricultural Service (FAS) and the International Trade Commission that highlight the operations and trading practices of STEs operating in the world dairy and wheat markets, have led to the issuance of three GAO reports on the subject of STEs. We have already published reports on state trading, including (1) a July 1995 report that provides a summary of trade remedy laws available to investigate and respond to activities of entities trading with the United States, including STEs; (2) a report on the GATT/WTO disciplines that apply to STEs and the effectiveness of those disciplines to date; and (3) a correspondence report describing the impact of the Uruguay Round on U.S. cheese quotas and importer licensing process, as well as the operations of the New Zealand Dairy Board (NZDB) in the United States. Eighteen Members of the House of Representatives and the Senate have also asked us to provide more information on how STEs operate in an open, competitive marketplace. Members noted the role of state trading in the wheat and dairy sectors, saying that any trade problems in these sectors could be representative of potential problems that may affect U.S. producers, processors, exporters, and importers. We were asked to describe (1) the potential capability of export-oriented agricultural STEs to distort trade and (2) the specific potential of the Canadian Wheat Board (CWB), the Australian Wheat Board (AWB), and NZDB to engage in trade-distorting activities, based on their status as STEs. We agreed to review the three export STEs based upon their considerable role in international trade and not due to any assumption of trade distortion. To create a framework for understanding export STEs, we reviewed various trade practices and trade agreements; reviewed related literature; interviewed U.S., GATT/WTO member country and GATT/WTO secretariat officials; and utilized information from STE and national government officials in Canada, Australia, and New Zealand. Our purpose in establishing a framework was to (1) facilitate data collection in the three countries, (2) allow for various STE characteristics to be reported in a consistent and organized manner, and (3) determine the relevant relationships maintained by STEs and thereby come to some conclusion about whether or not an STE is able to distort international trade. We used the framework as a tool to try to partially overcome the transparency (openness) problem found in international trade in both the dairy and wheat sectors. The absence of transaction-level data, protected as commercial practice by both STE and private sector traders, necessitated another way of evaluating STEs’ influence on the market. However, foreign countries’ STEs and private firms are under no obligation to provide these data, since we have no audit authority over them. Even with this information, such an extensive analysis would require additional data regarding production costs. As such, definitive conclusions regarding STEs’ trade-distorting activities cannot be reached, given the complexity of the overall task. The framework underwent a peer review by economists at WTO, USDA’s FAS and Economic Research Service (ERS), the Congressional Research Service, and a private sector agricultural organization. We made changes in the framework where appropriate. To obtain information about STE operations in Canada, we interviewed officials from CWB, Agriculture Canada, the Canadian Grain Commission, the Canadian International Grains Institute, the Department of Foreign Affairs and International Trade, private sector grain traders, and provincial grain associations. In Australia, we interviewed officials with AWB, the Department of Primary Industries and Energy (DPIE), the Department of Foreign Affairs and Trade, the Grains Council of Australia, and the Industry Commission. To obtain information about the operations of NZDB, we interviewed officials from NZDB, the Ministry of Agriculture and Fisheries (MAF), the Ministry of Foreign Affairs and Trade, the Federated Farmers of New Zealand. We also spoke with or reviewed materials from assorted industry and academic groups. In the United States, we interviewed officials at the Office of the U.S. Trade Representative (USTR) and USDA’s FAS. We met with Canadian, Australian, and New Zealand embassy representatives located in Washington, D.C. We also conducted interviews with officials representing both U.S. dairy and wheat interests. In the case of the wheat industry, we spoke to officials from U.S. wheat, miller, and grain trading associations. We also reviewed background documents and reports on wheat and dairy trade provided by the officials mentioned previously, as well as reports from other government, industry, and academic organizations. Information on foreign law in this report does not reflect our independent legal analysis but is based on interviews and secondary sources. We did our review from April 1995 to October 1995 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the USTR and the Secretary of Agriculture or their designees. On March 26, 1996, we received oral comments from USTR. The agency was generally pleased with the report and declined to offer written comments. On May 2, 1996, the FAS Administrator provided us with written comments on the draft. In general, FAS agreed with the conclusions in our report. FAS was concerned that we had not fully explored certain market power issues as they relate to STEs, such as a guaranteed product supply and pricing flexibility. Although we generally addressed these issues in our draft report, we have expanded the discussion to better reflect the importance of the market power of these issues. Additionally, specific comments regarding clarifying language or updated information have been incorporated as appropriate. We also discussed the factual content of the report as it relates to the STE in their individual country with embassy representatives from Canada, Australia, and New Zealand. Their comments have been incorporated in the report where appropriate. Various types of STEs operate in the world market, with differences in aspects such as an export or import STE, the types of industries, the size of the operations, and the level of government involvement. This diversity makes it hard to generalize about the effects of STE operations on particular markets or on the world trading system. This is true even among CWB, AWB, and NZDB, which are the subject of this report. As a result, it is necessary to consider STEs on a case-by-case basis to understand their potential effects. We developed our framework for reference to incorporate information from a variety of sources that we believe should be considered in an analysis of the potential effects of individual export STEs. In subsequent chapters, we use this framework in reviewing three specific export STEs. Using this framework, we divided the relationships of export STEs into three groups: the relationship of the STE to domestic producers, the relationship of the STE to the government, and the relationship of the STE to foreign buyers. (See fig. 2.1) Using such a framework provided advantages in the collection, reporting, and interpretation of information on STE operations. First, it should aid in the collection of a consistent and comprehensive set of information about the operations of these entities. Similarly, it facilitated reporting about STE characteristics since the material can be described in an organized manner. Finally, the framework helped in the interpretation of the information about STEs since it distinguished between important characteristics and those that are less important. In each of the relationships, we considered the advantages and disadvantages the STE might have in relation to its private sector counterparts. In particular, we highlighted those characteristics that might provide a unique advantage in international markets, especially those that have the potential to distort trade. We also included material on a number of practices that are common to both private firms and STEs, even if they are not trade distorting. Some of these practices have been the cause of concern among industry observers. We developed this framework based on our own expertise in reviewing various trade practices and trade agreements, our review of related literature, and our discussions with STEs and officials with national governments and international organizations that deal with STE issues. We circulated a draft of this framework among agency officials and solicited their comments. The discussion of the framework in this chapter draws upon examples from CWB, AWB, and NZDB. Chapters 3, 4, and 5 provide more detailed descriptions of those boards using the framework set forth in this chapter. One of the relationships that is central to the discussion of export STEs is the relationship between the STE and the domestic producers. Two aspects of this relationship are important: (1) the ownership and management of the STE by the domestic producers and (2) the requirement that domestic producers sell to the STE. The ownership and management structure can vary significantly across STEs: these characteristics may provide insights into the goals of the enterprises. For example, STEs can be owned and managed entirely by producers, where all of the returns from the sales are given back to the producers in the form of profits. In these cases, we might expect the organization to try to maximize its own returns by selling at the highest prices possible. The stated objectives of the three STEs we assessed suggest that they are all producer oriented (see app. I for the three STEs’ objectives and other information). In each case, these enterprises seem to be operated on behalf of farmers. For example, the CWB annual report for 1993-94 states: “The CWB focuses on maximizing performance for prairie farmers,” while the AWB literature says that its mission is to “maximize long-term returns to Australian grain growers.” Alternatively, if the STE is owned or managed by some group other than the producers, it is possible that it might have a different goal, such as maximizing domestic political benefits. In these cases, the STE might choose to sell the commodity at prices that are advantageous to certain domestic groups. In this situation, the STE might be able to use its monopoly authority to lower the returns to producers. This would allow the STE to sell at a lower price in either the domestic or the international market. However, if the STE is successful in lowering returns to producers, this will make those sales less attractive, eventually drive marginal producers from the market, and decrease supply. The management of the STE could also make other changes in the terms, such as pooling the returns of producers. For example, the STE may choose to pay the producers the same return regardless of the time of delivery during the marketing year. For example, CWB describes price pooling efforts as “something which smooths out the seasonal fluctuations in prices and reflects the values that are achieved over the course of a marketing year.” This might make it easier for some producers to secure commercial financing by reducing the volatility of the returns to producers. However, these practices may also have disadvantages, since this feature would remove some of the incentive for the individual producers to try to be responsive to world markets. One of the central elements of an export STE is the relationship of the STE to the domestic producers. As part of their status as government-related entities, STEs often have some control over the sales of particular commodities. However, the extent of this control can vary. In some cases, the STE may have exclusive rights to acquire a commodity destined for export from producers in designated regions, as in the case of CWB, or from the nation, as in the case of NZDB. Under this authority, NZDB typically handles the export transactions, and sometimes licenses private firms to do the exporting. This type of authority might provide certain advantages in terms of size over individual producers or groups of producers who attempt to export on their own behalf. Exclusive purchasing authority can provide the STE with a more secure source of supply than would be the case for a private exporter. Depending upon the size of the domestic market and the extent of the purchasing authority, an STE can count on a certain level of supply for its export sales. This may increase its willingness to enter into long-term supply relationships. However, the success of the STE over a period of years depends more upon its ability to charge high prices and generate high returns for producers. These high returns keep the marginal suppliers in business and induce others to increase their production for the STE. These pressures are similar to those facing private exporters. A somewhat different situation exists when the STE has exclusive authority to purchase all production of a particular commodity, whether destined for domestic or export markets. Although none of the three enterprises we reviewed has control over all exports and all domestic sales, CWB does have control over all wheat and barley sales for human consumption from the western provinces. This additional authority over domestic sales could provide the STE with the ability to charge different prices in the domestic and export market. For example, if the STE’s goal were to increase consumption in the domestic market, it could charge higher prices abroad in order to subsidize the domestic price. On the other hand, if the STE’s goal were to maximize exports, it might charge higher prices to domestic consumers and use the profits to lower the export price. When the export prices are below the cost of production, these actions are referred to as “cross-subsidization,” and are potentially trade distorting. Two factors are important in considering the ability of an STE to engage in this type of cross-subsidy. One is the openness of the STE’s domestic market to imports. If the domestic market is open to shipments from abroad, the ability of the STE to raise the domestic price would be limited by the availability of imports from the world market. On the other hand, if the market is closed to imports, this would create at least the potential for the STE to raise prices above the level of the world price. For example, AWB must compete with both domestic wheat sellers and foreign wheat sellers for a share of the Australian domestic wheat market. As a result, an STE with both domestic market and export authority that operates from a closed market has more potential for trade distortion than an STE with only two of those factors. None of the STEs that we reviewed has all these capabilities. Finally, the extent to which this type of cross-subsidization is possible depends in part upon the relative size of the domestic and the export markets. For example, the fact that CWB exports more than 85 percent of the wheat under its control limits its ability to cross-subsidize. Domestic prices would have to be raised significantly in order to collect enough funds to lower the export price in any meaningful way. Certain types of relationships between the STE and the government could provide financial benefits to the STE that would not be available to private firms. For example, direct subsidies could provide advantages for the STE over its competitors in the international market. Other government actions may also provide benefits for the STE, but these may or may not be related to the fact that the exporter in a particular industry happens to be organized as an STE. The most obvious type of advantage a government can provide is direct subsidies paid out from general revenues to STEs. These funds could be used to reduce the prices of exports to gain an advantage in the international market. If these subsidies are used in an isolated case, they could have the effect of protecting the producers from unusually low prices. For example, the Canadian government provided financial assistance in the 1990-91 marketing year to CWB during a year when market prices were low, thus diminishing the impact of the low prices on producers. If these subsidies were provided on a regular basis, the higher returns to subsidized producers would likely lead to an increase in the supply of the commodity and reduce the sales and profits of other producers in the world market. These kinds of changes are generally considered trade distorting in the international markets. There are other ways in which a government could provide financial assistance to the STE. For example, a special tax advantage for an STE could reduce the amount of taxes for an STE or its domestic suppliers. Alternatively, if the STE is allocated tariff revenues on imports of the commodities, these revenues could be used to lower the price of its exports. In each of these cases, the potential exists for government assistance to be used to lower the prices of the STE to increase sales without lowering the prices received by producers. These actions have the potential to distort trade. In addition, there are a number of ways in which a government might provide indirect advantages to an STE. One of these indirect benefits is the interest rate advantage that might accrue to those firms that are associated with the government. Because the perceived risk of lending to governments is usually lower than the risk of lending to private entities, the costs of borrowing money are typically lower for governments than for private organizations. Because of their association with the government, STEs might thus have a lower cost of borrowing than a private organization with the same characteristics. The extent of this advantage would be difficult to estimate but would depend upon the amount of borrowing and the difference between the borrowing rate of the STE and the rate of a private entity with similar characteristics but without the government association. In cases where the government has actually stepped in to provide funds when the STE was in danger of default, the difference would tend to be the highest. On the other hand, in situations where the government has not provided funds since the inception of the STE, the difference would tend to be the lowest. There are other situations in which the STE may not pay the full cost of services provided. One example is a transportation subsidy where the stated cost of transporting commodities has been held significantly below the true cost, although these subsidies may or may not be related to the STE. For example, in the case of a transportation subsidy, it could be that the STE happens to be operating in an industry where this type of subsidy exists. While the STE might benefit from the subsidy, the potential for trade distortion comes from the indirect subsidy itself, whether it is a transportation subsidy or some other type of subsidy. It is also useful to examine the relationship between the STE and the foreign buyers to determine whether there is any unique advantage to operating as an STE in foreign markets. For example, as single sellers from export markets, STEs may have certain advantages in terms of spreading costs and achieving unity among producers. Some of these STE characteristics appear to be especially important in selling to foreign markets restricted by import quotas. In other situations, however, STEs appear to rely chiefly on practices that are also available to commercial exporters. An STE might provide certain advantages in terms of size and experience over individual producers acting on their own behalf. The costs of operating an office with specialized expertise in exports is likely to be considerable, and the larger scale of operations of an STE might enable these costs to be spread over a much greater volume of sales. NZDB officials noted that individual farmers or cooperatives would have a difficult time marketing dairy products on their own; thus, NZDB provides a mechanism through which the New Zealand dairy farmer can compete in a global marketplace. Multinational firms may not have the captive source of supply, but can achieve economies of scale through efficient operations and establishing relationships with producers in various countries and in various commodities. The establishment of an STE can also lead to a reduction in the number of exporters and an increase in the market power of the remaining participants. This might allow the STE to be more effective in certain situations in acting as a cartel to maintain higher prices than a collection of private firms. The distinction between the STE and the producers who sell to an exporter or participate in a cooperative is that the STE can prevent its producers from selling at a discount. Private firms and cooperatives would generally rely on voluntary cooperation and would therefore have the ability to offer discounts from the prices set by the cooperative. To the extent that STEs can extend their control over supply through collusion with other exporters, their ability to influence the market would increase. However, the exercise of market power over more than one year depends on the response of other suppliers to those higher prices. If those higher prices result in greater production by other nations, the STE may face additional competition in the market in the following years. There are other ways in which STEs might have an advantage in exporting to controlled import markets. One reason is that the importing nation may be more responsive to export promotion efforts when they are government affiliated, such as an STE. STEs with control over the exports of a commodity may also have an advantage in selling into a market that is protected by a quota. In this case, the STE is better able to capture the full difference between the lower world price and the higher price in the protected market through the establishment of a subsidiary in the importing nation. For example, NZDB has set up a wholly owned subsidiary for importing quota cheese products into the United States. As a sole exporter selling to a subsidiary in the protected market, NZDB has been able to capture more of the return than would have been possible in selling to an independent agent. There may also be differences in the way that STEs deal with foreign buyers. However, our ability to analyze sales practices is somewhat limited by the lack of transaction-level price information for either STEs or private firms. Recognizing this limitation, nevertheless it is useful to identify certain practices of firms and STEs in international markets and ask whether the status of the STE offers any particular advantages. Price discrimination is the practice of distinguishing between buyers of a particular good or service in order to charge a higher price to some buyers and a lower price to others. With the right combination of market characteristics, some sellers may be able to increase their profits because the lower-priced sales do not affect their sales to premium customers. STEs may be able to lower the price to certain importing countries without affecting the prices to its other customers. However, the important part of price discrimination is to be able to charge a higher price to premium customers. If there are other sellers willing to sell at a known world price, as there are in many commodity markets, it is not obvious why any buyer would ever be willing to pay a higher price to the STE. As a result, the success of the price discrimination would depend upon the existence of other producers willing to sell at the world price, rather than the fact that one seller happens to be an STE. One particular type of price discrimination is “predatory pricing,” where a seller or group of sellers lowers prices for the purpose of driving other sellers from a market by using higher prices from one market to lower prices in a second market. If successful, the remaining seller(s) can raise prices once the competition has been eliminated. However, we did not examine data to determine whether STEs practice predatory pricing, or how STEs might provide any unique advantage in this area. Successful predatory pricing would depend upon the existence of barriers to entry in the agricultural commodity markets, which would prevent new competitors from taking the place of those eliminated from the market. Predatory pricing implies a certain size in relation to the available market. In these cases, the important issue is whether the STE or the multinational firms have that type of market power. STEs might use other practices such as engaging in long-term supply arrangements or emphasizing quality to differentiate its products and services from those of other sellers. For example, STEs might be able to set some uniform grading standards for the producers; in fact, AWB sets standards for its wheat for export and further classifies the wheat based on quality and variety. Similarly, CWB has emphasized the high quality of the grain as a marketing strategy, but in some cases may have provided a higher quality than the customer required, potentially reducing the returns to the Canadian farmers. The success of these efforts in raising returns to producers would depend upon whether the STE is more responsive to the demands of world markets than a private firm. In these cases, it is useful to ask whether the practices are somehow unique to STEs or could be equally—or perhaps more effectively—practiced by any seller in the market. The actions of CWB in using private firms to export commodities rather than export the commodities itself may be evidence that the private sector is more effective at some of these commercial practices. By volume, CWB is the world’s largest grain-marketing board. As an STE, CWB has certain factors that provide it with the potential to distort international trade in wheat and barley. The CWB’s control over both domestic human consumption and exports of wheat creates the potential for cross-subsidization, though the risk of such practices is reduced by Canada’s dependence on the export market. However, CWB could potentially cross-subsidize between the domestic and foreign markets in its barley trade. Canadian government payments to CWB to cover the CWB’s periodic wheat and barley pool deficits have at times represented a significant subsidy. Finally, the margin between initial payments and final payments to the Canadian producers allows for greater flexibility in pricing than is the case with private sector grain traders. Nonetheless, some changes in subsidies and CWB control, as well as ongoing reviews of the CWB’s monopoly status, may have the effect of reducing the CWB’s ability to potentially distort trade. In addition, a joint commission established by the United States and Canada has made suggestions for restructuring both U.S. and Canadian trade practices. CWB operates as a government-backed, centralized marketer of wheat and barley. It remains the world’s largest grain-marketing board and Canada’s single largest net exporter. According to USDA figures, Canada’s 19-percent share of world exports of wheat and wheat products in 1994 was expected to increase to 22 percent in 1995. Figure 3.1 shows the six largest wheat-exporting nations over the last 3 years. 1995 (Forecast) In the previous 6 crop years, Canadian exports have averaged about 75 percent of total wheat production, making wheat growers dependent on export sales. Canadian barley growers are less dependent on foreign markets. Exports of barley over the past 6 years have averaged about 32 percent of Canada’s total barley production (see table 3.1). The first attempt to organize the Canadian prairie farmers began with the Manitoba Grain Act of 1900. This act provided farmers with the right to ship their own grain and to load from their own wagons or warehouses, rather than having to sell to the grain elevators. The first cooperatives were soon to follow in 1906, with the first Wheat Board established in 1919. Although the Wheat Board lasted for only one year’s crop, it incorporated the concepts of initial and final payments, pricing to maximize producer (pool) return, and centralized marketing. Prairie provincial wheat pools were successfully formed in 1924, but went into temporary receivership after the stock market crash of 1929. Following the financial hardship faced by farmers during the Depression, the government of Canada passed the Canadian Wheat Board Act of 1935 establishing CWB. CWB was also given control of marketing oats and barley, although oats have since been removed from the CWB’s control. CWB is administered by three to five commissioners, who are appointed by the government of Canada. A producers’ advisory committee, composed of 11 farmer-elected representatives from the prairie provinces, provides CWB with producer advice on matters related to its operation. As of July 1994, CWB employed 464 permanent employees and 58 temporary employees. The Canadian government has limited oversight of CWB operations. Officials from Canada’s Department of Foreign Affairs and International Trade told us that the Canadian government takes a “hands-off” approach to CWB. The CWB’s day-to-day operations are free from government monitoring and supervision. The CWB’s only formal reporting requirement to the government of Canada is an annual report to the Parliament under the authority of the Minister of Agriculture. Western Canadian farmers are required to pool their wheat and barley production for domestic human consumption and export under CWB, which then markets this commodity in both the domestic and foreign markets. The CWB’s control of domestic sales for human consumption sales and monopoly over export sales of wheat and barley provide it with the potential ability to charge a higher domestic price for these commodities and use these proceeds to lower export prices, particularly in the case of barley exports. Though pooling diminishes the uncertainty involved in marketing their product, pooling may also lower the returns to some Canadian producers. The limited transparency of CWB operations reduces the ability of Canadian farmers to determine the success of the CWB’s services. Some Canadian farmers have questioned the CWB’s role and are requesting the chance to market their wheat and barley outside the CWB system. The CWB’s 1993-94 annual report states that “the CWB’s monopoly is its single greatest asset” and concludes that “the economic benefits that accrue to Prairie farmers from this marketing strength would be greatly diminished were the CWB to operate in tandem with a private system.” CWB has the sole authority to market for export and for domestic human consumption wheat and barley grown in the western prairie provinces of Manitoba, Saskatchewan, Alberta, and British Columbia. The small quantities of wheat and barley grown outside of this area are not handled by CWB. In addition, feed wheat and feed barley grown throughout Canada can be sold by the producer domestically. CWB controls all exports of wheat and barley products through an export licensing process. Even producers who do not operate under CWB, such as producers with the Ontario Wheat Producers’ Marketing Board, are still required to obtain an export license from CWB. Canadian producers can buy back their own grain in order to export it themselves, but they have to purchase it back at the price that CWB sets. CWB also allows accredited exporters, both Canadian and foreign grain companies, to buy grain from CWB and sell it on their own. Until recently, CWB also controlled imports of wheat into Canada. On August 1, 1995, Canada replaced the CWB’s wheat import-licensing procedure with a tariff-rate quota. The change from licenses to a tariff-rate quota was part of the alterations agreed to under the Uruguay Round. Canada’s Department of Foreign Affairs and International Trade administers the new system. Canada’s barley import-licensing procedure, already administered by the federal government, was also replaced with a tariff-rate quota. Canada has established industry advisory committees for each commodity subject to a tariff-rate quota. The advisory committees are open to national industry representatives, producers, and consumers. CWB and others participated in the wheat advisory committee meeting held before implementation of the tariff-rate quotas on August 1, 1995. As the sole marketing agent for western prairie wheat and barley destined for domestic human consumption or export trade, CWB has the ability to offer differentiated prices. Under the framework discussed in chapter 2, an STE with both domestic and export authority might charge higher prices to domestic consumers and use the profits to lower the export price. The market-distorting potential of CWB in domestic and export sales depends on whether CWB is selling wheat or barley. In the case of wheat, Canada’s small domestic consumption of wheat compared to its large export sales limits the CWB’s ability to cross-subsidize between these two markets: charging a higher domestic price would generate limited profits and therefore have a small impact on the export price (see table 3.1 for a comparison of domestic consumption of wheat versus exported wheat). As shown in table 3.2, the majority of CWB wheat sales have been to foreign markets. In addition, the CWB’s ability to raise the domestic price of wheat is also limited by the availability of imports of wheat from the United States. In the case of barley, CWB has a greater ability to use domestic prices to lower the price of barley exports since only about one-third of Canada’s barley production is exported (as shown earlier in table 3.1). However, the CWB’s domestic control is limited to barley sold for human consumption. CWB does not have control over Canadian feed barley sold domestically. In fact, CWB does not attempt to sell feed barley domestically, as shown in table 3.2, though CWB does sell about half of its human consumption barley to the domestic market. Another factor that strengthens the CWB’s position with regard to Canada’s domestic barley market is the tariff Canada places on U.S.-designated barley imports, limiting the ability of Canadians to substitute U.S. barley for Canadian barley. A USDA official said these high barley tariffs have been a point of contention between the two countries. The intent of pooling farmer wheat and barley production is to maximize the returns of Canadian farmers while minimizing the risk inherent in marketing their grain. Pooling effects include (1) removing the timing of sales as a factor for farmers and (2) distributing market risk while also sharing resources. Approximately 50 different grades of wheat and barley are delivered by farmers in a crop year. Also, the wheat and barley are sold in different quantities at different prices at different times of the year. In July, the farmers indicate the number of acres seeded to various crops. CWB then signs a contract with the farmers committing itself to purchase a certain percentage of each farmer’s offer. The contract should indicate the quantity and quality of the wheat and barley that each farmer intends to deliver to CWB in four contract series over the crop year. The marketing year for wheat and barley lasts from August to July of the following year. According to CWB officials, the grain delivery period is longer than usual because Canada’s internal transportation infrastructure limits the amount of wheat CWB can market at any one time. Farmers deliver their grain to country elevators, where it is graded and binned with similar grades entering into the marketing system for exporting grain. At that time, the elevator companies make initial partial payments to the farmer. In turn, CWB reimburses the elevator companies once the grain is delivered to a shipping port. The initial payments are set by the government of Canada in consultation with CWB and are to cover approximately 70 to 85 percent of the anticipated price of the grain. At the end of the marketing year, CWB tallies its total revenues from marketing sales, deducts appropriate operational and marketing costs from each pool account according to pool sales and expenses, and returns the difference to the Canadian producers. Each producer’s payment is based on the type of grain provided, less transportation, handling and cleaning costs. If revenues are lower than the initial payment to the farmers, the Canadian government covers the CWB’s price pooling deficit. (Pooling deficits are discussed in greater detail on p. 41.) As we reported in 1992, pooling by itself does not guarantee higher prices for farmers. The very nature of distributing the production and marketing risk means that some Canadian farmers benefit more than others in a given year. For example, a farmer who gets his or her crop into the distribution system when the international price for the commodity is at a high point will still receive no more for the grain than the average pool price. Distributed costs, such as some farmers incurring greater transportation costs to get their product to market, may also benefit some farmers at the expense of others. Some Canadian producers have questioned the underlying premise of pooling. For example, grain farmers in the province of Alberta have expressed concerns that the CWB’s operations are not transparent enough to determine whether CWB is maximizing returns to the farmers. During November 1995, the government of Alberta held a referendum to determine whether the provincial farmers should have the freedom to sell their grain outside CWB. The majority of Albertans voted for voluntary participation in CWB, though the result of the vote is not binding on the federal government. Other Canadian grain producers and grain traders have also questioned CWB operations, with some of them voicing concern that CWB inefficiencies can be hidden through the pooling process. Although the Canadian groups we questioned seek an opportunity to market their grain outside of CWB, they are not calling for the CWB’s elimination, but rather for a voluntary relationship with CWB. The Canadian government has already attempted to respond to some of the farmers’ concerns. In July 1995, the Canadian Minister of agriculture announced the formation of a nine-member panel to review western grain marketing issues. This panel, in consultation with the Canadian public, farmers, and farm organizations, is to look at “all available facts and background information about our existing and potential markets, the commodities and products we sell into those markets, and the marketing systems we have or could have to maximize our sales volume and returns.” The panel was expected to hold local town hall meetings throughout western Canada in late 1995, followed by formal hearings in early 1996 where farmers and farmer organizations can put forward their own arguments for alternative marketing methods. A concluding report is expected to be released in 1996. CWB benefits both from federal direct subsidies and from government guarantees. As a quasi-governmental entity, CWB has its periodic operational losses covered by the federal government, providing CWB with almost $1 billion in government assistance over the last 10 years. Canadian wheat producers have also benefited from government transportation subsidies, though these subsidies were eliminated in 1995. In addition, CWB receives indirect subsidies, such as a lower interest rate on commercial loans as a result of its quasi-governmental status. CWB officials told us the only direct revenue CWB receives from the federal government is for the purpose of covering operational deficits. As a crown corporation, CWB can make a direct charge of its unliquidated financial obligations to the Canadian government. As a result, the CWB’s status has protected CWB from price pooling losses. Since 1943, CWB has experienced 3 crop years with wheat pool deficits and 7 crop years with barley pool deficits (see table 3.3). Pool deficits have also increased in recent years. The wheat pool deficit in the 1990-91 crop year, by far the largest of the pool deficits, cost the federal government over $695 million. The losses in the 1990-91 market year accounted for approximately 57 percent of the total pooling deficits recorded since the establishment of CWB. CWB attributed the 1990-91 pooling loss to a price collapse in wheat and barley markets caused by a “trade war” between the United States and the EU, where both nations highly subsidized their wheat and barley exports. CWB added that a record world cereal crop in 1990 also caused a decline in the price received for these commodities. CWB also benefited from indirect subsidies. One indirect subsidy to CWB and Canadian wheat and barley producers, though a direct subsidy to the Canadian railroad, existed in the form of transportation subsidies. The 1983 Western Grain Transportation Act, which modified the Crow’s Nest Pass Agreement, was enacted to subsidize Canadian rail transportation. This subsidy amounted to approximately $410 million during the 1994-95 crop year. According to a USDA official, this transportation subsidy encouraged farmers to grow primarily those crops covered under the program, such as wheat and barley. Due to internal budget constraints plus Canada’s obligations to reduce subsidies under the Uruguay Round, on August 1, 1995, the Canadian government eliminated the transportation subsidy provided under the Western Grains Transportation Act. In order to offset the impact of this change, the government intends to compensate Canadian farmers for this loss by (1) providing about $1.2 billion as a lump sum payment to the farmers, (2) establishing a $220-million Adjustment Assistance Fund, and (3) offering about $732 million in new export credit guarantees for Canadian agricultural products. Transportation pricing will also change in the 1995-96 crop year due to the elimination of deductions on transportation costs for wheat and barley traveling to eastern Canada. In the past, all grain producers had to support the additional costs for grain going eastward, even though the majority of grain was shipped from western ports. During the 3-year phaseout period of this subsidy and afterward, producers shipping their grain East will begin to bear the full cost of the transportation. USDA officials said the elimination of the transportation subsidies may affect what Canadian farmers grow and where they sell their goods. Since the government will no longer subsidize the transportation costs of crops being exported, Canadian farmers are expected to diversify out of grain crops, plant more high-value crops, and expand livestock production. Nonetheless, the effect of the eliminated subsidies on U.S.-Canadian trade is still uncertain. According to USDA’s November 1995 Agricultural Outlook, “more Canadian grains could eventually move south because of the lower transportation costs.” However, the report noted that increased crop diversification and livestock production in Canada could increase the demand for U.S. grain. The CWB’s 1993-94 annual report states that a partnership of farmers and government creates a link between farmers and the federal government that offers “distinct economic advantages.” The report goes on to cite the benefits of this relationship, including government backing of CWB borrowing, which “translates into lower interest costs.” CWB officials told us that although the government does not provide CWB with any loans or preferential treatment, it guarantees CWB an excellent credit rating by virtue of its status as a crown corporation. This credit rating assists CWB in obtaining the loans it needs at favorable rates on commercial markets. According to CWB officials, CWB does not benefit from special tax treatment or the ability to levy assessments on Canadian wheat and barley producers. Although CWB does not pay taxes to the federal government, the returns paid to the farmers are taxed as regular income to the farmers. In addition, CWB officials told us that CWB initiated a voluntary levy was initiated in the 1994-95 marketing year to help fund grain research at the Western Canadian Grain Research Institute. A CWB official said that 30 percent of the wheat and barley producers have declined to participate in the voluntary levy. The United States, as well as other grain-trading countries, has questioned the CWB’s monopoly authority over Canadian wheat and barley as well as the lack of transparency in the CWB’s marketing system. This lack of transparency in the CWB’s pricing methods may provide CWB with greater pricing flexibility than is found among private sector traders. CWB has attempted to address some of these transparency concerns. However, a recent U.S.-Canadian joint commission has questioned both CWB and U.S. trade practices. Canada is the third-largest export market for U.S. agricultural commodities. USDA’s ERS preliminary figures for 1995 showed the United States exporting $5.8 billion in agricultural products to Canada. Earlier ERS forecasts showed Canada as the second-largest source for U.S. agricultural imports, with the United States importing $5.2 billion in agricultural products from Canada in 1995. With respect to grain, the United States has run a trade deficit with Canada. In 1994, the United States had a $500-million trade deficit with Canada in the grains, grains product, and animal feeds sector in 1994. The U.S. government, as well as other grain-exporting countries, has expressed concerns about the CWB’s monopoly power and the limited transparency of its operations. U.S. critics of CWB contend that CWB has an unfair pricing advantage due to its status as the single selling authority. According to one USDA official, the day-to-day “replacement cost” for wheat is more readily apparent in the United States with its commodity markets than is true of CWB. In such a case, the grain traders in the United States are “price takers,” or are required to buy their grain at the given market price without being able to affect that price. The CWB’s exclusive purchasing authority over wheat and barley for human consumption provides CWB with a more secure source of supply, as well as more control, than would be the case for a private exporter. USDA officials expressed concern that the CWB’s margin between the initial price and the final price paid to the Canadian wheat and barley producers allows CWB to adjust transaction prices at will, even if it is to the detriment of Canadian producers. As stated earlier, some Canadian producers are also concerned that such detrimental pricing policies could occur without greater transparency over CWB operations. Some U.S. officials are also concerned about CWB undercutting U.S. producers using its grain quality standards. According to USDA officials, CWB has used high quality as a marketing strategy, often providing higher protein content in its wheat than the customer requests and thus developing an expectation that CWB’s wheat is a better value for the money. In comparison, the U.S. wheat industry tends to blend wheat to the specifications of the buyer. Although the CWB’s approach may be a useful marketing strategy, it also has the effect of providing a benefit to a buyer without CWB getting the full value of the higher quality wheat. The uniform grading standards that CWB uses, although also cited as a benefit of CWB by providing consistency across sales, may also be a liability at times to Canadian producers. A USDA official told us about U.S. concerns that CWB has downgraded wheat to “feed quality” using these standards, even though the “feed” grain is later milled in the United States. In such a situation, Canadian producers would be deprived of the full value of their wheat. Two recent Canadian reports indicate continued attempts to understand the benefits and costs of the CWB’s single selling authority status. The first report, authored by three Canadian agriculture economists with the assistance of CWB, estimated that CWB has provided greater revenues and lower management costs to Canadian wheat producers than would have been the case had the producers sold their grain through a multiple-seller system. The report estimates that from 1980 to 1994, Canadian wheat producers received additional revenues ranging from a low of $18.88 to a high of $34.47 per ton of wheat due to the single selling authority marketing system. A second report, prepared by two Canadian agriculture economists with the assistance of the Alberta Department of Agriculture, found no evidence of CWB price premiums for wheat and barley when prices were examined at the farm level. The report also found that the hidden costs of the single selling authority marketing system to producers could be as high as $20 per ton for wheat and more than $20 per ton for barley. Moreover, the report indicated that hidden costs to Canadian taxpayers for having a single selling authority could be another $5.50 per ton for wheat and about $9 per ton for barley. CWB has attempted to provide greater transparency in its operations and final price forecasts. CWB has started to provide more detail on expected returns for CWB grains as well as daily price quotes. In 1993, CWB introduced the Pooled Return Outlook/Expected Pool Return to forecast pool returns for each crop year in order to assist producers with seeding, marketing, and financial planning decisions. A truck-offer program was also initiated to provide daily price quotes based directly on the Minneapolis future and cash wheat markets to Canadian farmers wishing to buy back their grain. Finally, CWB started a weekly South East Asian News Flash publication showing the CWB’s offer/tradable prices for grain at West Coast ports. Even so, without additional transaction price information, there is little likelihood that the transparency issue between Canada and other grain-trading nations will be resolved. CWB, like private sector grain traders, continues to protect this information as commercially sensitive data. One USDA official said U.S. grain traders are just as likely as CWB to treat this information as proprietary. In addition, CWB does not always have access to end-user transaction prices. According to CWB officials, accredited exporters are not, in all cases, required to provide CWB with the final transaction price or even the customer. These accredited exporters purchase wheat from CWB and then resell it to U.S. customers, as well as other customers throughout the world. Canadian government officials have stated that the transparency issue has already been resolved, claiming that previous U.S. reports have exonerated CWB from charges of violating applicable trade agreements and U.S. law. USDA officials we interviewed early in our review acknowledged that they did not have any evidence that CWB was violating existing trade agreements. Nonetheless, trade differences between the United States and Canada have led to curbs on Canadian wheat imports into the United States as well as the establishment of a joint commission to look at all aspects of the two countries’ respective marketing and support systems for grain. In response to growing U.S. criticism of Canadian exports of durum wheat to the United States, on November 17, 1993, the President requested that the U.S. International Trade Commission begin a section 22 investigation. The investigation began on January 18, 1994, with the purpose of reviewing U.S. imports of wheat, wheat flour, and semolina from all countries, including Canada. The International Trade Commission issued its final report in July 1994. As a result of the investigation and negotiations, a memorandum of understanding between the United States and Canada with respect to cross-border wheat trade was made effective on September 12, 1994. The memorandum called for (1) a Joint Commission on Grains to be established to further examine the grain problems between the two countries; (2) a 12-month period, beginning September 12, 1994, during which the United States would apply a new schedule of tariffs on the importation of wheat into the United States; and (3) a 12-month hold on all countermeasures under NAFTA or GATT, as well as a hold on all countermeasures inconsistent with either the North American Free Trade Agreement (NAFTA) or GATT provisions. The Canada-U.S. Joint Commission on Grains released its preliminary report in June 1995 and its final report in January 1996. The final report made recommendations in a number of areas, including (1) policy coordination, (2) cross-border trade, (3) grain grading and regulatory issues, (4) infrastructure, and (5) domestic and export programs and institutions. In relation to domestic and export programs, the final report noted that “the use of discretionary pricing by governments, directly through their programs or entities, had led to trade distortions.” As a result, the report recommended that both the United States and Canada reduce and remove these trade distortions by (1) the United States eliminating, or significantly reducing with a view to eliminating, its export subsidy programs such as EEP for all cereals and their products and (2) CWB being “placed at risk of profit or loss in the marketplace” or conducting itself in an equivalent manner. In this section, the report also recommended removing trade-distorting effects in each country’s domestic agricultural policies. Finally, the Joint Commission noted that the implementation of these recommendations will depend heavily on other grain-exporting countries, such as the EU and Australia, undertaking comparable actions. Among other things, the final report also recommended that (1) Canada and the United States undertake regular and structured consultative process concerning grain policy issues with the goal of reducing trade-distorting policies and (2) a bilateral producer/industry-based Consultative Committee be established to handle short-term cross-border issues as an “early warning system for trade difficulties.” AWB has limited capability to distort international wheat markets. It has monopoly power over wheat exports but does not routinely receive direct subsidies from the Australian government. The AWB’s initial payments to farmers are underwritten by a government guarantee. Because of this guarantee, it most likely receives favorable interest rates on its loans. Additionally, its access to additional funds allows it to diversify risk by investing in other projects. AWB has the capability to be flexible in its pricing; this flexibility could lead to either lower or higher returns for producers. Although Australia is a country of less than 18 million people, its agriculture exports totaled $12.2 billion in 1992-93. This equates to about one-quarter of Australia’s total export income. Australian wheat ranks as the country’s fourth-largest export market, with 12.9 percent of total world exports in 1994, representing about 80 percent of all wheat grown in Australia. Australia ranks as the world’s fourth-largest wheat exporter. AWB is a statutory marketing authority with federal and enabling state government legislation providing it with the sole license to export Australian wheat. AWB was established in 1939 to “acquire, with certain exceptions, all wheat held in Australia and to arrange for its disposal in view of low world prices prevailing and the marketing and transport difficulties created by the wartime conditions.” However, when World War II ended and the justification no longer existed, AWB was not disbanded. It was reconstituted in 1948 to establish it as the central marketing authority for wheat and to enable it to administer various wheat stabilization and marketing arrangements. New legislation in 1989 modified the AWB’s role by deregulating the domestic market, expanding the AWB’s operating domain to include other grains produced in Australia and to wheat from other countries. The legislation also removed price supports and established the Wheat Industry Fund (WIF), which is discussed in more detail in the following section. AWB is a national and international grain marketer, financing and marketing wheat and other grains for growers. AWB also spends a portion of its budget on market development and promotion, especially in the Asia/Pacific region. All profits are distributed to growers, even though it is not officially a grower-owned organization. Australia’s grains industry is not governed by a single entity. Some grains are freely traded in all states, while others are governed by state boards in certain states. AWB is the only organization in Australia that has acquisition authority for a particular grain (wheat) across all states, and thus the only organization with the power to make an impact. See table 4.1 for an overview of the various boards’ acquisition authorities. Wheat growers may deliver their wheat to AWB, which operates a number of pools each year. The wheat is segregated by class and variety, and growers receive initial payments upon delivery. AWB deducts storage, transport, operating, and marketing costs from sales and returns the remainder to the farmers once all the wheat has been sold. The AWB’s major markets lie in Asia and the Middle East, as shown in figure 4.1. AWB is responsible to both producers and the government, and its managing board includes representatives from both groups. Producers sell their wheat to AWB through a pooling system that averages individual producer returns, thus dispersing the producers’ financial risk. AWB payments to producers are not immediate, though, since product pools may take years to close. Since AWB must compete with other suppliers in the domestic market, it does not have the capability to cross-subsidize between its domestic and foreign market sales. AWB’s managing board consists of a nonexecutive chairperson, the Managing Director, eight members with special expertise in wheat production or other specified fields, and a government representative. The eight members with special expertise include growers, as evidenced by the current board composition. DPIE, a government agency, loosely oversees the AWB’s activities by appointing a government representative to sit on the AWB’s managing board; requiring an annual report, which is submitted to Parliament; requiring a 3- to 5-year corporate plan, which is approved by DPIE’s Minister; and requiring an annual operating plan, which is not subject to ministerial approval. AWB must also consult with the Grains Council of Australia annually. For the past 57 years, AWB has had the statutory authority to be the primary buyer and seller of Australian wheat. It is the only entity licensed by the Australian government to export Australian wheat to the global marketplace. Thus, growers who wish to take advantage of the export market are forced to sell their product to AWB. AWB purchases all Australian wheat bound for export and combines it into a number of pools based on quality and variety. AWB then sells the wheat on the international market and returns the proceeds, minus expenses, to growers. Through the pooling system, all growers of a similar quality and variety of wheat generally receive the same price. This means that bad luck in delivering their products during a part of the marketing year when prices are low will have less impact on individual producers. However, it also means that those who were able to deliver the product at a time of higher-than-average prices receive a lower return. Actual net pool revenues may vary based on individual grower transportation and storage costs. The majority of wheat produced in Australia is delivered for marketing and payment within the AWB’s pooling system for export. Various criteria govern the pools, including quality, time of delivery, location, and category of wheat. Storage, handling, and transport costs are disaggregated and charged to growers, and marketing costs and borrowings to fund payments are pooled. AWB makes a net payment to growers at each stage of the process, mostly in advance of receipts from sale of the delivered wheat. Typically, the first payment is made within 3 weeks of delivery, sometime between November and January. It amounts to about 80 percent of the estimated total payment. The second payment is made during March, once AWB receives the entire harvest. Other payments may take place before a final payment is made. The final payment for a particular pool may not take place for years, since some of the wheat may be sold on credit terms and not finalized for several years. AWB conducts its domestic market dealings somewhat differently. AWB offers cash on delivery to a designated silo for wheat destined for the domestic market. According to AWB, this is a relatively small quantity of wheat compared to the amount handled in the pooling system. AWB does not have the capability to cross-subsidize its sales between its domestic and overseas markets. AWB sells wheat on the domestic market, but it must compete with other sellers. According to AWB officials, AWB only accounts for 30 to 40 percent of the domestic wheat market; however, other sources claim that this figure is as high as 80 percent. Additionally, AWB does not have any control over the import of wheat to Australia, so it cannot control the entrance of other sellers to the domestic Australian wheat market. Besides its monopoly on Australian wheat exports, AWB benefits from several forms of assistance. This assistance has changed over time. The AWB’s current benefits include a government guarantee on borrowings, which most likely results in lower interest rates. WIF funds also allow AWB to maintain a strong capital base and invest in outside interests. Additionally, a number of indirect subsidies benefit AWB, including government matching research funds. Before 1989, the Australian government provided economic support to wheat farmers through a number of mechanisms, including guaranteed minimum prices and an artificial premium on domestic wheat prices. Unit-pooled returns to growers were guaranteed at a certain level by the federal government, at least for a limited volume of exports, with the guaranteed price based on cost of production estimates by the Australian Bureau of Agricultural Resource Economics. Economic assistance to AWB also included a home consumption price that was set in line with the guaranteed price, based on the assessed cost of production. Generally, domestic end-users paid a higher price for wheat than foreign buyers under this scenario. The guaranteed minimum price for wheat was ensured through a stabilization fund. If export prices exceeded a trigger price, an effective export tax was imposed. If prices fell below the guaranteed price, a deficiency payment to growers made up the difference between the actual price and the guaranteed price, up to a specified limit. If the stabilization fund was depleted, the federal government made up the difference. When the fund was first established, growers paid into it. However, from 1958 to 1974, the federal government was forced to heavily subsidize the fund. After other changes in the 1970s and 1980s, including altering the baseline of stabilized prices, establishing guaranteed minimum delivery prices, and allowing AWB to borrow on the commercial money market, major reforms were introduced in 1989. The most important of these included deregulation of the domestic market, establishment of WIF, and abolition of the government’s guaranteed minimum pricing scheme. AWB was given some flexibility in the commercial market; besides other activities, AWB may buy and sell a variety of grains. Since 1989, the Australian government has guaranteed a portion of the AWB’s borrowings to pay farmers at harvest time. This guarantee covers, at a minimum, between 80 and 90 percent of the aggregate estimated net pool return. According to the Industry Commission, this guarantee has risen in value from $21.5 million in 1989-90 to $26.4 million in 1992-93. The government guarantee was initially established to last until June 1994, but was extended at that time to continue until June 1999 at a maximum of 85 percent. Both AWB officials and the Industry Commission agree that the government’s guarantee translates into real savings on interest rates, since the guarantee transfers the risk from AWB to the taxpayers. This guarantee results in increased net returns to the wheat industry because of the lower interest charges. WIF, a nonsales source of AWB revenue, is supported by a 2-percent levy on wheat growers. WIF serves as the AWB’s capital base and underwrites the AWB’s domestic trading operations, as well as strategic investments that support outside business activities. Growers hold equity in WIF and may transfer that equity. AWB manages the fund in conjunction with the Grains Council of Australia. As noted previously, AWB may use this fund to diversify its holdings. For example, it has used WIF funds to invest in flour mills in China and Vietnam. Thus, farmers are not completely reliant on the international wheat market for income; outside investments may help soften the blow of declining wheat prices. WIF also provides a capital base for the AWB’s domestic market activities. This practice is questionable because of its implications for other domestic sellers. That is, farmers who sell their wheat abroad through AWB may also choose to sell their wheat on the domestic market through another company. However, the farmers then must pay a 2-percent WIF levy on their exported wheat to AWB; in effect, they could be funding the efforts of a competitor. Wheat research and development are partially funded by the government. The government matches industry research contributions dollar for dollar up to 0.5 percent of gross value of production. The Grains Research and Development Corporation manages about 22 percent of the wheat research funds for the industry. Growers only funded about 20 percent of wheat research and development in 1993-94, and the remainder was provided by the Commonwealth government, state governments, and private sources. Before 1990, drought was regarded in Australia as a natural disaster, and automatic relief was available through direct subsidies. Direct subsidies were not available after 1992, when Australia instituted the National Drought Policy. This policy reclassified drought as “normal operating procedure” and removed the direct payments. Through this policy, Australia offers welfare assistance and interest rate subsidy support for exceptional drought circumstances, assistance with the creation of financial reserves, and research funds for drought impact and risk management practices. In 1992, through the Crop Planting Scheme, the government spent $2.2 million to cover 75 percent of the interest rates on commercial loans to farmers who, although considered as having viable farms in the long run, were financially unable to plant a crop. The Australian government has also compensated farmers directly for extreme circumstances that affected their incomes directly. For example, it made a single payment of $27 million to wheat farmers to compensate for losses due to the sanctions against Iraq. Growers are taxed on the returns under Australia’s income tax system. Primary sector producers receive tax breaks from the government under a number of measures, including two schemes that may reduce the producers’ taxes. The Income Averaging Scheme allows producers to average their income over 5 years to compute their tax rate, and the Income Equalization Deposits Scheme allows producers to make tax-deductible deposits into a fund that can be used in low-income periods. AWB does not pay a separate tax on any returns distributed to the growers, but instead pays corporate tax on holdings and investments, both domestic and abroad. The AWB’s monopoly over wheat exports allows it to set prices without fear of competition from other Australian wheat exporters. This allows for price flexibility; however, we were unable to determine whether AWB engaged in any form of price discrimination or cross-subsidization between foreign markets since data were not available from public or private sector wheat traders. Australian government-sponsored reports have suggested that the wheat industry would benefit from complete deregulation and should focus more on market-based activities. The Australian government has authorized AWB to be the sole exporter of Australian wheat, through legislation that is reviewed every 5 years. As mentioned earlier, AWB also has the right to buy and sell wheat on the domestic market, but it must compete with other firms. This differs from the pre-1989 arrangement, when AWB maintained monopolistic control over both the domestic and export markets in Australia. Since AWB is a monopoly, it may set prices for Australian wheat abroad without competition from other Australian exporters. This status may provide some advantages of a cartel in that individual producers are unable to undercut a particular price that AWB sets. In situations where there are limited alternatives to Australian wheat, this might enable AWB to charge higher prices and capture higher returns for Australian producers. Additionally, AWB’s single-desk seller status gives it a sure source of supply for its export sales. Similarly, the averaging of all sales may allow the sales at prices that are lower than a primary seller would be willing to accept. This could be done either to match lower prices of a competitor or to ensure sales to a particular buyer for other reasons. This could lead to lower returns to Australian producers. We were unable to determine whether or not AWB engaged in price discrimination because we did not have access to individual transaction data from AWB or private grain traders. Likewise, we were unable to determine whether or not AWB engaged in cross-subsidization between foreign markets. In 1993, the Australian government released a report on National Competition Policy, also known as the “Hilmer report.” This report clearly stated that STEs, known in Australia as “statutory marketing authorities,” should not exist except for certain situations based on public interest grounds. It stated that statutory marketing authorities’ anticompetitive practices such as compulsory acquisition of product and monopoly marketing arrangements are often grossly inefficient. Another report indicated that grain marketing boards cost more than private traders to perform similar services. In 1989, the Grains Council of Australia initiated the Grains 2000 Project. It identified a number of issues critical to the long-term profitability and sustainability of the Australian grains industry. Subsequently, the Grains Council of Australia established several strategic planning units to address these issues as they relate to specific grains. One of those units, the National Grain Marketing Strategic Planning Unit, commissioned a report on the Australian milling wheat industry. The study focused on issues that may affect the industry for the next 20 years and made recommendations that the authors believe would lead to greater efficiency. The Grains 2000 study concluded, among other things, that the benefits of single-desk selling currently outweighed the costs. However, it noted that this situation might change once the effects of GATT reforms take hold; that is, when effective subsidies are reduced and price differentials between subsidized and unsubsidized markets shrink, or if the market no longer supports the differentiation strategy. The study also reported that the net effect of AWB to the Australian grower in 1992-93 fell somewhere between a loss of $1.22 per ton and a gain of $4.93 per ton. Thus, it is unclear how much AWB benefits wheat farmers, if at all. The report made additional recommendations that, in its view, should result in greater efficiency and support for sustainable practices. These other recommendations included (1) protecting core markets and developing targeted defenses against Canada, (2) allowing AWB to trade all grains,(3) allowing AWB investment in wheat handling and elevation, and (4) making AWB a corporation with grower ownership. NZDB is a major player in the world dairy trade. Individual domestic producers have some involvement in NZDB activities and participate in a pooling process, thus dispersing risk across the entire New Zealand dairy industry. NZDB has successfully weathered the removal of government subsidies in 1984 and maintains about a 25-percent share of the world dairy market. The NZDB’s statutory authority allows it to maintain a monopoly over dairy exports, but does not allow it to maintain control over the domestic market or collect tariffs on imports of dairy products. The NZDB’s network of subsidiaries allows it to sell a greater amount of its goods at the best possible price in other countries’ markets, especially those with a controlled dairy import market. State trading also plays a role in international trade in dairy products. Although the United States is among the world’s largest milk producers (see fig. 5.1), the country is not a substantial exporter of dairy products because the great majority of U.S. dairy production is sold to U.S. consumers. Among the top exporters of skimmed milk powder shown in figure 5.2, three of the five countries listed maintained STEs in their dairy sector: Australia, New Zealand, and Poland. In the case of the major cheese-exporting countries, shown in figure 5.3, Australia and New Zealand again appear among the listed countries. Metric tons (in millions) Note 1: EU estimate excludes trade between EU countries. Note 2: “Other” not specified in source. NZDB operates within the terms of the Dairy Board Act of 1961, as amended. Its group mission is to maximize the sustainable income of New Zealand dairy farmers through excellence in the global marketing of New Zealand origin dairy products. According to NZDB officials, NZDB helps New Zealand farmers obtain the maximum return possible by acting as a single agent on the export market for New Zealand dairy products. This eliminates possible “undercutting” by individual dairy cooperatives and reduces the number of global players in the competition for dairy sales. Dairy exports constitute a significant portion of New Zealand’s overall export trade; approximately 90 percent of New Zealand’s dairy products are exported. According to MAF, in the year ending December 1993, dairy product exports totaled $1.9 billion. This figure represents 33 percent of New Zealand’s agricultural exports and 18 percent of New Zealand’s total merchandise exports. (See fig. 5.4.) In recent years, New Zealand has been a leading supplier of most dairy produce to world markets; in particular, it supplies a significant percentage of the world’s exports of milk powder, butter, and cheese. Conversely, New Zealand’s dairy imports are minimal. No dairy products are subject to import-licensing requirements, and no quantitative restrictions apply to dairy products entering New Zealand. New Zealand domestic producers participate, through elected representatives, in NZDB policy direction. NZDB is accountable to its producers and reports back through a number of vehicles, including annual reports and efficiency audits. Individual producer risk is dispersed across the entire industry through the pooling process. The small New Zealand domestic market is deregulated, so any company may sell dairy products domestically. NZDB cannot engage in cross-subsidization between domestic and foreign market sales because it neither has control over imports nor does it sell its dairy products in the domestic market. NZDB is owned by the New Zealand dairy industry. Policy direction is determined by a managing board of 13 directors, 11 of whom are elected by the cooperative dairy companies and are themselves both directors and shareholders of their own companies. The other two directors are appointed by the New Zealand government, on the recommendation of NZDB, on the basis of their commercial expertise. NZDB reports back to the dairy industry through a number of vehicles. Its publications include an annual report, which has financial and marketing information, and newsletters. It also conducts annual general meetings for farmers and meets with producer organizations, such as the Federated Farmers of New Zealand. MAF acknowledged that producer boards were not subject to the same competitive disciplines as commercial marketing organizations because of their statutory position and powers. Therefore, the government decided to subject these boards to performance and efficiency audits every 5 years, with the requirements for the audits specified in each board’s legislation. According to MAF, these audits would help to give producer boards more financial autonomy and make them more responsible for their actions, improve their performance, and make them more accountable to farmers for their commercial performance and to the parliament for the exercise of their statutory powers. The NZDB’s first performance and efficiency audit was published in October 1993. It was conducted by the Boston Consulting Group on behalf of the New Zealand government. The audit’s overall purpose was to “assess the effectiveness and efficiency of the NZDB’s activities in achieving its mission.” It covered 11 major topics, ranging from personnel to communication. The overall assessment was “seven out of ten.” Recommendations included a need to develop an industry vision, to conduct a review of the payments system, and to improve the key processes through which NZDB creates value for shareholders. Individual producer risk is dispersed through the pooling system. According to its enabling legislation, NZDB has the statutory power to purchase and market all dairy products intended for export. NZDB acquires these products from approximately 14,000 milk producers through a series of 15 dairy cooperatives. The processed milk is sold on the export market, and returns (minus marketing and operating costs) are distributed to the cooperatives, which in turn distribute them to the individual farmers. Cooperatives pool the milk separately, so producers are paid according to the quantity of milk provided to the individual cooperative. More efficient cooperatives will have lower operating costs and will thus provide higher payments to the producers. NZDB sells its products in export markets through a worldwide network of holding companies and subsidiaries. The number of cooperatives has decreased over time, but the volume of dairy products has generally increased. The number of dairy cooperatives in New Zealand has fallen from 95 in June 1970 to 15 companies as of May 1995. However, the volume of dairy products manufactured, in actual tons, has grown in several sectors. NZDB officials credit this phenomenon to the increased efficiency of the cooperatives and their operations and the effect of a free market system. New Zealand’s domestic dairy market has been deregulated since the late 1980s. Thus, NZDB does not have the same control over the domestic market as it does the export market. In fact, NZDB stated that it is not involved directly in the marketing of dairy products in New Zealand, but that it does have a role in coordinating market promotion and other activities on behalf of the wider industry. Only 10 percent of New Zealand milk remains in New Zealand, either as raw milk or as processed dairy products. The domestic dairy market is very small compared to the export market. For example, NZDB exported 205,000 tons of butter in 1993-94, while local market sales in 1993 totaled 32,000 tons. Similarly, typical cheese exports in 1993 were 124,000 tons, while local market sales in 1993 were 29,000 tons. Since NZDB does not have control over the domestic dairy market, cross-subsidization between domestic and foreign sales is not possible. The NZDB’s control over imports of dairy products was removed in the mid-1980s, and it does not receive any tariffs from imported dairy products. Moreover, NZDB does not even sell dairy products in New Zealand; individual dairy cooperatives may compete for shares of the domestic market. Even though NZDB has sole export authority for New Zealand dairy products, it has not received direct government subsidies since 1984, when a governmentwide reform removed most agricultural subsidies. The New Zealand government continues to support NZDB indirectly through a research grant scheme, which benefits the dairy industry as a whole. However, the New Zealand government has removed some of the NZDB’s advantages, including its access to New Zealand’s Reserve Bank credit. New Zealand has instituted a number of reforms that directly affected NZDB. The first and most important reform was put in place in 1984; it removed direct government subsidies to farmers. This reform was instituted virtually overnight, abolishing more than 30 agricultural production and export subsidy programs. As a result, New Zealand farmers lost nearly 40 percent of their gross income, and producer boards were forced to reevaluate their operations and marketing strategies and to implement new initiatives. Other terminated programs included the Export Programme Suspensory Loan Scheme and portions of the Export Market Development Tax Incentive Scheme. This scheme was available to taxpayers who incurred expenditures for the purpose of seeking markets, retaining existing markets, obtaining market information, doing market research, creating or increasing demand for the export of goods and services, or attracting tourists to New Zealand. The Supplementary Minimum Price program applied to the dairy industry, but only one payment was made in 1978-79, of $37.8 million. The PSE on milk fell from a peak of 67 percent in 1983 to an average of 15 percent in 1985-87 and an estimated 1.7 percent in 1990. The NZDB’s mission is further enhanced by enforcement actions written into its enabling legislation. The New Zealand government, through the Dairy Board Act of 1961, may impose fines on persons or companies that circumvent NZDB and try to export dairy goods without a license. This fine may not exceed $1,187. According to NZDB officials, such fines have not been imposed at any time. NZDB does not receive any direct grants or concessionary loans from the government for research, but its research affiliate may compete for government research grants. Through its Public Good Science Fund, the government sponsors a variety of projects; funds are bid upon by a variety of research institutions. NZDB sponsors the New Zealand Dairy Research Institute, which focuses on fundamental, long-term dairy research; NZDB also maintains research centers in Singapore, the United Kingdom, Japan, and the United States. Other research on dairy issues takes place in New Zealand universities and at Crown Research Institutes. In the 1980s, NZDB lost access to Reserve Bank of New Zealand credit; it has been forced to turn to the commercial lending market to obtain loans. Thus, it can no longer obtain cheap loans through the Reserve Bank of New Zealand. In 1983, the outstanding deficit in the Dairy Industry (Loans) Account, an account that served as an overdraft facility for NZDB, was converted to a long-term loan. This $725-million loan, considered a substantial subsidy by the New Zealand government, was repayable over 40 years. In 1986, the New Zealand government conceded part of this loan and allowed NZDB to pay off the balance for $102 million as part of its transition in dissolving the NZDB’s financial arrangements with the Reserve Bank. NZDB benefits from a good credit rating, which may be related to its status as a government-established STE. However, NZDB no longer benefits from tax concessions; it is taxed on its retained earnings the same as any other enterprise. Producers pay individual income tax on their returns. NZDB’s sole export authority affords it the opportunity to achieve economies of scale and provides other benefits. By using its statutory authority to export dairy products to the United States and other countries, NZDB benefits from its extensive subsidiary network and higher U.S. prices, since the U.S. price for dairy goods is higher than the standard world price. The NZDB’s ability to invest in outside companies also allows it to diversify its economic interests. While price discrimination is possible and not prohibited under GATT, we were unable to analyze the extent to which NZDB or other exporters engage in this practice because we did not have access to public or private companies’ transaction-level data. Likewise, we were unable to determine whether NZDB engaged in cross-subsidization between its higher- and lower-priced foreign market sales. The New Zealand Dairy Board Act of 1961 granted NZDB the sole authority to purchase and market all export dairy products from New Zealand. That is, all New Zealand dairy products destined for export are under the NZDB’s jurisdiction; thus, NZDB is assured a certain level of product supply and the NZDB buying price is the prevailing level of compensation available to producers. To achieve this, NZDB purchases dairy produce from the cooperative manufacturing dairy companies and sells it through a worldwide marketing network of subsidiary and associate companies. NZDB is also responsible for packaging, transporting, storing, and making shipping arrangements for its exports. NZDB has the authority to grant export licenses to other companies that want to export dairy products on their own. It may choose to grant such licenses if it is not interested in exporting a particular dairy commodity. For example, companies have successfully obtained licenses to export ice cream and certain specialty cheese products, as NZDB does not market these products. This export authority provides NZDB with the opportunity to achieve economies of scale in its operations, which translates into the ability to spread the cost of its international operations across a large volume of sales. NZDB officials noted that individual farmers or cooperatives would have a difficult time marketing dairy products on their own; thus, NZDB provides a mechanism through which the New Zealand dairy farmer can compete in a global marketplace. NZDB’s exclusive authority and size translate into market power for NZDB in certain world dairy markets. Situations where STEs or private firms supply a large share of world markets, increases the concerns about efforts of suppliers to work together to exercise their market power. As an example of the possible exercise of this market power, U.S. dairy industry sources provided us with a June 1995 proposal addressed to the Australian Dairy Industry Council from NZDB. This proposal suggested that the two industries coordinate their supply of dairy products to satisfy new EU quotas. We spoke with industry officials from both New Zealand and Australia, who were unable to pinpoint the exact origin of the proposal. According to NZDB officials, this was an effort to respond to the two governments’ agreement to maintain closer economic relations. Officials from both countries’ dairy industries affirmed that the proposal was dropped. NZDB benefits from the U.S. market, as well as other restricted markets around the world, because of its subsidiaries and domestic dairy price support programs. NZDB sells its products through 88 subsidiary companies in more than 60 countries around the world, including each of New Zealand’s largest trading partners. These companies are managed by geographically oriented holding companies. NZDB believes that this subsidiary framework allows it better access to markets, and these subsidiaries appear to offer particular advantages in markets restricted by quotas, such as the United States. The NZDB’s subsidiaries, such as Western Dairy Products, Inc., can import New Zealand cheese that is subject to quota and help NZDB realize profits that would otherwise go to unaffiliated U.S. importers. For example, under the U.S. quota system, New Zealand’s allocation of cheese can be assigned to any licensed U.S. importer. The New Zealand government has the authority to choose the U.S. importers of New Zealand cheese. NZDB may encourage the New Zealand government to select the NZDB’s own subsidiaries to import the cheese, thus keeping the cash flow within the organization. NZDB can take advantage of the difference between world and U.S. prices by selling its goods through wholly owned subsidiaries in the United States. U.S. prices are significantly higher than world prices because (1) the U.S. dairy program keeps domestic prices more elevated than they would otherwise be and (2) the U.S. cheese import quota system restricts the supply of generally lower-priced imports. Thus, NZDB can get the greatest advantage for its sales by working through subsidiaries. As of 1988, the New Zealand government granted NZDB the “powers of a natural person.” This allowed NZDB to, among other commercial practices, enter into contracts and invest in other businesses. NZDB has taken advantage of this privilege by investing in businesses in other countries and thus diversifying its economic interests. For example, during the 1993-94 season, NZDB formed New Zealand Milk Products (Egypt) Ltd., a 100-percent subsidiary to manufacture and market ghee, and New Zealand Milk Products Treasury (S) Pte Limited in Singapore as a treasury and reinvoicing center for the South East Asia region. We could not determine whether or not NZDB engaged in price discrimination because we did not have access to public or private firm transaction data. Similarly, we were unable to ascertain whether or not NZDB subsidized its sales in one foreign market with higher-priced sales in another foreign market. Some U.S. dairy industry sources expressed concerns regarding the NZDB’s potential to cross-subsidize its sales between foreign markets, but we had insufficient data to make a judgement on this potential practice. | Pursuant to a congressional request, GAO reviewed three state trading enterprises (STE), the Canadian Wheat Board (CWB), the Australian Wheat Board (AWB), and the New Zealand Dairy Board (NZDB) focusing on: (1) the potential capability of export-oriented agricultural STEse to distort trade; and (2) the specific potential capability of CWB, AWB, and NZDB to engage in trade-distorting activities based on their status as STEs. GAO found that: (1) it is necessary to consider STEs on a case-by-case basis to understand their potential to distort trade; and (2) the three STEs reviewed have varying capabilities to potentially distort trade in their respective commodities, although in each case these capabilities have generally been reduced over recent years due to lower levels of government assistance. CWB benefits from: (1) the Canadian government's subsidies to cover CWB's periodic operational deficits, (2) monopoly over both the domestic human consumption and export wheat and barley markets which may allow for cross-subsidization, and (3) pricing flexibility through delayed producer payments. Canada's elimination of transportation subsidies in 1995 has reduced some of the indirect government support going to its wheat and barley producers, and ongoing Canadian reviews of its agricultural policies may reduce the control of CWB in the future. AWB has not received direct government subsidies in several years but enjoys a government guarantee on its payments to producers. It also enjoys indirect subsidies in the form of favorable interest rates and an authority to collect from producers for investment. The deregulation of Australia's domestic grain trade and the decline of direct government assistance have lessened the possibile trade-distorting policies of AWB. Recent studies have challenged the premise behind a single selling authority, but AWB's monopoly over wheat exports still provides it with a sure source of supply. NZDB is relatively subsidy free but benefits from its monopoly over New Zealand dairy exports and its extensive subsidiary structure worldwide. NZDB's size and exclusive purchasing authority for export also translate into market power for NZDB in certain world dairy markets. Its subsidiaries allow it to keep profits from foreign sales within the organization and take advantage of the difference between world prices and those of the country in which it is selling the goods, such as the United States. NZDB's potential to distort trade due to direct government subsidies was eliminated during the 1980s when New Zealand deregulated the domestic dairy market and stopped offering dairy farmers direct government subsidies. |
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As computer technology has advanced, both government and private entities have become increasingly dependent on computerized information systems to carry out operations and to process, maintain, and report essential information. Public and private organizations rely on computer systems to transmit sensitive and proprietary information, develop and maintain intellectual capital, conduct operations, process business transactions, transfer funds, and deliver services. In addition, the Internet has grown increasingly important to American business and consumers, serving as a medium for hundreds of billions of dollars of commerce each year, as well as developing into an extended information and communications infrastructure supporting vital services such as power distribution, health care, law enforcement, and national defense. Consequently, the security of these systems and networks is essential to protecting national and economic security, public health and safety, and the flow of commerce. Conversely, ineffective information security controls can result in significant risks, including loss or theft of computer resources, assets, and funds; inappropriate access to and disclosure, modification, or destruction of sensitive information, such as national security information, personally identifiable information (PII), or proprietary business information; disruption of critical operations supporting critical infrastructure, national defense, or emergency services; undermining of agency missions due to embarrassing incidents that erode the public’s confidence in government; use of computer resources for unauthorized purposes or to launch attacks on other systems; damage to networks and equipment; and high costs for remediation. Recognizing the importance of these issues, Congress recently enacted laws intended to improve federal cybersecurity. These include the Federal Information Security Modernization Act of 2014 (FISMA), which revised the Federal Information Security Management Act of 2002 to, among other things, clarify and strengthen information security roles and responsibilities for the Office of Management and Budget (OMB) and the Department of Homeland Security (DHS). The act also reiterated the requirement for federal agencies to develop, document, and implement an agency-wide information security program. The program is to provide security for the information and information systems that support the operations and assets of the agency, including those provided or managed by another agency, contractor, or other source. In addition, the Cybersecurity Workforce Assessment Act and the Homeland Security Cybersecurity Workforce Assessment Act aim to help DHS address its cybersecurity workforce challenges. Another law, the National Cybersecurity Protection Act of 2014, codifies the role of DHS’s National Cybersecurity and Communications Integration Center as the federal civilian interface for sharing information between federal and nonfederal entities regarding cyber risk, incidents, analysis, and warnings. The Cybersecurity Enhancement Act of 2014, among other things, authorizes the National Institute of Standards and Technology (NIST) to facilitate and support the development of voluntary standards to reduce cyber risks to critical infrastructure and to develop and encourage the implementation of a strategy for the use and adoption of cloud computing services by the federal government. Risks to cyber-based assets can originate from unintentional and intentional threats. Unintentional threats can be caused by, among other things, defective computer or network equipment, and careless or poorly trained employees. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled employees, foreign nations engaged in espionage and information warfare, and terrorists. Threat sources vary in terms of the capabilities of the actors, their willingness to act, and their motives, which can include monetary gain or political advantage, among others. For example, adversaries possessing sophisticated levels of expertise and significant resources to pursue their objectives—sometimes referred to as “advanced persistent threats”— pose increasing risks. Table 1 describes common sources of cyber threats. These threat sources make use of various techniques— or exploits—that may adversely affect federal information, computers, software, networks, and operations. Table 2 describes common types of cyber exploits. An adversarial threat source may employ multiple tactics, techniques, and exploits to conduct a cyber attack. NIST has identified several representative events that may constitute a cyber attack: Perform reconnaissance and gather information: An adversary may gather information on a target by, for example, scanning its network perimeters or using publicly available information. Craft or create attack tools: An adversary prepares its means of attack by, for example, crafting a phishing attack or creating a counterfeit (“spoof”) website. Deliver, insert, or install malicious capabilities: An adversary can use common delivery mechanisms, such as e-mail or downloadable software, to insert or install malware into its target’s systems. Exploit and compromise: An adversary may exploit poorly configured, unauthorized, or otherwise vulnerable information systems to gain access. Conduct an attack: Attacks can include efforts to intercept information or disrupt operations (e.g., denial of service or physical attacks). Achieve results: Desired results include obtaining sensitive information via network “sniffing” or exfiltration, causing degradation or destruction of the target’s capabilities; damaging the integrity of information through creating, deleting, or modifying data; or causing unauthorized disclosure of sensitive information. Maintain a presence or set of capabilities: An adversary may try to maintain an undetected presence on its target’s systems by inhibiting the effectiveness of intrusion-detection capabilities or adapting behavior in response to the organization’s surveillance and security measures. More generally, the nature of cyber-based attacks can vastly enhance their reach and impact. For example, cyber attacks do not require physical proximity to their victims, can be carried out at high speeds and directed at multiple victims simultaneously, and can more easily allow attackers to remain anonymous. These inherent advantages, combined with the increasing sophistication of cyber tools and techniques, allow threat actors to target government agencies and their contractors, potentially resulting in the disclosure, alteration, or loss of sensitive information, including PII; theft of intellectual property; destruction or disruption of critical systems; and damage to economic and national security. The number of information security incidents affecting systems supporting the federal government is increasing. Specifically, the number of information security incidents reported by federal agencies to the U.S. Computer Emergency Readiness Team (US-CERT) increased from 5,503 in fiscal year 2006 to 67,168 in fiscal year 2014, an increase of 1,121 percent (see fig. 1). Similarly, the number of information security incidents involving PII reported by federal agencies has more than doubled in recent years, from 10,481 in 2009 to 27,624 in 2014. Figure 2 shows the different types of incidents reported in fiscal year 2014. These incidents and others like them could adversely affect national security; damage public health and safety; and lead to inappropriate access to and disclosure, modification, or destruction of sensitive information. Recent examples highlight the potential impact of such incidents: In April 2015, the Department of Veterans Affairs (VA) Office of Inspector General reported that two VA contractors had improperly accessed the VA network from foreign countries using personally owned equipment. In September 2014, a cyber intrusion into the United States Postal Service’s information systems may have compromised PII for more than 800,000 of its employees. According to the Director of National Intelligence, unauthorized computer intrusions were detected in 2014 on the networks of the Office of Personnel Management and two of its contractors. The two contractors were involved in processing sensitive PII related to national security clearances for federal employees. In 2011, according to a media report, the Deputy Secretary of Defense acknowledged a significant cyber attack in which a large number of files was taken by foreign intruders from a defense contractor. The deputy secretary was quoted as saying “it is a significant concern that over the past decade, terabytes of data have been extracted by foreign intruders from corporate networks of defense companies” and that some of the data concerned “our most sensitive systems.” Given the risk posed by cyber threats and the increasing number of incidents, it is crucial that the federal government take appropriate steps to secure its systems and information. However, both we and agency inspectors general have identified challenges in the government’s approach to cybersecurity, including those related to protecting the government’s information and systems. In particular, challenges remain in the following key areas: Designing and implementing risk-based cybersecurity programs at federal agencies. Agencies continue to have shortcomings in assessing risks, developing and implementing security controls, and monitoring results. Specifically, for fiscal year 2014, 19 of the 24 federal agencies covered by the Chief Financial Officers Act reported that information security control deficiencies were either a material weakness or a significant deficiency in internal controls over their financial reporting. Moreover, inspectors general at 23 of the 24 agencies cited information security as a major management challenge for their agency. For fiscal year 2014, most of the agencies had weaknesses in five key security control categories. Figure 3 shows the number of the 24 agencies reviewed with weaknesses in each of the five control categories for fiscal year 2014. Over the last several years, GAO and agency inspectors general have made hundreds of recommendations to agencies aimed at improving their implementation of information security controls. For example: Addressing cybersecurity for building and access control systems. In December 2014 we reported that DHS lacked a strategy for addressing cyber risk to building and access control systems and that its Interagency Security Committee had not included cyber threats to such systems in its threat report to federal agencies.Further, the General Services Administration (GSA) had not fully assessed the risk of cyber attacks aimed at building control systems. We recommended that DHS and GSA take steps to address these weaknesses. DHS and GSA agreed with our recommendations. Enhancing oversight of contractors providing IT services. In August 2014 we reported that five of six agencies reviewed were inconsistent in overseeing assessments of contractors’ implementation of security controls. This was partly because agencies had not documented IT security procedures for effectively overseeing contractor performance. In addition, according to OMB, 16 of 24 agency inspectors general found that their agency’s program for managing contractor systems lacked at least one required element. We recommended that OMB, in conjunction with DHS, develop and clarify guidance to agencies for annually reporting the number of contractor-operated systems and that the reviewed agencies establish and implement IT security oversight procedures for such systems. OMB did not comment on our report, but the agencies generally concurred with our recommendations. Improving security incident response activities. In April 2014 we reported that the 24 major agencies did not consistently demonstrate that they had been effectively responding to cyber incidents. Specifically, we estimated that agencies did not completely document actions taken in response to detected incidents reported in fiscal year 2012 in about 65 percent of cases. In addition, six agencies we reviewed had not fully developed comprehensive policies, plans, and procedures to guide their incident-response activities. We recommended that DHS and OMB address agency incident-response practices government-wide and that the six agencies in our review improve the effectiveness of their cyber incident response programs. The agencies generally agreed with these recommendations. Responding to breaches of PII. In December 2013 we reported that eight federal agencies had inconsistently implemented policies and procedures for responding to data breaches involving PII. In addition, OMB requirements for reporting PII-related data breaches were not always feasible or necessary. Thus, we concluded that agencies may not be consistently taking actions to limit the risk to individuals from PII-related data breaches and may be expending resources to meet OMB reporting requirements that provide little value. We recommended that OMB revise its guidance on federal agencies’ responses to a PII-related data breach and that the reviewed agencies take specific actions to improve their response to PII-related data breaches. OMB neither agreed nor disagreed with our recommendation; four of the reviewed agencies agreed, two partially agreed, and two neither agreed nor disagreed. Implementing security programs at small agencies. In June 2014 we reported that six small agencies (i.e., agencies with 6,000 or fewer employees) had not fully implemented their information security programs. For example, key elements of their plans, policies, and procedures were outdated, incomplete, or did not exist, and two of the agencies had not developed an information security program with the required elements. We recommended that OMB include a list of agencies that did not report on the implementation of their information security programs in its annual report to Congress on compliance with the requirements of FISMA, as well as including information on small agencies’ programs. We also recommended that DHS develop guidance and services targeted at small agencies. OMB and DHS generally concurred with our recommendations. Until federal agencies take actions to address these challenges— including implementing the hundreds of recommendations made by us and inspectors general—federal systems and information, as well as sensitive personal information about members of the public, will be at an increased risk of compromise from cyber-based attacks and other threats. In summary, the cyber threats facing the nation are evolving and growing, with a wide array of threat actors having access to increasingly sophisticated techniques for exploiting system vulnerabilities. The danger posed by these threats is heightened by weaknesses in the federal government’s approach to protecting federal systems and information, including personally identifiable information entrusted to the government by members of the public. Implementing GAO’s many outstanding recommendations will assist agencies in better protecting their systems and information, which will in turn reduce the risk of the potentially devastating impacts of cyber attacks. Chairman Chaffetz, Ranking Member Cummings, and Members of the Committee, this concludes my statement. I would be happy to answer any questions you may have. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other key contributors to this statement include Larry Crosland (Assistant Director), Rosanna Guerrero, Fatima Jahan, and Lee McCracken. Information Security: IRS Needs to Continue Improving Controls over Financial and Taxpayer Data. GAO-15-337. March 19, 2015. Information Security: FAA Needs to Address Weaknesses in Air Traffic Control Systems. GAO-15-221. January 29, 2015. Information Security: Additional Actions Needed to Address Vulnerabilities That Put VA Data at Risk. GAO-15-220T. November 18, 2014. Information Security: VA Needs to Address Identified Vulnerabilities. GAO-15-117. November 13, 2014. Federal Facility Cybersecurity: DHS and GSA Should Address Cyber Risk to Building and Access Control Systems. GAO-15-6. December 12, 2014. Consumer Financial Protection Bureau: Some Privacy and Security Procedures for Data Collections Should Continue Being Enhanced. GAO-14-758. September 22, 2014. Healthcare.Gov: Information Security and Privacy Controls Should Be Enhanced to Address Weaknesses. GAO-14-871T. September 18, 2014. Healthcare.Gov: Actions Needed to Address Weaknesses in Information Security and Privacy Controls. GAO-14-730. September 16, 2014. Information Security: Agencies Need to Improve Oversight of Contractor Controls. GAO-14-612. August 8, 2014. Information Security: FDIC Made Progress in Securing Key Financial Systems, but Weaknesses Remain. GAO-14-674. July 17, 2014. Information Security: Additional Oversight Needed to Improve Programs at Small Agencies. GAO-14-344. June 25, 2014. Maritime Critical Infrastructure Protection: DHS Needs to Better Address Port Cybersecurity. GAO-14-459. June 5, 2014. Information Security: Agencies Need to Improve Cyber Incident Response Practices. GAO-14-354. April 30, 2014. Information Security: SEC Needs to Improve Controls over Financial Systems and Data. GAO-14-419. April 17, 2014. Information Security: IRS Needs to Address Control Weaknesses That Place Financial and Taxpayer Data at Risk. GAO-14-405. April 8, 2014. Information Security: Federal Agencies Need to Enhance Responses to Data Breaches. GAO-14-487T. April 2, 2014. Critical Infrastructure Protection: Observations on Key Factors in DHS’s Implementation of Its Partnership Model. GAO-14-464T. March 26, 2014. Information Security: VA Needs to Address Long-Standing Challenges. GAO-14-469T. March 25, 2014. Critical Infrastructure Protection: More Comprehensive Planning Would Enhance the Cybersecurity of Public Safety Entities’ Emerging Technology. GAO-14-125. January 28, 2014. Computer Matching Act: OMB and Selected Agencies Need to Ensure Consistent Implementation. GAO-14-44. January 13, 2014. Information Security: Agency Responses to Breaches of Personally Identifiable Information Need to Be More Consistent. GAO-14-34. December 9, 2013. Federal Information Security: Mixed Progress in Implementing Program Components; Improved Metrics Needed to Measure Effectiveness. GAO-13-776. September 26, 2013. Communications Networks: Outcome-Based Measures Would Assist DHS in Assessing Effectiveness of Cybersecurity Efforts. GAO-13-275. April 10, 2013. Information Security: IRS Has Improved Controls but Needs to Resolve Weaknesses. GAO-13-350. March 15, 2013. Cybersecurity: A Better Defined and Implemented National Strategy is Needed to Address Persistent Challenges. GAO-13-462T. March 7, 2013. Cybersecurity: National Strategy, Roles, and Responsibilities Need to Be Better Defined and More Effectively Implemented. GAO-13-187. February 14, 2013. Information Security: Federal Communications Commission Needs to Strengthen Controls over Enhanced Secured Network Project. GAO-13-155. January 25, 2013. Information Security: Actions Needed by Census Bureau to Address Weaknesses. GAO-13-63. January 22, 2013. Information Security: Better Implementation of Controls for Mobile Devices Should Be Encouraged. GAO-12-757. September 18, 2012. Mobile Device Location Data: Additional Federal Actions Could Help Protect Consumer Privacy. GAO-12-903. September 11, 2012. Medical Devices: FDA Should Expand Its Consideration of Information Security for Certain Types of Devices. GAO-12-816. August 31, 2012. Privacy: Federal Law Should Be Updated to Address Changing Technology Landscape. GAO-12-961T. July 31, 2012. Information Security: Environmental Protection Agency Needs to Resolve Weaknesses. GAO-12-696. July 19, 2012. Cybersecurity: Challenges in Securing the Electricity Grid. GAO-12-926T. July 17, 2012. Electronic Warfare: DOD Actions Needed to Strengthen Management and Oversight. GAO-12-479. July 9, 2012. Information Security: Cyber Threats Facilitate Ability to Commit Economic Espionage. GAO-12-876T. June 28, 2012. Prescription Drug Data: HHS Has Issued Health Privacy and Security Regulations but Needs to Improve Guidance and Oversight. GAO-12-605. June 22, 2012. Cybersecurity: Threats Impacting the Nation. GAO-12-666T. April 24, 2012. Management Report: Improvements Needed in SEC’s Internal Controls and Accounting Procedures. GAO-12-424R. April 13, 2012. IT Supply Chain: National Security-Related Agencies Need to Better Address Risks. GAO-12-361. March 23, 2012. Information Security: IRS Needs to Further Enhance Internal Control over Financial Reporting and Taxpayer Data. GAO-12-393. March 16, 2012. Cybersecurity: Challenges in Securing the Modernized Electricity Grid. GAO-12-507T. February 28, 2012. Critical Infrastructure Protection: Cybersecurity Guidance is Available, but More Can Be Done to Promote Its Use. GAO-12-92. December 9, 2011. Cybersecurity Human Capital: Initiatives Need Better Planning and Coordination. GAO-12-8. November 29, 2011. Information Security: Additional Guidance Needed to Address Cloud Computing Concerns. GAO-12-130T. October 6, 2011. Information Security: Weaknesses Continue Amid New Federal Efforts to Implement Requirements. GAO-12-137. October 3, 2011. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Federal agencies, as well as their contractors, depend on interconnected computer systems and electronic data to carry out essential mission-related functions. Thus, the security of these systems and networks is vital to protecting national and economic security, public health and safety, and the flow of commerce. If information security controls are ineffective, resources may be lost, information—including sensitive personal information—may be compromised, and the operations of government and critical infrastructure could be disrupted, with potentially catastrophic effects. Federal law sets forth various requirements, roles, and responsibilities for securing federal agencies' systems and information. In addition, GAO has designated federal information security as a high-risk area since 1997. GAO was asked to provide a statement summarizing cyber threats facing federal agency and contractor systems, and challenges in securing these systems. In preparing this statement, GAO relied on its previously published work in this area. Federal and contractor systems face an evolving array of cyber-based threats. These threats can be unintentional—for example, from equipment failure, careless or poorly trained employees; or intentional—targeted or untargeted attacks from criminals, hackers, adversarial nations, or terrorists, among others. Threat actors use a variety of attack techniques that can adversely affect federal information, computers, software, networks, or operations, potentially resulting in the disclosure, alteration, or loss of sensitive information; destruction or disruption of critical systems; or damage to economic and national security. These concerns are further highlighted by the sharp increase in cyber incidents reported by federal agencies over the last several years, as well as the reported impact of such incidents on government and contractor systems. Because of the risk posed by these threats, it is crucial that the federal government take appropriate steps to secure its information and information systems. However, GAO has identified a number of challenges facing the government's approach to cybersecurity, including the following: Implementing risk-based cybersecurity programs at federal agencies: For fiscal year 2014, 19 of 24 major federal agencies reported that deficiencies in information security controls constituted either a material weakness or significant deficiency in internal controls over their financial reporting. In addition, inspectors general at 23 of these agencies cited information security as a major management challenge for their agency. Securing building and access control systems: GAO previously reported that the Department of Homeland Security lacked a strategy for addressing cyber risks to agencies' building and access control systems—computers that monitor and control building operations—and that the General Services Administration had not fully assessed the risk of cyber attacks to such systems. Overseeing contractors: The agencies GAO reviewed were inconsistent in overseeing contractors' implementation of security controls for systems they operate on behalf of agencies. Improving incident response: The agencies GAO reviewed did not always effectively respond to cybersecurity incidents or develop comprehensive policies, plans, and procedures to guide incident-response activities. Responding to breaches of personally identifiable information: The agencies GAO reviewed have inconsistently implemented policies and procedures for responding to data breaches involving sensitive personal information. Implementing security programs at small agencies: Smaller federal agencies (generally those with 6,000 or fewer employees) have not always fully implemented comprehensive agency-wide information security programs. Until agencies take actions to address these challenges—including the hundreds of recommendations made by GAO and inspectors general—their systems and information will be at increased risk of compromise from cyber-based attacks and other threats. In its previous work, GAO has made numerous recommendations to agencies to assist in addressing the identified cybersecurity challenges. |
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The term “contingent work” can be defined in many ways to refer to a variety of nonstandard work arrangements. Broadly defined, “contingent work” refers to work arrangements that are not long-term, year-round, full- time employment with a single employer. For example, an employer may hire workers when there is an immediate and limited demand for their services, without any offer of permanent or even long-term employment. Independent contractors, temporary workers, and part-time workers are examples of contingent workers. Specifically, independent contractors can be seen as individuals who obtain customers on their own to provide a product or service (and who may have other employees working for them), such as maids, realtors, child care providers, and management consultants. Research has shown that employers use contingent work arrangements for a variety of reasons. Employers may hire contingent workers to accommodate workload fluctuations, fill temporary absences, meet employees’ requests for part-time hours, screen workers for permanent positions, and save on wage and benefit costs, among other reasons. Previous analyses of data from the CPS Contingent Work Supplement have indicated that workers also take temporary and other contingent jobs for a variety of personal and economic reasons. For example, workers in various types of contingent jobs indicated that they (1) preferred a flexible schedule to accommodate their school, family, or other obligations; (2) needed additional income; (3) could not find a more permanent job; or (4) hoped the job would lead to permanent employment. Studies using data from the BLS National Longitudinal Survey of Youth show that events such as the birth of a child or a change in marital status affect the likelihood of entering different types of employment arrangements and prompt some workers to enter contingent work arrangements. Concerns arise when employers misclassify workers as independent contractors, who are excluded from certain worker protections. Employee misclassification occurs when an employer improperly classifies a worker as an independent contractor when the worker should be classified as an employee. In 2000, we reported that because most key workforce protection laws cover only workers who are employees, independent contractors and certain other contingent workers, such as self-employed workers, are, by definition, not covered. DOL may encounter employee misclassification while enforcing worker protection laws. DOL’s mission is to promote the welfare of job seekers, workers, and retirees in the United States by improving their working conditions, advancing their opportunities for profitable employment, protecting their retirement and health care benefits, helping employers find workers, strengthening free collective bargaining, and tracking changes in employment, prices, and other national economic measurements. In carrying out this mission, DOL enforces a variety of worker protection laws, including those guaranteeing workers’ rights to safe and healthful working conditions, a minimum hourly wage and overtime pay, freedom from employment discrimination, and unemployment insurance. In particular, DOL’s Employment Standards Administration’s (ESA) Wage and Hour Division enforces FLSA. The Wage and Hour Division—with staff located in 5 regional and 72 district, area, and field offices throughout the country—conducts investigations of employers who have $500,000 or more in annual sales volume. In addition, the division conducts outreach efforts for employers and workers to ensure compliance with FLSA. District directors oversee investigators, who play a key role in carrying out FLSA enforcement. Investigators are trained to investigate a wide variety of workplace conditions and complaints and enforce a variety of labor laws in addition to FLSA. Regional and district offices conduct outreach to employers and workers through brochures, workplace posters, presentations or training sessions for individuals or groups, and Web- based information. FLSA—which provides minimum wage and overtime pay protections— requires that employers pay those employees covered by the act at least the minimum wage and pay overtime wages when they work more than 40 hours a week. FLSA requires that an employer-employee relationship exist for a worker to be covered by the act’s provisions. In 2005, an estimated 7.4 percent of the total employed workforce were independent contractors. By comparison, 6.7 percent of the workforce were independent contractors in 1995. During this time period, the number of independent contractors grew from an estimated 8.3 million to 10.3 million workers in 2005. (In 2005, there were about 42.6 million contingent workers in the workforce—representing an estimated 31 percent of the workforce.) Independent contractors, in 2005, were on average 46 years old. The majority were men (65 percent), had attended or graduated from college, and 8 out of 10 were white, non-Hispanic. Independent contractors were employed in a wide range of industries, but in 2005, 23 percent were employed in professional services and 22 percent were employed in construction. Regarding occupations, the percentage of independent contractors in sales and related occupations (17 percent) and management (16 percent) were greater than in other occupations. In 2005, 9 percent of independent contractors indicated that they would prefer to work for someone else. About 11 percent of independent contractors reported family income below $20,000. The tests used to determine whether a worker is an independent contractor or an employee are complex, subjective, and differ from law to law. Nevertheless, when employees are misclassified as independent contractors, they may be excluded from coverage under key laws designed to protect workers and may not have access to certain employer-provided benefits, such as health insurance coverage and pension plans. Moreover, misclassification of employees can affect the administration of many federal and state programs. For example, misclassification could affect payment of taxes and payments into state workers’ compensation and unemployment insurance programs. No definitive test exists to distinguish whether a worker is an employee or an independent contractor. The tests used to determine whether a worker is an independent contractor or an employee are complex, subjective, and differ from law to law. For example, the National Labor Relations Act, the Civil Rights Act, the Fair Labor Standards Act, and the Employee Retirement Income Security Act each use a different definition of an employee and various tests, or criteria, to distinguish independent contractors from employees. In determining whether an employment relationship exists under federal statutes, courts have developed several criteria. These criteria have been classified as the economic realities test, the common law test, and a combination of the two sometimes referred to as a hybrid test. The economic realities test looks to whether the worker is economically dependent upon the principal or is in business for him or herself. The test is not precise, leaving determinations to be made on a case-by-case basis. The test consists of a number of factors, such as the degree of control exercised by the employing party over the worker, the worker’s opportunity for profit or loss, the worker’s capital investment in the business, the degree of skill required for the job, and whether the worker is an integral part of the business. The traditional common law test examines the employing party’s right to control how the work is performed. To determine whether the employing party has this right, courts may consider the degree of skill required to perform the work, who supplies the tools and equipment needed to perform the work, and the length of time the worker has been working for the employing party. When the tests are combined in some type of hybrid, a court typically weighs the common law factors and some additional factors related to the worker’s economic situation, such as how the work relationship may be terminated, whether the worker receives leave and retirement benefits, and whether the hiring party pays Social Security taxes. Aside from the complexities of distinguishing employees from independent contractors, employers have economic incentives to misclassify employees as independent contractors. Namely, employers are not obligated to make certain financial expenditures for independent contractors that they make for employees, such as paying certain taxes (Social Security, Medicare, and unemployment taxes), providing workers’ compensation insurance, paying minimum wage and overtime wages, or including independent contractors in employee benefit plans. Contingent workers who are employees are generally protected under key laws designed to protect workers, but certain categories of contingent workers—such as independent contractors—may be excluded from coverage under these laws. While most of the key worker protection laws do not distinguish between types of employees (i.e., contingent and standard full-time employees), some laws contain requirements that exclude certain categories of contingent workers or contain certain time- in-service requirements that make it difficult for them to be covered. In addition, because these laws are based on the traditional employer- employee relationship, they generally cover only workers who are employees; independent contractors, therefore, are not covered. Some of the key laws designed to protect workers but that only apply to “employees” include the following: Fair Labor Standards Act—establishes minimum wage, overtime, and child labor standards; Family and Medical Leave Act—requires employers to allow employees to take up to 12 weeks of unpaid, job-protected leave for medical reasons related to a family member’s or the employee’s own health; Occupational Safety and Health Act—requires employers to maintain a safe and healthy workplace for their employees and requires employers and employees to comply with all federal occupational health and safety standards; National Labor Relations Act—guarantees the right of employees to organize and bargain collectively; Unemployment Insurance—pays benefits to workers in covered jobs who become unemployed and meet state-established eligibility rules; and Workers’ Compensation—provides benefits to injured workers while limiting employers’ liability strictly to workers’ compensation payments. When employers have misclassified workers as independent contractors, workers may need to go to court to establish their employee status and their eligibility for protection under the laws. In addition, DOL may bring a lawsuit on behalf of the worker or group of workers to require that the employer provide the benefit or protection under the law. Employees who are misclassified as independent contractors, because by definition they would not be considered employees, may not have access to certain employer-provided benefits, such as health insurance coverage and pension plans. Some states and professional associations have developed health insurance programs that help contingent workers access health care. While these public and private initiatives are relatively new and long-term outcomes have yet to be determined, the programs have succeeded in expanding health insurance options for some contingent workers. Misclassification of employees can affect the administration of many federal and state programs, such as payment of taxes and pension benefits. For example, if employers misclassify workers as independent contractors, then they may not be paying the payroll taxes required to be paid for employees. At the federal level, misclassification can reduce tax payments, Medicare payments, and Social Security payments. At the state level, misclassification can affect payments into state tax, workers’ compensation, and unemployment insurance programs. DOL detects and addresses employee misclassification when enforcing the FLSA minimum wage and overtime pay provisions. As part of its FLSA investigation process, DOL examines the employment relationship— whether a worker is an employee or an independent contractor—to determine which workers are covered. Investigators use various methods to test the employment relationship of workers, including interviewing employers and workers, reviewing payroll and related documents, and touring work sites. While misclassification alone is not an FLSA violation, it may contribute to FLSA violations or violations of other laws, such as tax violations. DOL’s outreach efforts provide some information to employers and workers on employee misclassification issues. DOL procedures require officials to share information with other federal and state agencies whenever investigators find possible violations of other laws. However, the district offices that we contacted vary in how often they forward misclassification cases as a possible violation of other agencies’ laws. DOL relies on complaints as a primary way to identify potential violations for investigation. All FLSA investigations of minimum wage and overtime pay complaints begin with an examination of workers’ employment relationship because FLSA applies only to employees, not to independent contractors. If investigators determine that a worker is an employee and not an independent contractor, they continue with their FLSA investigation to determine whether the employer has provided the minimum wage and overtime pay required by the act. Employee misclassification alone is not a violation of FLSA, but may contribute to FSLA minimum wage and overtime pay violations or violations of tax, workers’ compensation, or unemployment insurance laws. DOL investigations have identified FLSA violations associated with employee misclassification. For example, one misclassification case involved a valet parking company located in Arizona that provided services to local restaurants, sports venues, hotels, and theaters. In 2004, this company paid $66,947 in minimum wage and overtime pay back wages to 262 employees who had been misclassified as independent contractors. When reviewing the employment relationship, the DOL investigator found that the services provided by these workers were integral to the business, and that the employer had imposed strict policies and procedures to follow, and told them when they would work, where they would work, what their pay rate would be, and what uniforms they would wear. The investigator determined that the workers were not required to use initiative, judgment, or foresight to be successful as independent contractors, did not have any investment in facilities or equipment, and were not operating to make a profit. As part of general FLSA outreach efforts to employers and workers, DOL provides some information on establishing the employment relationship. While these outreach efforts primarily focus on how to comply with provisions of FLSA—minimum wage, overtime pay, and child labor—they also include some information on the employment relationship. Specifically, information on employment relationship issues is available to employers and workers through brochures, pamphlets, fact sheets, and Web-based information. According to DOL officials, outreach efforts conducted specifically for industries likely to use independent contractors may also address the topic of employee misclassification. Another form of outreach that DOL provides is its workplace poster. FLSA regulations require that every employer that has employees subject to the act’s provisions post a notice explaining the act in a prominent and accessible place at the work site. While DOL relies heavily on complaints from workers to enforce FLSA, the FLSA workplace poster does not provide a telephone number for workers or others to call to register complaints. Employers’ misclassification of workers as independent contractors may in some circumstances violate tax, unemployment insurance, and workers’ compensation laws. According to the Field Operations Handbook, DOL regional or district officials are required to share information with other appropriate federal and state agencies whenever investigators conducting FLSA investigations find instances of possible violations of other laws. At the same time, however, the handbook cautions investigators not to interpret laws outside their authority. We discussed whether DOL forwards misclassification cases identified during an FLSA investigation. The DOL officials we spoke to in nine district offices could not provide the number of misclassification cases they referred to other agencies because they do not track this information. However, their responses indicated that district offices vary in how often they implement the procedures to refer cases to other agencies. Some of the DOL district offices told us that they notified IRS and state agencies when they found misclassification, while others told us that they had little or no contact with other agencies regarding misclassification issues. These district offices also reported that it was rare for them to receive misclassification referrals from other federal or state agencies. DOL investigators identify instances of employee misclassification when responding to minimum wage and overtime pay complaints. However, because the FLSA workplace poster does not provide an easy method for workers to report complaints, DOL may be missing opportunities to address other instances of potential misclassification. Improving the workplace poster would reinforce DOL’s complaint-based strategy and would help further protect the wages of employees who may be misclassified. While DOL investigators conducting FLSA investigations are required to share information with other federal and state agencies whenever they find instances of possible violations of other laws, DOL district offices we studied varied in how often they forwarded misclassification cases to other agencies. DOL does not know the extent to which district offices refer misclassification cases to other agencies. DOL cautions investigators not to interpret laws outside their authority, but referring misclassification cases identified through FLSA investigations would not require DOL to interpret other agencies’ laws. In addition, referring this information may assist other federal and state agencies in addressing misclassification. Furthermore, when DOL does not refer cases of misclassification, other agencies lose opportunities to fulfill their fiduciary duties in conserving government funds. To facilitate the reporting of FLSA complaints, we recommended that the Secretary of Labor instruct the Wage and Hour Division to revise the FLSA workplace poster to include national, regional, and district office telephone numbers and a Web site address that complainants may use to report alleged employee misclassification issues. Following the publication of our report, DOL notified the Congress that it was redesigning the poster and expected the work to be completed in spring 2007. To facilitate addressing employee misclassification across federal and state programs, we recommended that the Secretary of Labor instruct the Wage and Hour Division to evaluate the extent to which misclassification cases identified through FLSA investigations are referred to the appropriate federal or state agency potentially affected by employee misclassification, and take action to make improvements as necessary. In addressing its referral mechanism, the Wage and Hour Division officials should consider building upon efforts by district offices currently engaging in referrals. Following the publication of our report, DOL notified the Congress that it was researching the nature and effectiveness of the referral of potential employee misclassification by different district offices to various federal and state agencies. DOL also noted that it will consider appropriate revisions to its procedures, and expected the work to be done by the end of September 2007. Mr. Chairmen, this concludes my prepared statement. I will be happy to answer any questions that you or other members of the subcommittees may have. For future information regarding this testimony, I can be contacted at (202) 512-7215. Key contributors to this testimony were Brett Fallavollita and Linda Siegel. 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. | Some workers do not receive worker protections to which they are entitled because employers misclassify them as independent contractors when they should be classified as employees. Key worker protections include minimum hourly wage and overtime pay and access to unemployment insurance. The Department of Labor (DOL) enforces several labor laws to protect workers, including the Fair Labor Standards Act (FLSA). Misclassification can also have a negative impact on tax collection for Social Security, unemployment insurance, and other programs. This testimony draws upon a previous GAO report and focuses specifically on (1) the number and characteristics of independent contractors, (2) the workforce protections and benefits provided to employees that typically are not available to independent contractors, and (3) the actions that DOL takes to detect and address employee misclassification. The number of independent contractors in the total employed workforce grew from 6.7 percent in 1995 to 7.4 percent in 2005. In 2005, there were 10.3 million independent contractors. Independent contractors, in 2005, had an average age of 46 years, were almost twice as likely to be male than female, and almost two-thirds had some college or higher education. Independent contractors were employed in a wide range of industries (such as professional services and construction) and occupations (including sales and management). When employees are misclassified as independent contractors, they may be excluded from coverage under key laws designed to protect workers and may not have access to employer-provided health insurance coverage and pension plans. Moreover, misclassification of employees can affect the administration of many federal and state programs, such as payment of taxes and payments into state workers' compensation and unemployment insurance programs. Notably, the tests used to determine whether a worker is an independent contractor or an employee are complex, subjective, and differ from law to law. DOL detects and addresses misclassification of employees as independent contractors by investigating complaints, but does not always forward misclassification cases to other federal and state agencies. DOL investigators detect and address employee misclassification primarily when responding to FLSA minimum wage and overtime pay complaints. DOL procedures require officials to share information with other federal and state agencies whenever investigators find possible violations of other laws. However, the district offices GAO contacted vary in how often they forward misclassification as a possible violation of other laws. As one form of outreach to workers, DOL has an FLSA workplace poster that explains the act, but it is missing key contact information. |
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USPS’s financial condition continued to decline over the past fiscal year and its financial outlook is poor for fiscal year 2011 and the foreseeable future. Key USPS results for fiscal year 2010 included a $1.0 billion decline in total revenue to $67.1 billion, and a $3.7 billion increase in total expenses to $75.6 billion, resulting in a record loss of about $8.5 billion, a $1.8 billion increase in outstanding debt (which left $1.2 billion of available borrowing authority), a total of $12 billion in outstanding debt due to the Treasury, and a $1.2 billion cash balance at the end of the fiscal year. USPS has recently released its budget for fiscal year 2011, projecting a $6.4 billion loss (see fig. 1)—one of the largest in USPS history— including the impact of a $5.5 billion payment due in 2011 to prefund retiree health benefits; a $3 billion increase in outstanding debt due to the Department of the Treasury (Treasury), thereby reaching its $15 billion statutory limit; and a $2.7 billion cash shortfall at the end of the fiscal year. USPS’s revenue drop in fiscal year 2010 was driven by continuing declines in total mail volume. In fiscal year 2010, mail volume decreased about 6 billion pieces from the previous fiscal year to 171 billion pieces. This volume was about 20 percent below the peak of 213 billion pieces delivered during fiscal year 2006. Most of the volume declines were in profitable First-Class Mail—which were particularly significant because the average piece of First-Class Mail generated about three times the profitability of the average piece of Standard Mail. USPS currently projects mail volume to increase by about 2 billion pieces in fiscal year 2011. In this fiscal year, First-Class Mail is expected to decrease by 3 billion pieces, but Standard Mail is expected to increase by 5 billion pieces. With these volume changes and expected small rate increases, USPS projects revenues to increase $0.6 billion in fiscal year 2011. Meanwhile, USPS’s expenses increased by $3.7 billion in fiscal year 2010 compared to fiscal year 2009 for several reasons. First, in fiscal year 2010, USPS made its statutorily required payment of $5.5 billion to prefund health benefits for its retirees, in contrast to fiscal year 2009 when Congress deferred all but $1.4 billion of USPS’s scheduled payment of $5.4 billion. Second, USPS’s workers’ compensation costs in fiscal year 2010 were $3.6 billion, up $1.3 billion from the previous fiscal year, primarily from the non-cash effect of changes in the discount rates used to estimate the liability. Third, results of USPS cost savings efforts in fiscal year 2010 were insufficient to offset rising costs in other areas. According to USPS, it achieved a total of close to $13 billion in cost savings from fiscal years 2006 through 2010 (see fig. 2), primarily by reducing 280 million work hours and its workforce by 131,000 employees. Most savings resulted from attrition, reductions in overtime, and changes in postal operations. USPS reported saving $3 billion in fiscal year 2010, primarily because of a reduction of 75 million work hours—half the savings achieved in fiscal year 2009. Looking forward, USPS projects cost savings of $2 billion in fiscal year 2011, primarily from continued attrition and associated savings. As its core product—First-Class Mail—continues to decline, USPS must modernize and restructure to become more efficient, control costs, keep rates affordable, and meet changing customer needs. To do so, USPS will need to become much leaner and more flexible. Key challenges include the following: Mail volume and changing use of the mail: USPS projects mail volume to continue declining to about 150 billion pieces by fiscal year 2020—about 30 percent below its 2006 peak. Most of the declines are projected to be in profitable First-Class Mail. Use of the mail is changing as communications and payments continue to shift to electronic alternatives—a shift that is being facilitated by rapid adoption of broadband. These trends expose weaknesses in USPS’s business model, which has relied on volume growth to help cover costs. Postal revenues: USPS expects revenue to stagnate in the next decade as continued declines in mail volume are offset by rate increases. Rate increases are generally limited by the inflationary price cap on market- dominant products that generate close to 90 percent of USPS revenue. Compensation and benefit costs: Compensation and benefits, including retiree health benefits and workers’ compensation, totaled about $60 billion in fiscal year 2010, or close to 80 percent of USPS costs. USPS pays a higher share of employee health and life insurance premiums than other federal agencies. Difficulties achieving network realignment: Realigning USPS’s mail processing and retail facilities will be crucial for it to achieve sustainable cost reductions and productivity improvements, but limited progress has been made in rightsizing these networks to eliminate costly excess capacity. Although USPS is working to consolidate some mail processing operations, it has closed few large mail processing facilities since 2005. Similarly, its network of post offices and postal retail facilities has remained largely static despite expanded use of retail alternatives and population shifts. Capital investment: Continuing losses from operations have constrained funds for USPS capital investment. USPS’s purchases of capital property and equipment and building improvements have declined in recent years, from $1.8 billion in fiscal year 2009 to $1.4 billion in fiscal year 2010. The deferral of maintenance could impede modernization and efficiency gains from optimizing mail processing, retail, and delivery networks. Further, USPS has delayed buying new delivery vehicles for lack of capital resources. We have an ongoing review of USPS’s delivery fleet of about 185,000 vehicles, including about 140,000 long-life vehicles purchased in the late 1980s and early 1990s that are nearing the end of their 24-year expected operating time frame. USPS has estimated replacing its delivery fleet will cost about $5 billion. Lack of borrowing capacity: USPS expects to increase its outstanding debt to Treasury during fiscal year 2011 by $3 billion, thereby reaching its total statutory debt limit of $15 billion. Even with this debt increase, USPS projects a cash shortfall at the end of this fiscal year. Its cash outlook is uncertain, as indicated by recent experience. USPS reported in August 2010 that it “would likely experience a cash shortfall if legislation similar to that passed in September 2009 is not passed.” USPS ended fiscal year 2010 with cash of about $1.2 billion and remaining annual borrowing authority of an additional $1.2 billion, or slightly more than the funds needed for one biweekly payroll. USPS projects it will have insufficient cash at the end of fiscal year 2011 to meet all of its obligations. Large unfunded financial obligations and liabilities: USPS’s unfunded obligations and liabilities were roughly $100 billion at the end of fiscal year 2010. Looking forward, USPS will continue to be challenged by these financial obligations and liabilities, together with expected large financial losses and long-term declines in First-Class Mail volume. Proposed postal legislation, including S. 3831, provides a starting point for considering key issues where congressional decisions are needed to help USPS undertake needed reforms. This bill is based on legislative proposals USPS made this past spring. Resolving large USPS funding requirements for pension and retiree health benefits is important. It is equally important to USPS’s future to address constraints and legal restrictions, such as those related to closing facilities, so that USPS can take more aggressive action to reduce costs. Urgent action is needed as some changes, such as rightsizing networks, will take time to implement and produce results. In addition, including incentives and oversight mechanisms would make an important contribution to assuring an appropriate balance between providing USPS with more flexibility and assuring sufficient transparency, oversight, and accountability. Congressional decisions may involve difficult trade-offs related to USPS’s role as a federal entity expected to provide universal mail delivery and ready access to postal retail service while being self-financing through businesslike operations. Future USPS actions and other stakeholder actions are expected to be informed and guided based on congressional decisions related to public policy questions, such as: Benefits: What changes, if any, should be made to USPS pension and retiree health benefit obligations and payment schedules? What would be the impact on the federal budget? Delivery: Should the long-standing requirement for Saturday delivery be dropped so USPS can implement its proposal to reduce delivery frequency to 5 days a week? What would be the specific effects on operations, costs, workforce mix, employees, service, competition, the value of mail, mail volume, and revenue? How would shifting to 5-day delivery affect customers including business mailers and the public? Post office closings: Should USPS have greater flexibility to rightsize its retail networks and workforce, which may involve closing post offices and moving retail services to alternative commercial locations that are often open more days and longer hours than postal facilities? Or should USPS retain its retail facilities and provide new nonpostal products and services? Nonpostal products: Should USPS be allowed to offer new nonpostal products and services that compete with private-sector firms? If so, how should fair competition be assured? Would it need additional capital for such initiatives? If so, how would they be financed? Processes for change: What role should Congress, the PRC, USPS, employees, and customers, including business mailers and the public, have in decisions on postal policy issues? What incentives and oversight mechanisms are needed as part of congressional actions to assure an appropriate balance between providing USPS with more flexibility and assuring sufficient transparency, oversight, and accountability? We have discussed several options that Congress and USPS could consider in a report we issued last April, and are currently conducting a congressionally requested review of USPS’s 5-day delivery proposal. In this testimony, we will highlight some options related to three areas that are also addressed by S. 3831—compensation and benefits, rightsizing networks and workforce, and expanding nonpostal activities. S. 3831 addresses key retiree health and pension benefit issues. Specifically, it requires OPM to recalculate USPS’s CSRS pension obligation in a way expected to make the federal government responsible for a greater share of USPS’s CSRS pension obligation. The bill also authorizes the USPS Board of Governors to transfer any part of a resulting pension surplus to the Postal Service Retiree Health Benefits Fund. The sponsor of S. 3831 has estimated that these legislative changes could result in an increase in the government’s pension obligations of approximately $50 billion. Such an increase could impact the federal budget deficit and require funding over time. USPS has said it cannot afford its required prefunding payments to the retiree health benefit fund on the basis of its significant volume and revenue declines, large losses, debt nearing its limit, and limited cost- cutting opportunities under its current authority. We have reported that Congress should consider providing financial relief to USPS, including modifying its retiree health benefit cost structure in a fiscally responsible manner. Several legislative proposals have been made to defer costs by revising statutory requirements, including extending and revising prefunding payments to the Retiree Health Benefits Fund, with smaller payment amounts in the short term followed by larger amounts later. Deferring some prefunding of these benefits would serve as short-term fiscal relief. However, deferrals also increase the risk that USPS will not be able to make future benefit payments as its core business declines. Therefore, it is important that USPS fund its retiree health benefit obligations—including prefunding these obligations—to the maximum extent that its finances permit. In addition to considering what is affordable and a fair balance of payments between current and future ratepayers, Congress would also have to address the impact of these proposals on the federal budget. Further, the Congressional Budget Office has raised concerns about how aggressive USPS’s cost-cutting measures would be if prefunding payments for retiree health care were reduced. Congress could revisit other aspects of the postal compensation and benefits framework. USPS is required to maintain compensation and benefits comparable to the private sector, a requirement that has been a source of disagreement between USPS and its unions in collective bargaining and binding arbitration. If USPS and its unions go to arbitration, there is no statutory requirement for arbitrators to consider USPS’s financial condition. We continue to favor such an arbitration requirement. The law also requires USPS’s fringe benefits to be at least as favorable as those in effect when the Postal Reorganization Act of 1970 was enacted. Career employees participate in federal pension and benefit programs, and USPS covers a higher proportion of its employees’ health care and life insurance premiums than most other federal agencies. USPS is also required by law to participate in the federal workers’ compensation program, and some benefits paid exceed those provided in the private sector. Furthermore, USPS employees in this program can choose not to retire when they become eligible to retire, and they often decide to remain on the more generous workers’ compensation rolls. Congressional action is needed to speed USPS’s progress in rightsizing its networks and workforce, and S. 3831 seeks to address these issues. Such progress is limited by both stakeholder resistance and statutory requirements. USPS has costly excess capacity and inadequate flexibility to quickly reduce costs in its processing and retail networks. USPS has faced formidable resistance to facility closures and consolidations because of concerns about possible effects on service, employees, and communities, particularly in small towns or rural areas. We have suggested that Congress consider establishing a panel similar to the military Base Realignment and Closure Commissions to facilitate action and progress. Such panels have successfully informed prior difficult restructuring decisions. The panel could consider options for USPS’s networks including the following: Mail processing: Decisions to maintain or close facilities are best made in the context of a comprehensive, integrated approach for optimizing the processing network. Issues include how to inform Congress and the public, address resistance, and ensure employees will be treated fairly. Related issues include whether to relax current delivery standards to enable additional facility closures and associated savings. Retail: USPS has retained most of its retail facilities in recent years despite the growing use of less costly alternatives to traditional post offices, such as self-service kiosks and stamp sales in grocery stores, drug stores, and over the Internet. USPS has called for statutory changes to facilitate modernizing its retail services. USPS has asked Congress to change the law so it can diversify into nonpostal areas to find new opportunities for revenue growth, and S. 3831 would authorize such action. This could involve USPS entering into new business areas or earning revenues from partners selling nonpostal products at USPS facilities. About 10 years ago, we reported that USPS incurred losses on early electronic commerce and other nonpostal initiatives, and its management of its electronic commerce initiatives was fragmented, with inconsistent implementation and incomplete financial information. Congress then restricted USPS from engaging in new nonpostal activities in the Postal Accountability and Enhancement Act of 2006. Allowing USPS to expand into new nonpostal activities would raise issues about the areas in which it should be allowed to compete with the private sector, how to assure fair competition, how to mitigate risks associated with entering new lines of business, and how to finance such efforts. Related issues could include whether USPS’s mission and role as a government entity with a monopoly should be changed, what transparency and accountability would apply, whether USPS would be subject to the same regulatory entities and regulations as its competitors, and whether losses would be borne by postal ratepayers or taxpayers. A senior USPS official told us that USPS is studying various possibilities for introducing new products and services. A continued issue is whether USPS would make money if it was allowed to compete in new nonpostal areas. USPS has reported that if it could enter such areas, such as banking or sales of consumer goods, its opportunities would be limited by its high cost structure and the relatively light customer traffic of post offices compared with commercial retailers. (There are 600 weekly counter customers at the average post office, compared to 20,000 at the average major supermarket, according to USPS.) USPS has said that the possibility of building a sizable presence in logistics, banking, integrated marketing, and document management was currently not viable because of its net losses, high wage and benefit costs, and limited access to cash to support necessary investment. USPS concluded that building a sizable business in any of these areas would require “time, resources, new capabilities (often with the support of acquisitions or partnerships) and profound alterations to the postal business model.” In summary, the need for postal reform continues as business and consumer use of the mail continues to evolve. Congress and USPS urgently need to reach agreement on a package of actions to restore USPS’s financial viability and enable it to begin making necessary changes. Mr. Chairman, that concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have. For further information about this statement, please contact Phillip Herr at (202) 512-2834 or [email protected]. Individuals who made key contributions to this statement include Joseph Applebaum, Chief Actuary; Susan Ragland, Director, Financial Management and Assurance; Amy Abramowitz; Teresa Anderson; Joshua Bartzen; Kenneth John; Hannah Laufe; SaraAnn Moessbauer; Robert Owens; Crystal Wesco; and Jarrod West. 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. Postal Service's (USPS) financial condition and outlook deteriorated sharply during fiscal years 2007 through 2009. USPS actions to cut costs and increase revenues were insufficient to offset declines in mail volume and revenues. Mail volume declined from 213 billion pieces in fiscal year 2006, to 171 billion pieces in fiscal year 2010--or about 20 percent. Volume declines resulted from the recession and changes in the use of mail as transactions and messages continued to shift to electronic alternatives. In this environment, USPS initiatives to increase revenues had limited results. USPS expects mail volume to decline further to about 150 billion pieces by 2020. This trend exposes weaknesses in USPS's business model, which has relied on growth in mail volume to help cover costs. GAO and others have reported on options for improving USPS's financial condition, including GAO's April 2010 report on USPS's business model (GAO-10-455). Recently, legislation has been introduced that addresses USPS's finances and the need for flexibility to help modernize operations. This testimony discusses (1) updated information on USPS's financial condition and outlook, (2) the need to modernize and restructure USPS, and (3) key issues that need to be addressed by postal legislation. It is based primarily on GAO's past and ongoing work. In comments on our statement, USPS generally agreed with its accuracy and provided technical comments that were incorporated as appropriate. USPS's financial condition continued to decline in fiscal year 2010 and its financial outlook is poor for fiscal year 2011 and the foreseeable future. Key results for fiscal year 2010 included total revenue of $67.1 billion and total expenses of $75.6 billion, resulting in (1) a record loss of $8.5 billion--up $4.7 billion from fiscal year 2009, (2) a $1.8 billion increase in outstanding debt to the Treasury, thus making the total outstanding debt $12 billion, and (3) a $1.2 billion cash balance at the end of the fiscal year. USPS's budget for fiscal year 2011 projects (1) a $6.4 billion loss, (2) a $3 billion increase in debt to the $15 billion statutory limit, and (3) an end-of-year cash shortfall of $2.7 billion. USPS has reported achieving close to $13 billion in cost savings in the past 5 fiscal years. However, as its most profitable core product, First-Class Mail, continues to decline, USPS must modernize and restructure to become more efficient, control costs, keep rates affordable, and meet changing customer needs. To do so, USPS needs to become much leaner and more flexible. Key challenges include: changing use of the mail; compensation and benefit costs that are close to 80 percent of total costs; difficulties realigning networks to remove costly excess capacity and improve efficiency; constrained capital investment, which has declined to one of the lowest levels in two decades and led to delays in buying new vehicles; lack of borrowing capacity when USPS reaches its statutory debt limit; and large unfunded financial obligations and liabilities of roughly $100 billion at the end of fiscal year 2010. Proposed postal legislation, including S. 3831, provides a starting point for addressing key issues facing USPS and facilitating changes, such as rightsizing networks, that will take time to implement and produce results. Also, decisions on postal issues may involve trade-offs related to USPS's role as a federal entity expected to provide universal postal service while being self-financing through businesslike operations. Three key areas addressed by the bill include compensation and benefits; rightsizing USPS networks and workforce; and whether to allow USPS to expand its nonpostal activities. For example, resolving large USPS funding requirements for retiree health benefits is important, while continuing to prefund retiree health benefits to the extent USPS's finances permit. It is equally important to address constraints and legal restrictions, such as those related to closing facilities, so that USPS can take more aggressive action to reduce costs. Allowing USPS to expand into nonpostal activities raises issues of how to mitigate risks associated with new lines of business, assure fair competition with the private sector, and how to finance such efforts. Congress and USPS urgently need to take action to restore USPS's financial viability as business and consumer use of the mail continues to evolve. |
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A domestic bioterrorist attack is considered to be a low-probability event, in part because of the various difficulties involved in successfully delivering biological agents to achieve large-scale casualties. However, a number of cases involving biological agents, including at least one completed bioterrorist act and numerous threats and hoaxes, have occurred domestically. In 1984, a group intentionally contaminated salad bars in restaurants in Oregon with salmonella bacteria. Although no one died, 751 people were diagnosed with foodborne illness. Some experts predict that more domestic bioterrorist attacks are likely to occur. The burden of responding to such an attack would fall initially on personnel in state and local emergency response agencies. These “first responders” include firefighters, emergency medical service personnel, law enforcement officers, public health officials, health care workers (including doctors, nurses, and other medical professionals), and public works personnel. If the emergency were to require federal disaster assistance, federal departments and agencies would respond according to responsibilities outlined in the Federal Response Plan. Several groups, including the Advisory Panel to Assess Domestic Response Capabilities for Terrorism Involving Weapons of Mass Destruction (known as the Gilmore Panel), have assessed the capabilities at the federal, state, and local levels to respond to a domestic terrorist incident involving a weapon of mass destruction (WMD), that is, a chemical, biological, radiological, or nuclear agent or weapon. While many aspects of an effective response to bioterrorism are the same as those for any disaster, there are some unique features. For example, if a biological agent is released covertly, it may not be recognized for a week or more because symptoms may not appear for several days after the initial exposure and may be misdiagnosed at first. In addition, some biological agents, such as smallpox, are communicable and can spread to others who were not initially exposed. These differences require a type of response that is unique to bioterrorism, including infectious disease surveillance, epidemiologic investigation, laboratory identification of biological agents, and distribution of antibiotics to large segments of the population to prevent the spread of an infectious disease. However, some aspects of an effective response to bioterrorism are also important in responding to any type of large-scale disaster, such as providing emergency medical services, continuing health care services delivery, and managing mass fatalities. Federal spending on domestic preparedness for terrorist attacks involving WMDs has risen 310 percent since fiscal year 1998, to approximately $1.7 billion in fiscal year 2001, and may increase significantly after the events of September 11, 2001. However, only a portion of these funds were used to conduct a variety of activities related to research on and preparedness for the public health and medical consequences of a bioterrorist attack. We cannot measure the total investment in such activities because departments and agencies provided funding information in various forms—as appropriations, obligations, or expenditures. Because the funding information provided is not equivalent, we summarized funding by department or agency, but not across the federal government (see apps. I and II). Reported funding generally shows increases from fiscal year 1998 to fiscal year 2001. Several agencies received little or no funding in fiscal year 1998. For example, within the Department of Health and Human Services (HHS), the Centers for Disease Control and Prevention’s (CDC) Bioterrorism Preparedness and Response Program was established and first received funding in fiscal year 1999 (see app. I and app. II). Its funding has increased from approximately $121 million at that time to approximately $194 million in fiscal year 2001. Research is currently being done to enable the rapid identification of biological agents in a variety of settings; develop new or improved vaccines, antibiotics, and antivirals to improve treatment and vaccination for infectious diseases caused by biological agents; and develop and test emergency response equipment such as respiratory and other personal protective equipment. Appendix I provides information on the total reported funding for all the departments and agencies carrying out research, along with examples of this research. The Department of Agriculture (USDA), Department of Defense (DOD), Department of Energy, HHS, Department of Justice (DOJ), Department of the Treasury, and the Environmental Protection Agency (EPA) have all sponsored or conducted projects to improve the detection and characterization of biological agents in a variety of different settings, from water to clinical samples (such as blood). For example, EPA is sponsoring research to improve its ability to detect biological agents in the water supply. Some of these projects, such as those conducted or sponsored by DOD and DOJ, are not primarily for the public health and medical consequences of a bioterrorist attack against the civilian population, but could eventually benefit research for those purposes. Departments and agencies are also conducting or sponsoring studies to improve treatment and vaccination for diseases caused by biological agents. For example, HHS’ projects include basic research sponsored by the National Institutes of Health to develop drugs and diagnostics and applied research sponsored by the Agency for Healthcare Research and Quality to improve health care delivery systems by studying the use of information systems and decision support systems to enhance preparedness for the delivery of medical care in an emergency. In addition, several agencies, including the Department of Commerce’s National Institute of Standards and Technology and DOJ’s National Institute of Justice are conducting research that focuses on developing performance standards and methods for testing the performance of emergency response equipment, such as respirators and personal protective equipment. Federal departments’ and agencies’ preparedness efforts have included efforts to increase federal, state, and local response capabilities, develop response teams of medical professionals, increase availability of medical treatments, participate in and sponsor terrorism response exercises, plan to aid victims, and provide support during special events such as presidential inaugurations, major political party conventions, and the Superbowl. Appendix II contains information on total reported funding for all the departments and agencies with bioterrorism preparedness activities, along with examples of these activities. Several federal departments and agencies, such as the Federal Emergency Management Agency (FEMA) and CDC, have programs to increase the ability of state and local authorities to successfully respond to an emergency, including a bioterrorist attack. These departments and agencies contribute to state and local jurisdictions by helping them pay for equipment and develop emergency response plans, providing technical assistance, increasing communications capabilities, and conducting training courses. Federal departments and agencies have also been increasing their own capacity to identify and deal with a bioterrorist incident. For example, CDC, USDA, and the Food and Drug Administration (FDA) are improving surveillance methods for detecting disease outbreaks in humans and animals. They have also established laboratory response networks to maintain state-of-the-art capabilities for biological agent identification and the characterization of human clinical samples. Some federal departments and agencies have developed teams to directly respond to terrorist events and other emergencies. For example, HHS’ Office of Emergency Preparedness (OEP) created Disaster Medical Assistance Teams to provide medical treatment and assistance in the event of an emergency. Four of these teams, known as National Medical Response Teams, are specially trained and equipped to provide medical care to victims of WMD events, such as bioterrorist attacks. Several agencies are involved in increasing the availability of medical supplies that could be used in an emergency, including a bioterrorist attack. CDC’s National Pharmaceutical Stockpile contains pharmaceuticals, antidotes, and medical supplies that can be delivered anywhere in the United States within 12 hours of the decision to deploy. The stockpile was deployed for the first time on September 11, 2001, in response to the terrorist attacks on New York City. Federally initiated bioterrorism response exercises have been conducted across the country. For example, in May 2000, many departments and agencies took part in the Top Officials 2000 exercise (TOPOFF 2000) in Denver, Colorado, which featured the simulated release of a biological agent. Participants included local fire departments, police, hospitals, the Colorado Department of Public Health and the Environment, the Colorado Office of Emergency Management, the Colorado National Guard, the American Red Cross, the Salvation Army, HHS, DOD, FEMA, the Federal Bureau of Investigation (FBI), and EPA. Several agencies also provide assistance to victims of terrorism. FEMA can provide supplemental funds to state and local mental health agencies for crisis counseling to eligible survivors of presidentially declared emergencies. In the aftermath of the recent terrorist attacks, HHS released $1 million in funding to New York State to support mental health services and strategic planning for comprehensive and long-term support to address the mental health needs of the community. DOJ’s Office of Justice Programs (OJP) also manages a program that provides funds for victims of terrorist attacks that can be used to provide a variety of services, including mental health treatment and financial assistance to attend related criminal proceedings. Federal departments and agencies also provide support at special events to improve response in case of an emergency. For example, CDC has deployed a system to provide increased surveillance and epidemiological capacity before, during, and after special events. Besides improving emergency response at the events, participation by departments and agencies gives them valuable experience working together to develop and practice plans to combat terrorism. Federal departments and agencies are using a variety of interagency plans, work groups, and agreements to coordinate their activities to combat terrorism. However, we found evidence that coordination remains fragmented. For example, several different agencies are responsible for various coordination functions, which limits accountability and hinders unity of effort; several key agencies have not been included in bioterrorism-related policy and response planning; and the programs that agencies have developed to provide assistance to state and local governments are similar and potentially duplicative. The President recently took steps to improve oversight and coordination, including the creation of the Office of Homeland Security. Over 40 federal departments and agencies have some role in combating terrorism, and coordinating their activities is a significant challenge. We identified over 20 departments and agencies as having a role in preparing for or responding to the public health and medical consequences of a bioterrorist attack. Appendix III, which is based on the framework given in the Terrorism Incident Annex of the Federal Response Plan, shows a sample of the coordination efforts by federal departments and agencies with responsibilities for the public health and medical consequences of a bioterrorist attack, as they existed prior to the recent creation of the Office of Homeland Security. This figure illustrates the complex relationships among the many federal departments and agencies involved. Departments and agencies use several approaches to coordinate their activities on terrorism, including interagency response plans, work groups, and formal agreements. Interagency plans for responding to a terrorist incident help outline agency responsibilities and identify resources that could be used during a response. For example, the Federal Response Plan provides a broad framework for coordinating the delivery of federal disaster assistance to state and local governments when an emergency overwhelms their ability to respond effectively. The Federal Response Plan also designates primary and supporting federal agencies for a variety of emergency support operations. For example, HHS is the primary agency for coordinating federal assistance in response to public health and medical care needs in an emergency. HHS could receive support from other agencies and organizations, such as DOD, USDA, and FEMA, to assist state and local jurisdictions. Interagency work groups are being used to minimize duplication of funding and effort in federal activities to combat terrorism. For example, the Technical Support Working Group is chartered to coordinate interagency research and development requirements across the federal government in order to prevent duplication of effort between agencies. The Technical Support Working Group, among other projects, helped to identify research needs and fund a project to detect biological agents in food that can be used by both DOD and USDA. Formal agreements between departments and agencies are being used to share resources and knowledge. For example, CDC contracts with the Department of Veterans Affairs (VA) to purchase drugs and medical supplies for the National Pharmaceutical Stockpile because of VA’s purchasing power and ability to negotiate large discounts. Overall coordination of federal programs to combat terrorism is fragmented. For example, several agencies have coordination functions, including DOJ, the FBI, FEMA, and the Office of Management and Budget. Officials from a number of the agencies that combat terrorism told us that the coordination roles of these various agencies are not always clear and sometimes overlap, leading to a fragmented approach. We have found that the overall coordination of federal research and development efforts to combat terrorism is still limited by several factors, including the compartmentalization or security classification of some research efforts.The Gilmore Panel also concluded that the current coordination structure does not provide for the requisite authority or accountability to impose the discipline necessary among the federal agencies involved. The multiplicity of federal assistance programs requires focus and attention to minimize redundancy of effort. Table 1 shows some of the federal programs providing assistance to state and local governments for emergency planning that would be relevant to responding to a bioterrorist attack. While the programs vary somewhat in their target audiences, the potential redundancy of these federal efforts highlights the need for scrutiny. In our report on combating terrorism, issued on September 20, 2001, we recommended that the President, working closely with the Congress, consolidate some of the activities of DOJ’s OJP under FEMA. We have also recommended that the federal government conduct multidisciplinary and analytically sound threat and risk assessments to define and prioritize requirements and properly focus programs and investments in combating terrorism. Such assessments would be useful in addressing the fragmentation that is evident in the different threat lists of biological agents developed by federal departments and agencies. Understanding which biological agents are considered most likely to be used in an act of domestic terrorism is necessary to focus the investment in new technologies, equipment, training, and planning. Several different agencies have or are in the process of developing biological agent threat lists, which differ based on the agencies’ focus. For example, CDC collaborated with law enforcement, intelligence, and defense agencies to develop a critical agent list that focuses on the biological agents that would have the greatest impact on public health. The FBI, the National Institute of Justice, and the Technical Support Working Group are completing a report that lists biological agents that may be more likely to be used by a terrorist group working in the United States that is not sponsored by a foreign government. In addition, an official at USDA’s Animal and Plant Health Inspection Service told us that it uses two lists of agents of concern for a potential bioterrorist attack. These lists of agents, only some of which are capable of making both animals and humans sick, were developed through an international process. According to agency officials, separate threat lists are appropriate because of the different focuses of these agencies. In our view, the existence of competing lists makes the assignment of priorities difficult for state and local officials. Fragmentation is also apparent in the composition of groups of federal agencies involved in bioterrorism-related planning and policy. Officials at the Department of Transportation (DOT) told us that that even though the nation’s transportation centers account for a significant percentage of the nation’s potential terrorist targets, the department was not part of the founding group of agencies that worked on bioterrorism issues and has not been included in bioterrorism response plans. DOT officials also told us that the department is supposed to deliver supplies for FEMA under the Federal Response Plan, but it was not brought into the planning early enough to understand the extent of its responsibilities in the transportation process. The department learned what its responsibilities would be during the TOPOFF 2000 exercise, which simulated a release of a biological agent. In May 2001, the President asked the Vice President to oversee the development of a coordinated national effort dealing with WMDs. At the same time, the President asked the Director of FEMA to establish an Office of National Preparedness to implement the results of the Vice President’s effort that relate to programs within federal agencies that address consequence management resulting from the use of WMDs. The purpose of this effort is to better focus policies and ensure that programs and activities are fully coordinated in support of building the needed preparedness and response capabilities. In addition, on September 20, 2001, the President announced the creation of the Office of Homeland Security to lead, oversee, and coordinate a comprehensive national strategy to protect the country from terrorism and respond to any attacks that may occur. These actions represent potentially significant steps toward improved coordination of federal activities. Our recent report highlighted a number of important characteristics and responsibilities necessary for a single focal point, such as the proposed Office of Homeland Security, to improve coordination and accountability. Nonprofit research organizations, congressionally chartered advisory panels, government documents, and articles in peer-reviewed literature have identified concerns about the preparedness of states and local areas to respond to a bioterrorist attack. These concerns include insufficient state and local planning for response to terrorist events, a lack of hospital participation in training on terrorism and emergency response planning, questions regarding the timely availability of medical teams and resources in an emergency, and inadequacies in the public health infrastructure. In our view, there are weaknesses in three key areas of the public health infrastructure: training of health care providers, communication among responsible parties, and capacity of laboratories and hospitals, including the ability to treat mass casualties. Questions exist regarding how effectively federal programs have prepared state and local governments to respond to terrorism. All 50 states and approximately 255 local jurisdictions have received or are scheduled to receive at least some federal assistance, including training and equipment grants, to help them prepare for a terrorist WMD incident. In 1997, FEMA identified planning and equipment for response to nuclear, biological, and chemical incidents as areas in need of significant improvement at the state level. However, an October 2000 research report concluded that even those cities receiving federal aid are still not adequately prepared to respond to a bioterrorist attack. Inadequate training and planning for bioterrorism response by hospitals is a major problem. The Gilmore Panel concluded that the level of expertise in recognizing and dealing with a terrorist attack involving a biological or chemical agent is problematic in many hospitals. A recent research report concluded that hospitals need to improve their preparedness for mass casualty incidents. Local officials told us that it has been difficult to get hospitals and medical personnel to participate in local training, planning, and exercises to improve their preparedness. Local officials are also concerned about whether the federal government could quickly deliver enough medical teams and resources to help after a biological attack. Agency officials say that federal response teams, such as Disaster Medical Assistance Teams, could be on site within 12 to 24 hours. However, local officials who have deployed with such teams say that the federal assistance probably would not arrive for 24 to 72 hours. Local officials also told us that they were concerned about the time and resources required to prepare and distribute drugs from the National Pharmaceutical Stockpile during an emergency. Partially in response to these concerns, CDC has developed training for state and local officials in using the stockpile and will deploy a small staff with the supplies to assist the local jurisdiction with distribution. Components of the nation’s public health system are also not well prepared to detect or respond to a bioterrorist attack. In particular, weaknesses exist in the key areas of training, communication, and hospital and laboratory capacity. It has been reported that physicians and nurses in emergency rooms and private offices, who will most likely be the first health care workers to see patients following a bioterrorist attack, lack the needed training to ensure their ability to make observations of unusual symptoms and patterns. Most physicians and nurses have never seen cases of certain diseases, such as smallpox or plague, and some biological agents initially produce symptoms that can be easily confused with influenza or other, less virulent illnesses, leading to a delay in diagnosis or identification. Medical laboratory personnel require training because they also lack experience in identifying biological agents such as anthrax. Because it could take days to weeks to identify the pathogen used in a biological attack, good channels of communication among the parties involved in the response are essential to ensure that the response proceeds as rapidly as possible. Physicians will need to report their observations to the infectious disease surveillance system. Once the disease outbreak has been recognized, local health departments will need to collaborate closely with personnel across a variety of agencies to bring in the needed expertise and resources. They will need to obtain the information necessary to conduct epidemiological investigations to establish the likely site and time of exposure, the size and location of the exposed population, and the prospects for secondary transmission. However, past experiences with infectious disease response have revealed a lack of sufficient and secure channels for sharing information. Our report last year on the initial West Nile virus outbreak in New York City found that as the public health investigation grew, lines of communication were often unclear, and efforts to keep everyone informed were awkward, such as conference calls that lasted for hours and involved dozens of people. Adequate laboratory and hospital capacity is also a concern. Reductions in public health laboratory staffing and training have affected the ability of state and local authorities to identify biological agents. Even the initial West Nile virus outbreak in 1999, which was relatively small and occurred in an area with one of the nation’s largest local public health agencies, taxed the federal, state, and local laboratory resources. Both the New York State and the CDC laboratories were inundated with requests for tests, and the CDC laboratory handled the bulk of the testing because of the limited capacity at the New York laboratories. Officials indicated that the CDC laboratory would have been unable to respond to another outbreak, had one occurred at the same time. In fiscal year 2000, CDC awarded approximately $11 million to 48 states and four major urban health departments to improve and upgrade their surveillance and epidemiological capabilities. With regard to hospitals, several federal and local officials reported that there is little excess capacity in the health care system in most communities for accepting and treating mass casualty patients. Research reports have concluded that the patient load of a regular influenza season in the late 1990s overtaxed primary care facilities and that emergency rooms in major metropolitan areas are routinely filled and unable to accept patients in need of urgent care. We found that federal departments and agencies are participating in a variety of research and preparedness activities that are important steps in improving our readiness. Although federal departments and agencies have engaged in a number of efforts to coordinate these activities on a formal and informal basis, we found that coordination between departments and agencies is fragmented. In addition, we remain concerned about weaknesses in public health preparedness at the state and local levels, a lack of hospital participation in training on terrorism and emergency response planning, the timely availability of medical teams and resources in an emergency, and, in particular, inadequacies in the public health infrastructure. The latter include weaknesses in the training of health care providers, communication among responsible parties, and capacity of laboratories and hospitals, including the ability to treat mass casualties. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-7118. Barbara Chapman, Robert Copeland, Marcia Crosse, Greg Ferrante, Deborah Miller, and Roseanne Price also made key contributions to this statement. We identified the following federal departments and agencies as having responsibilities related to the public health and medical consequences of a bioterrorist attack: USDA – U.S. Department of Agriculture APHIS – Animal and Plant Health Inspection Service ARS – Agricultural Research Service FSIS – Food Safety Inspection Service OCPM – Office of Crisis Planning and Management DOC – Department of Commerce NIST – National Institute of Standards and Technology DOD – Department of Defense DARPA – Defense Advanced Research Projects Agency JTFCS – Joint Task Force for Civil Support National Guard U.S. Army DOE – Department of Energy HHS – Department of Health and Human Services AHRQ – Agency for Healthcare Research and Quality CDC – Centers for Disease Control and Prevention FDA – Food and Drug Administration NIH – National Institutes of Health OEP – Office of Emergency Preparedness DOJ – Department of Justice FBI – Federal Bureau of Investigation OJP – Office of Justice Programs DOT – Department of Transportation USCG – U.S. Coast Guard Treasury – Department of the Treasury USSS – U.S. Secret Service VA – Department of Veterans Affairs EPA – Environmental Protection Agency FEMA – Federal Emergency Management Agency Figure 1, which is based on the framework given in the Terrorism Incident Annex of the Federal Response Plan, shows a sample of the coordination activities by these federal departments and agencies, as they existed prior to the recent creation of the Office of Homeland Security. This figure illustrates the complex relationships among the many federal departments and agencies involved. The following coordination activities are represented on the figure: OMB Oversight of Terrorism Funding. The Office of Management and Budget established a reporting system on the budgeting and expenditure of funds to combat terrorism, with goals to reduce overlap and improve coordination as part of the annual budget cycle. Federal Response Plan – Health and Medical Services Annex. This annex to the Federal Response Plan states that HHS is the primary agency for coordinating federal assistance to supplement state and local resources in response to public health and medical care needs in an emergency, including a bioterrorist attack. Informal Working Group – Equipment Request Review. This group meets as necessary to review equipment requests of state and local jurisdictions to ensure that duplicative funding is not being given for the same activities. Agreement on Tracking Diseases in Animals That Can Be Transmitted to Humans. This group is negotiating an agreement to share information and expertise on tracking diseases that can be transmitted from animals to people and could be used in a bioterrorist attack. National Medical Response Team Caches. These caches form a stockpile of drugs for OEP’s National Medical Response Teams. Domestic Preparedness Program. This program was formed in response to the National Defense Authorization Act of Fiscal Year 1997 (P.L. 104-201) and required DOD to enhance the capability of federal, state, and local emergency responders regarding terrorist incidents involving WMDs and high-yield explosives. As of October 1, 2000, DOD and DOJ share responsibilities under this program. Office of National Preparedness – Consequence Management of WMD Attack. In May 2001, the President asked the Director of FEMA to establish this office to coordinate activities of the listed agencies that address consequence management resulting from the use of WMDs. Food Safety Surveillance Systems. These systems are FoodNet and PulseNet, two surveillance systems for identifying and characterizing contaminated food. National Disaster Medical System. This system, a partnership between federal agencies, state and local governments, and the private sector, is intended to ensure that resources are available to provide medical services following a disaster that overwhelms the local health care resources. Collaborative Funding of Smallpox Research. These agencies conduct research on vaccines for smallpox. National Pharmaceutical Stockpile Program. This program maintains repositories of life-saving pharmaceuticals, antidotes, and medical supplies that can be delivered to the site of a biological (or other) attack. National Response Teams. The teams constitute a national planning, policy, and coordinating body to provide guidance before and assistance during an incident. Interagency Group for Equipment Standards. This group develops and maintains a standardized equipment list of essential items for responding to a terrorist WMD attack. (The complete name for this group is the Interagency Board for Equipment Standardization and Interoperability.) Force Packages Response Team. This is a grouping of military units that are designated to respond to an incident. Cooperative Work on Rapid Detection of Biological Agents in Animals, Plants, and Food. This cooperative group is developing a system to improve on-site rapid detection of biological agents in animals, plants, and food. Bioterrorism: Coordination and Preparedness (GAO-02-129T, Oct. 5, 2001). Bioterrorism: Federal Research and Preparedness Activities (GAO-01-915, Sept. 28, 2001). Combating Terrorism: Selected Challenges and Related Recommendations (GAO-01-822, Sept. 20, 2001). Combating Terrorism: Comments on H.R. 525 to Create a President’s Council on Domestic Terrorism Preparedness (GAO-01-555T, May 9, 2001). Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-666T, May 1, 2001). Combating Terrorism: Observations on Options to Improve the FederalResponse (GAO-01-660T, Apr. 24, 2001). Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-463, Mar. 30, 2001). Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, Mar. 27, 2001). Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, Mar. 20, 2001). Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01-14, Nov. 30, 2000). West Nile Virus Outbreak: Lessons for Public Health Preparedness (GAO/HEHS-00-180, Sept. 11, 2000). Combating Terrorism: Linking Threats to Strategies and Resources (GAO/T-NSIAD-00-218, July 26, 2000). Chemical and Biological Defense: Observations on Nonmedical Chemical and Biological R&D Programs (GAO/T-NSIAD-00-130, Mar. 22, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000). | Federal research and preparedness activities related to bioterrorism center on detecting of such agents; developing new or improved vaccines, antibiotics, and antivirals; and developing performance standards for emergency response equipment. Preparedness activities include: (1) increasing federal, state, and local response capabilities; (2) developing response teams; (3) increasing the availability of medical treatments; (4) participating in and sponsoring exercises; (5) aiding victims; and (6) providing support at special events, such as presidential inaugurations and Olympic games. To coordinate their activities, federal agencies are developing interagency response plans, participating in various interagency work groups, and entering into formal agreements with each other to share resources and capabilities. However, GAO found that coordination of federal terrorism research, preparedness, and response programs is fragmented, raising concerns about the ability of states and localities to respond to a bioterrorist attack. These concerns include poor state and local planning and the lack of hospital participation in training on terrorism and emergency response planning. This report summarized a September 2001 report (GAO-01-915). |
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AOC manages and operates CPP to support the agency’s strategic goals and objectives, including stewardship of Capitol facilities and conservation of resources. AOC must also comply with relevant laws and regulations, including environmental-protection and energy-reduction requirements. CPP consists of six main facilities: an administration building, a boiler plant, the West Refrigeration Plant, the West Refrigeration Plant Expansion, the East Refrigeration Plant, and a coal yard at a secondary site (see fig. 1). CPP serves 25 buildings comprising about 17-million square feet, including the U.S. Capitol building, House and Senate office buildings, the Supreme Court, and five buildings not under AOC’s management, including Union Station and the Government Publishing Office. Figure 2 identifies the primary Capitol Complex facilities served by CPP. CPP provides steam to 25 buildings and chilled water to 19 buildings. CPP bills non-AOC customers for its costs under arrangements in various statutes. CPP is a district energy system that generates steam and chilled water for distribution through tunnels and direct buried piping to heat and cool nearby buildings (see fig. 3). Many district energy systems exist throughout the country, often at universities and office parks. In the absence of the district energy system, AOC would likely have to install a more dispersed system, such as heating and cooling generation equipment in each building. Alternatively, AOC could potentially obtain steam and chilled water from another district energy provider, such as the General Services Administration (GSA), to serve some of the buildings in the complex, but could face challenges in doing so. CPP has seven fossil-fuel fired boilers that primarily burn natural gas to generate steam. The boilers operate primarily on natural gas, but AOC can burn coal in two boilers when additional steam capacity is needed or fuel oil in five boilers if, for example, interruptions occurred in the supply of natural gas (see table 1). As we previously reported, CPP increased its use of natural gas over coal and fuel oil beginning in 2008 as a result of the “Green the Capitol’ initiative,” which began at the direction of the House of Representatives. CPP has continued this practice for environmental and other reasons. CPP currently has eight electricity-powered chillers to produce chilled water. AOC officials said CPP has experienced sporadic mechanical and electrical problems with its oldest chillers. AOC has a long-term plan to replace its older chillers, referred to as the Refrigeration Plant Revitalization (RPR) project, which calls for the replacement of several existing chillers and the addition of cooling towers over several phases by 2018. Table 2 provides information on CPP’s chillers in the West Refrigeration Plant and its West Refrigeration Plant Expansion. Since 2008, AOC has implemented many measures to manage the energy-related costs of the buildings served by CPP. AOC’s efforts have reduced the energy needed to cool the buildings in the complex and the energy-related costs of operating CPP have fallen since fiscal year 2011. AOC has additional opportunities to further manage its energy costs. Since 2008, AOC has implemented many measures to manage the energy-related costs of the complex. To reduce the costs of producing steam, AOC replaced some steam- powered water treatment equipment at CPP with new equipment powered by electricity. Specifically, in fiscal year 2014, AOC replaced two of the pumps feeding the plant’s boilers, formerly powered by steam, with new electric pumps. An outside study prepared by a consultant to AOC found that this would reduce in-plant steam use and improve the overall efficiency of the system, resulting in an almost 7 percent decrease in annual fuel costs and a nearly 10 percent improvement in the plant’s steam output. Additionally, AOC officials said they secured better terms in fiscal year 2014 for purchasing natural gas to operate the plant’s boilers. Starting in fiscal year 2014, AOC paid $8.36 per thousand cubic feet of natural gas as opposed to the $12.95 the agency paid in fiscal year 2013, a reduction of approximately 35 percent. The contract expires in 2017. AOC also completed several projects to lower the costs of providing chilled water. AOC officials said that in fiscal year 2012 they began a practice known as “free cooling” at CPP to reduce electricity costs. During winter months, CPP uses outside air, the plant’s cooling towers, and heat exchangers to chill water rather than using its electric chillers. A 2013 study of the chilled water system shows that CPP should be able to meet the majority of chilled water demand in winter months using free cooling, thereby lowering its electricity costs. The study estimated that free cooling would achieve about $307,000 annually in savings through reduced electricity use. Also, in fiscal year 2014, AOC installed new chillers at CPP. The 2013 chilled-water- system audit concluded CPP could produce chilled water more efficiently if it increased its use of two relatively new and efficient chillers located in the East Refrigeration Plant, where the chillers were underused due to the relatively poor condition of the cooling towers there. AOC initially planned to move the two chillers to the West Refrigeration Plant Expansion. Ultimately, AOC purchased and installed two new chillers of similar capacity and efficiency. Additionally, in fiscal year 2014 AOC started construction to add two new chillers and three cooling towers to the West Refrigeration Plant Expansion as part of the RPR project. AOC budget documents state the new chillers will operate 50 percent more efficiently than the older chillers. To better understand energy consumption, AOC installed energy meters at most of the buildings it serves and is installing sub-meters within selected buildings. Energy meters can provide information on the consumption of steam, chilled water, and electricity. According to AOC officials, metering allows the agency to identify changes in energy consumption that could indicate equipment problems, measure progress on energy conservation, assist in identifying future conservation measures, and evaluate energy losses during distribution. Within the last 6 years, AOC installed meters for most of the buildings served by CPP. AOC does not have meters for individual office spaces, but plans to install meters for some energy-intensive spaces, such as kitchens and data centers. According to AOC officials, the agency does not generally track energy use at the occupant level because of the cost and instead encourages energy conservation within offices through education and awareness activities. Select operators of other district energy systems we interviewed specifically mentioned the installation of energy meters to minimize the costs of operating their systems. Some of these operators said they installed meters at individual buildings served by their systems and are considering installing or have already installed submeters where appropriate. In addition, between 2008 and 2013, AOC commissioned energy audits of most of the buildings served by CPP. Energy audits involve examining a building’s physical features and utility history to identify conservation opportunities. AOC officials told us they engaged an engineering company to complete energy audits of the buildings operated by AOC, including the Supreme Court, and Thurgood Marshall buildings at a cost of $5 million. The audits produced estimates of the implementation cost, maximum energy and cost-savings potential, and pay-off period for energy conservation measures in all of the audited buildings. For the 16 largest buildings in the complex administered by AOC, these audits recommended several hundred conservation measures that could result in substantial energy savings. Most of the potential savings could stem from upgrades to heating and cooling systems. Three buildings—the Capitol, Madison Building, and Rayburn House Office Building–account for 52 percent of the potential energy savings from measures recommended by the contractor. Over one-third of the potential energy savings from these recommended measures involve the Library of Congress buildings, with the Madison Building—home of one of the Library’s largest data centers—accounting for the greatest number of recommendations and the highest potential energy savings. For example, the audits estimated that fully replacing heating, ventilation, and air conditioning (HVAC) control systems in the Madison Building could reduce the building’s cooling needs by half, and this project accounted for 18 percent of all potential energy savings from the recommended measures. The contractor estimated that independently implementing all of its recommended measures could cost $115 million and that each measure would eventually result in dollar savings, with the payoff period varying for the different individual measures. As described below, AOC implemented some measures and intends to implement others as resources allow. AOC officials subsequently evaluated the energy audits based on factors such as cost-effectiveness and execution difficulty and approved some measures for implementation. AOC staff and contractors have already implemented some of the measures. For example, AOC staff repaired and optimized some existing HVAC systems. AOC also hired contractors to improve the energy efficiency of the Capitol and House and Senate office buildings through conservation measures. To finance these measures, AOC repays the contractors from avoided costs. Under Energy Savings Performance Contracts (ESPC), federal agencies enter into contracts—up to 25 years—with a private company in which the company incurs the costs of financing and installing energy efficiency improvements in exchange for a share of any savings resulting from the improvements. Table 3 describes the energy conservation measures installed under these contracts. Air handling unit replacement HVAC systems and controls upgrades Lighting retrofit and controls Steam trap maintenance Energy efficient lighting upgrades HVAC and controls upgrades Steam trap replacement Water conservation / fixture upgrades HVAC systems and controls upgrades HVAC testing, adjusting, and balancing Insulation of steam system components Lighting retrofit and controls Transformer upgrades During the contract term, agencies typically continue to budget and request appropriations for energy-related operations and maintenance based on their baseline energy needs prior to implementation of the improvements. Agencies repay the company for the costs—such as initial construction and installation costs, and the company’s borrowing costs and profit—from appropriations using the savings generated by the improvements. The federal statute authorizing federal agencies to enter into ESPCs states that the aggregate annual payments may not exceed the amount the agency would have paid for utilities without an ESPC. At the end of the contract, payments to the company cease and the energy savings may allow agencies to reduce their energy-related expenses. Figure 4 illustrates the potential effect of an ESPC on an agency’s cash flows. We reported in 2004 that although ESPCs provide an alternative funding mechanism for agencies’ energy-efficiency improvements, for the cases we examined at that time, such funding costs more than using upfront appropriations. This is because the federal government can obtain capital at a lower financing rate than private companies. We also reported in June 2005 that vigilance is needed to ensure agencies negotiate the best possible contract terms and that energy savings achieved will cover agencies’ costs. To date, AOC’s contractors report that energy and cost savings have exceeded the guaranteed amounts. In fiscal year 2013, they reported total savings of over $9.8 million. AOC made nearly $8 million in payments to the contractors in 2013, resulting in a net savings of approximately $1.7 million. In September 2012, one of AOC’s contractors refinanced an ESPC project at a projected savings to the agency of $19.8 million over the term of the project. For the entire complex, total steam and chilled-water consumption declined between 2010 and 2013, and adjusting the data to account for yearly changes in weather shows reductions in energy use, mostly from greater efficiency in producing chilled water. Because changes in weather affect the need for steam and chilled water, energy managers evaluate energy consumption against a measure of the average need for heating or cooling services. Cooling and heating degree days measure the number of days with outdoor temperatures above or below, respectively, 65 degrees Fahrenheit and the amount above or below that temperature. For example, a cooling degree day value of 10 indicates that the average temperature for the day was 75 degrees. AOC’s annual energy consumption of chilled water per cooling degree day fell between fiscal years 2010 and 2013, which shows that consumption of chilled water (i.e., cooling) decreased more than would be expected simply due to lower temperatures. AOC’s steam consumption per heating degree day during this period fluctuated. Figure 5 shows AOC’s annual steam and chilled- water consumption per heating and cooling degree days. AOC incurs regularly occurring costs as well as capital costs to operate and maintain CPP. AOC’s regularly occurring costs to operate CPP, which include, among other things, the fuels and electricity to power the plant’s generating equipment and the personnel to operate and maintain them, rose from fiscal year 2009 to fiscal year 2011 and then fell between fiscal years 2012 and 2014. AOC’s costs (expressed as total obligations) to operate CPP were about $59 million in fiscal year 2009, rose to about $69 million in fiscal year 2011, and then fell to about $63 million by fiscal year 2014 (see table 4). From fiscal year 2009 to fiscal year 2014, fuel and electricity accounted for about 46 percent of the costs to operate CPP (in 2015 dollars). AOC’s total obligations on fuel and electricity for CPP rose from about $32 million in fiscal year 2009 to a high of $33 million in fiscal year 2010, before declining in the subsequent years to about $24 million in fiscal year 2014. Changes in a variety of factors can affect CPP’s costs, including fuel and electricity costs, staffing levels, maintenance needs, efficiency in using fuels, and consumption patterns. As shown above, costs for individual line items have varied over time. While AOC has implemented some conservation measures, AOC has additional opportunities to manage its energy-related costs. AOC’s past energy audits identified several hundred additional measures that could further reduce energy consumption in the complex and related costs and are expected to pay for themselves. Of these, AOC has selected some measures it intends to implement when resources become available (see table 5). These include upgrades to building lighting, plumbing, and mechanical systems throughout the complex. For example, such upgrades could include (1) replacing inefficient light fixtures with modern, more-efficient fixtures with occupancy sensors, (2) replacing older inefficient plumbing fixtures with low-flow fixtures with automatic sensors, or (3) replacing pneumatic air-handling controls with more modern, digital controls. The measures AOC selected with the largest projected energy reductions include upgrades to the Library of Congress buildings. AOC officials said they are considering entering into an ESPC for these buildings that would include improvements to lighting and HVAC systems, and infrastructure upgrades to the data center in the Madison Building. Based on a 2009 long-term plan and subsequent partial updates, AOC decided that it should install a cogeneration system to replace aging boilers, meet future demand for steam, and produce electricity. AOC officials said that since upfront appropriations would not likely be available to procure the cogeneration system, they had decided to finance the project. AOC’s iterative planning did not follow key leading practices we identified for federal capital planning. AOC officials said they were unaware of the relevant guidance we cited on leading practices and did not provide documents to support their claims that the agency needed to move quickly to execute a contract for the proposed cogeneration system. In 2009, AOC issued a long-term energy plan that concluded the agency should install a cogeneration system to replace aging boilers, meet future demand for steam, produce electricity, and serve other agency objectives. AOC continued to justify the need to pursue cogeneration in subsequent partial updates to the plan. Cogeneration, also known as combined heat and power, involves the simultaneous production of electricity and heat from a single fuel source, such as natural gas. AOC has proposed a cogeneration system that would use a natural gas combustion turbine to generate electricity and a recovery unit that would use excess heat from the turbine’s exhaust stream to heat water and create steam (see fig. 6). AOC officials stated the cogeneration system, despite initial costs that are significantly higher than other alternatives, will provide needed steam and save money over time by producing electricity to power its chillers— thereby avoiding or decreasing the costs of purchasing electricity. In addition, cogeneration systems can produce excess electricity that can be sold to local utilities, thereby generating income that helps offset the cost of the system. AOC’s 2009 long-term energy plan included a forecast showing that demand for steam would grow and exceed the plant’s capacity to generate steam by fiscal year 2016. To address this projected gap in capacity, the 2009 plan assessed nearly 30 capital alternatives for installing new steam-generating equipment, including natural-gas- powered boilers, a cogeneration system, or nuclear capabilities. The 2009 plan evaluated the capital alternatives using several criteria, including total life cycle costs, initial construction costs, air pollution emissions, energy efficiency, and security. AOC’s 2009 plan recommended that AOC continue to operate CPP as a district energy system to provide heating, and in that context, the best options based on life cycle costs and environmental impacts would involve a new cogeneration system or the use of synthetic coal. Ultimately, citing concerns about the cost and availability of synthetic coal as well as environmental concerns, the plan recommended that AOC procure a cogeneration system. Specifically, the 2009 long-term plan recommended that AOC purchase a cogeneration system comprising one 7.5-megawatt cogeneration combustion turbine, which would represent the first of a three-phase plan. The 2009 plan also called for the installation (in two subsequent phases) of five natural gas boilers along with two other combustion turbines—another 7.5-megawatt turbine and a 15-megawatt turbine—and the equipment needed to distribute electricity throughout the complex. The 2009 plan assumed the first combustion turbine would serve only CPP, but that the later installation of the additional turbines would enable AOC to distribute electricity throughout the complex and potentially allow for selling excess electricity to the local utility. The estimated construction cost for the project was $120 million over its three phases. AOC officials said that it estimated the construction costs in the 2009 plan through a benchmarking analysis and did not reflect an actual bid from a vendor. AOC engaged the National Academies’ National Research Council (NRC) to review a draft of its 2009 long-term energy plan. In response to AOC’s request, the NRC organized an expert panel that identified several shortcomings in the draft plan, including that the energy demand projections were not supported by firm data and did not account for mandates to reduce energy consumption. In the final version of the 2009 plan, AOC states it addressed NRC’s concerns and accounted for both increased utility demand from building renovations and reductions in demand due to the energy reduction mandates. AOC subsequently developed the design of the cogeneration project throughout 2012 and 2013. AOC formally proposed the project during its fiscal year 2012 appropriations hearings. In 2012, AOC also received two consultant-authored reports assessing the feasibility of the system. These reports included an analysis that concluded that the value of a cogeneration system, which AOC officials said represented the first two phases of the 2009 long-term plan, was highly dependent on the price at which AOC could sell the excess electricity generated by the system. Throughout 2013, AOC worked with a vendor to further develop the design of a cogeneration system representing the first two phases of the 2009 plan. In November 2013, AOC officials stated that the project’s initial construction-related costs would total roughly $67 million. The vendor ultimately provided a bid in late 2013 that resulted in a total project cost that was $100 million over AOC’s estimate. As a result, AOC initiated discussions with another vendor in January 2014. On two occasions in 2014, during the course of the audit work for this report, AOC provided GAO with draft plans that concluded a cogeneration system was still the preferred means of meeting steam demand. In July 2014, AOC provided GAO with a draft version of a partial update of the 2009 plan prepared by a consultant, titled Strategic Long Term Energy Plan Update: Draft Final Report, that concluded new steam-generating capacity was needed to replace two aging boilers and meet projected increased future demand for steam. The draft July 2014 partial update included an updated long-term forecast of demand and, unlike the 2009 plan, did not project a gap in steam capacity occurring in 2016. Instead, the draft recommended that AOC replace the capacity of two aging boilers to decrease CPP’s reliance on coal. The draft July 2014 partial update did not, however, describe the expected life of these boilers. Unlike the 2009 document, the draft July 2014 partial update was not comprehensive and reviewed adding new natural gas boilers or eight different configurations of a cogeneration system (which involved combining new gas boilers with the systems). When presenting the draft partial update to GAO in July 2014, AOC officials said that the agency had not accepted the update as final from the consultant and would likely ask the consultant to add information and make changes before doing so. The draft July 2014 update recommended the option with the lowest life cycle costs: that AOC install a natural gas cogeneration system with two 5.7-megawatt turbines, as well as two natural gas boilers providing a total of 190,000 pounds of steam per hour. The draft July 2014 partial update said the electricity generated by the cogeneration system would only be used within CPP and would not serve the rest of the complex or be sold to a utility; CPP does not have the infrastructure to provide electricity to the complex. Because of the low demand for electricity at CPP during winter months—due to relatively low chiller use—the plant would idle one of the two 5.7-megawatt units during peak winter conditions. In the draft July 2014 partial update, AOC’s consultant estimated the initial construction-related costs for the project at $56 million. Later, in December 2014, AOC provided GAO with a draft plan, along with consultant-generated supporting documents, that assessed a choice between a cogeneration system and a single natural gas-boiler. Unlike the 2009 long-term plan and the consultant’s draft July 2014 partial update, the December 2014 draft plan did not include updated long-term forecasts of demand for steam. Instead, the draft plan used one year of demand—calendar year 2013—as the basis for all future years. The December 2014 draft plan stated CPP needed to replace the steam- generating capacity of two of its oldest boilers, citing their age and increasing operations and maintenance costs and recommended that AOC install a natural gas cogeneration system with a single 7.5- megawatt combustion turbine providing a maximum steam capacity of 100,000 pounds per hour. AOC officials stated this would fulfill the first phase of its 2009 long-term energy plan. The December 2014 draft plan stated the electricity generated by the cogeneration system would power CPP’s electric chillers and not serve the rest of the complex. In contrast to the draft July 2014 update, the December 2014 draft plan stated that AOC would sell any excess electricity to the local utility. AOC officials said they expect to use up to 90 percent of the electricity generated by the proposed system to operate the plant’s chillers, thereby avoiding paying for the electricity from the local utility and justifying the system’s relatively large upfront investment (when compared to other alternatives). The agency plans to sell the excess 10 percent of electricity at rates to be determined by a future agreement with the local utility. AOC officials stated this could involve CPP’s becoming a facility qualified to sell electricity to the grid under the Public Utility Regulatory Policies Act (PURPA) of 1978. The officials said they used electricity rates for a qualified facility in the analysis supporting the December 2014 draft plan to use the most conservative approach. AOC officials said they are researching other arrangements for selling the excess electricity that could prove more economically favorable than as a qualified facility under PURPA. Table 6 summarizes some of the key attributes of the recommended options in AOC’s planning since 2009 for meeting future energy needs. AOC officials stated the cost estimates in the December 2014 draft plan reflected two independent cost estimates prepared by consultants and aligned with a bid received in November 2014 from the second vendor, a bid that was closer to the original project budget than the previous bid. AOC informed GAO in December 2014 that the agency desired to execute a contract with the vendor and proceed with construction of the cogeneration system—consisting of one 7.5 MW combustion turbine as described in its December 2014 draft plan. AOC officials said they continued to negotiate the scope of the project, a negotiation that resulted in, among other things, a reduction in the interest rate for financing the project. In March 2015, GAO received updated calculations from AOC reflecting these changes. As of March 2015, AOC had obligated about $16 million on design, preliminary site work, and management of the project. AOC intends to procure the cogeneration system using a utility energy services contract (UESC)—an agreement, similar to ESPCs described previously, in which, in this case, a utility arranges financing to cover the upfront costs of an energy project that a federal agency then repays over the contract term from energy cost savings achieved by the project. Under the UESC, AOC would pay for financing costs, such as interest payments to the utility, in addition to repaying the initial capital costs of the cogeneration project (i.e., construction and other upfront costs) over the contract period (AOC used an analysis period of two years for construction and up to a 25-year contract period). According to our analysis of AOC’s updated data supporting its December 2014 draft plan, the agency would pay about $28 million more in nominal costs under the UESC than if the agency acquired the system using upfront appropriated funds: $16 million more in initial construction costs, due to additional UESC vendor overhead costs, and $12 million more in financing costs over the life of the contract. Under a typical UESC, repayments to the utility reflect the estimated cost savings from the project’s energy efficiency measures. However, under a UESC like AOC has proposed where the utility guarantees performance and not savings, the utility does not guarantee that the project will generate sufficient savings to pay for itself over time. Acquiring the system using an upfront appropriation would cost less than using a third party to finance the project over the proposed 27-year analysis period. However, AOC officials said that since upfront appropriations would likely not be available to procure the cogeneration system, they had decided to pursue the project using a UESC. Because AOC planned to conduct the project without upfront appropriated funds, AOC officials stated they had not assessed the proposed cogeneration project using the agency’s capital-planning prioritization process, by which the agency ranks proposed capital projects and recommends those projects scoring the highest for funding through annual appropriations. As a result, AOC did not analyze the project and its merits relative to other projects using the agency’s pre-determined criteria for capital planning. AOC officials stated that the aforementioned ESPC projects did not go through the agency’s capital planning prioritization process for the same reason. AOC intends to use a UESC under an arrangement established by the General Services Administration (GSA) that could help facilitate the transaction but narrows the number of entities AOC can engage to complete the project. Through its UESC arrangement, GSA has established basic contract terms with select utility companies, and agencies using this arrangement contract with one of these providers. GSA has contracts with two providers in the Washington, D.C., area. While the selection of a UESC vendor is limited to two vendors, AOC officials said that this will not preclude competition as the selected UESC vendor will obtain competitive bids from subcontractors for the construction of the cogeneration system. Based on independent estimates and in alignment with the bid received in November 2014, AOC’s latest data show that a cogeneration system consisting of a 7.5 MW combustion turbine and funded by a UESC would have a total project cost of about $85 million. This includes about $57 million in initial construction-related costs (including contingency funds), another $4 million in agency project management costs, and about $24 million in financing costs. AOC’s data show the project’s life cycle costs as lower than other alternatives, such as a natural gas boiler procured using upfront appropriations. These data also show that the cogeneration system procured using a UESC, AOC’s intended course of action, would result in savings, when compared to a status quo option, of about $7.3 million over 27 years (in today’s dollars) due to the savings achieved by producing its own electricity for the plant. AOC’s data show that the project would repay the UESC vendor in full for the capital and financing costs in 21 years (after the completion of construction and once payments had begun). By comparison, AOC’s data show that a cogeneration system procured with upfront appropriations would achieve savings in today’s dollars of $21.4 million over the analysis period when compared to the status quo option. Further, AOC’s data show a natural gas boiler procured with upfront appropriations for $9.3 million would achieve savings of about $2.7 million over the analysis period when compared to the status quo option. AOC’s calculations on life cycle costs did not reflect the nearly $16 million in funds already obligated for the project. AOC officials said they relied on the National Institute of Standards and Technology (NIST) handbook on life cycle costing for federal energy management programs. AOC officials noted the handbook instructs federal agencies to not include sunk costs when estimating a project’s life cycle costs. Our analysis of AOC’s data suggest that the agency could have procured a natural gas boiler providing the same amount of steam for less than the $16 million the agency has already obligated for the cogeneration project. AOC’s data show a cost of about $9.3 million for procuring such a boiler. AOC officials said they would have had to also obligate funds to prepare the plant for a new boiler, but they did not identify the amount of funds this would have required. Key leading capital-planning practices and other federal guidance we identified state that agencies should, among other things, (1) update their plans in response to changes in their operating environment; (2) fully assess their needs and identify performance gaps; (3) assess a wide range of potential approaches—including non-capital approaches—for meeting those needs; (4) conduct valid sensitivity and uncertainty analyses to identify and quantify the riskiest cost drivers of proposed projects; and (5) engage independent experts when tackling complex issues. However, AOC’s planning that led the agency to pursue a cogeneration system did not follow these key leading practices. Leading organizations generally revise their decision-making process in response to a perception of changing needs or a changing environment. However, AOC did not update its 2009 long-term energy plan until late 2014, did so only partially, and has continued to use the 2009 plan to justify its decision to procure a cogeneration system. In the meantime, major changes have occurred in key assumptions affecting AOC’s plans, such as the price of natural gas and the complex’s demand for steam and chilled water. For example, in part due to increased supplies resulting from the boom in domestic shale gas extraction, prices for natural gas for commercial customers fell by about 20 percent between 2009 and 2012 (when AOC formally proposed the cogeneration project). Furthermore, since publishing its 2009 long-term plan, AOC completed energy audits of its buildings and implemented several energy conservation measures in the complex and reduced the complex’s demand for steam and chilled water. Despite these changes, AOC officials stated they did not believe it was necessary to fully update its 2009 long-term plan to implement the cogeneration system, which they consider to be a single energy conservation measure that addresses a need to replace aging boilers. The officials stated they updated the factors that changed since 2009 that could affect the choice between cogeneration and a natural gas boiler. AOC officials also told us they recognized the importance of fully updating the agency’s long-term energy plan and stated they plan to do so later in fiscal year 2015 after they have made a decision on implementing the proposed cogeneration system. However, by not fully updating its 2009 long-term plan, AOC has continued to pursue a cogeneration system without up-to-date information on a variety of factors, such as the changes in the natural gas markets and the realized impacts of AOC’s demand reduction efforts, that could change the relative merits of the full range of alternatives available to AOC for meeting its long-term needs. Select operators of other district energy system we spoke with stated they regularly conduct planning efforts to identify the needs of their systems, and alternatives to address them. For example, one operator said that although it prepares a strategic plan every 5 years, the operator also updates demand forecasts and conducts other planning as part of its annual budgeting process. AOC did not fully assess its long-term steam needs or identify the performance gap the cogeneration project would address. Leading practices and federal guidance, including the Office of Management and Budget’s (OMB’s) Supplement to OMB Circular A-11 and GAO’s Leading Practices in Capital Decision-Making, state that agencies should comprehensively assess what they need to meet their goals and objectives, identify any gaps between current and needed capabilities (i.e., performance gaps), and explain how a capital project helps the agency address those gaps and meet its goals. However, AOC’s December 2014 draft plan—which the agency has used to justify the current cogeneration project—has not comprehensively assessed the agency’s needs or identified potential performance gaps. Without fully assessing its needs, the agency risks committing to a project that does not fully meet its long-term needs and thereby does not provide the agency with the most efficient use of its funds. Specifically, AOC’s December 2014 draft plan did not forecast the future demand for CPP’s heating and cooling services and instead assumed 2013 levels of demand would continue over the 27-year contract for the cogeneration system. The agency’s 2009 long-term plan included long- term forecasts of steam and chilled water demand showing that future demand for steam would exceed current capabilities. However, the forecast for the 2009 long-term plan is outdated as it does not reflect the realized effects of AOC’s demand management efforts. AOC included long-term forecasts of steam and chilled water demand in its draft July 2014 partial update, but AOC did not finalize it. In addition, the demand forecasts in the 2009 long-term plan and its draft July 2014 partial update may have overstated future needs as they did not fully consider the impact of AOC’s completed and ongoing energy conservation measures and only included factors that would increase overall demand for steam. AOC’s 2009 long-term plan and draft July 2014 partial update assumed demand for steam and chilled water would increase due to future building renovations that would either increase the amount of building space served by CPP or increase the amount of outside air it heats or cools and circulates through buildings. In the 2009 long-term plan, AOC assumed energy reduction efforts would offset these increases. As described above, AOC’s chilled water use has fallen since that time and its steam use has fluctuated. The draft July 2014 partial update specifically states that it did not consider reductions in energy use. The absence of steam demand forecasts in the December 2014 draft plan (1) disregards prior forecasts that are either outdated or were not finalized, (2) ignores the possibility of future changes in demand, and (3) raises questions about the purpose and sizing of the proposed cogeneration system and how it will meet future needs. In explaining why it did not forecast long-term demand for the CPP’s services, AOC officials said new steam-generating capacity was needed—regardless of potential changes in the long-term demand for steam—to decrease the plant’s reliance on two of its older boilers at the end of their service life. AOC’s December 2014 draft plan stated that doing so would thereby allow AOC to avoid the increased maintenance costs associated with operating the boilers infrequently. AOC officials stated that the December 2014 draft plan was intended to compare installing one natural gas boiler with installing one cogeneration system and re-validate the 2009 long-term plan’s recommendation, rather than re‐evaluate all long‐term technical options for meeting steam demand—thereby making it inappropriate to include a long-term forecast of demand. Furthermore, the AOC officials stated that expected future demand that reflects reductions due to AOC’s conservation measures would not reduce demand to anywhere near the point where a boiler replacement is not needed. However, AOC’s December 2014 draft plan that it is using to justify the need and scope of the cogeneration project does not include any such forecasts to support these statements. AOC officials stated the two coal boilers needing replacement are nearly 60 years old and are showing signs of wear. The officials stated the boilers still operate but are unreliable and suffer frequent breakdowns requiring emergency repairs. However, AOC has not provided documents that support these statements. AOC estimated that renovating the boilers, including the addition of currently lacking air-pollution controls, could cost up to $10 million per boiler. However, reports on the condition of the boilers provided by AOC, as well as the agency’s aforementioned planning documents, did not estimate the expected remaining life of the boilers—thereby not assessing whether a performance gap exists and making it unclear how the cogeneration system will meet any long-term needs. Furthermore, AOC’s December 2014 draft plan did not make clear to what extent the proposed system would help AOC avoid the increased maintenance costs associated with continued operation and maintenance of the two older boilers which can operate on coal. AOC officials said in February 2015 that once it had installed the cogeneration system, CPP would keep at least one of the two boilers in reserve to meet peak steam demand. The officials added that the cogeneration system would allow CPP to operate these older boilers on natural gas instead of coal. However, later in its technical comments, AOC noted that CPP would maintain only one of the older boilers for occasional use (decommissioning the other once the cogeneration system is operational). Therefore, AOC will continue to incur maintenance costs associated with continued use of at least one of the two older boilers. AOC’s December 2014 draft plan stated the proposed cogeneration system would enhance the agency’s ability to meet its environmental objectives but stated the system is not needed to meet current EPA emissions standards for hazardous air pollutants. The plan stated CPP can meet promulgated rules limiting emissions of hazardous air pollutants (HAP) from industrial, commercial, and institutional boilers without installing the cogeneration system. Although the cogeneration system would likely increase emissions of certain air pollutants from CPP due to the increased use of natural gas, AOC’s draft plan estimated the system would result in lower regional emissions overall. The electricity generated by the cogeneration system using natural gas would result in relatively fewer emissions than the equivalent amount of electricity purchased from the local utility, which delivers electricity produced predominantly from coal. The December 2014 draft plan states a cogeneration system would result in 14 fewer metric tons of regional HAPs annually, or 18 percent less than a new natural gas boiler providing the same amount of steam. AOC’s draft plan estimates that the cogeneration system will result in lower regional greenhouse gas emissions, although federal regulations for limiting such emissions have not yet taken effect. AOC’s December 2014 draft plan stated a cogeneration system would result in about 15,000 fewer metric tons of regional carbon dioxide emissions per year—7 percent less than a new natural gas-powered boiler, an amount that AOC stated is the equivalent of removing nearly 3,200 vehicles from local roadways each year. Furthermore, the December 2014 draft plan stated meeting the agency’s energy reduction goals did not depend on the cogeneration project. In the plan, AOC stated that “due in large part to the results achieved through the ESPCs and other energy reduction activities, AOC will not require cogeneration to meet the EISA or EPAct requirements at this time.” However, AOC officials said that if Congress renews EISA or EPAct and additional annual energy reduction goals are set for federal agencies, cogeneration may again become key in future AOC energy reduction efforts. AOC’s plans have only considered capital options for meeting its heating needs, and its December 2014 draft plan did not evaluate a range of alternatives. Federal leading planning practices state that capital plans should consider a wide range of alternatives for meeting agency needs, including non-capital alternatives, and evaluate them based on established criteria. GAO’s Executive Guide: Leading Practices in Capital Decision-Making states that managers and decision-makers in successful organizations consider alternatives to investing in new capital projects. Without considering a wide range of options, including non-capital options, AOC may choose a more expensive alternative for meeting its needs. Specifically, AOC’s 2009 plan broadly considered capital alternatives for meeting long-term demand for steam, such as nuclear or geothermal power generation, but did not assess non-capital alternatives for meeting the agency’s objectives, such as implementing operational changes or conservation measures to decrease consumption in the buildings served by CPP. GAO’s capital decision-making guide calls for managers to consider non-capital approaches among the alternatives for meeting an agency need, but AOC’s plan did not explicitly examine such options. As a result, AOC may not have identified the most cost-effective means to heat and cool the complex. As we noted earlier, AOC’s 2014 planning documents assessed a narrower range of capital alternatives—adding a cogeneration system or new natural-gas powered boilers—to meet the demand for steam. AOC’s 2014 plans also envision smaller cogeneration systems that represent a significantly reduced scope from the 2009 plan, which recommended the installation of three turbines in phases to provide power to the entire complex. For example, the December 2014 draft plan recommends a single turbine system that provides electricity to CPP and not the complex The 2014 plans also did not fully take into account AOC’s efforts to reduce the demand for steam through conservation measures in the buildings served by CPP–which may include operational changes or smaller capital investments–on future steam demand. As described above, AOC has installed some conservation measures in the Capitol and House and Senate office buildings and has identified many additional measures that it could implement in the future. The July 2014 plan ignores energy savings from these measures, while the December plan used demand data from 2013 without adjustments for measures implemented since then or in the future. AOC officials stated its latest plan was not meant to fully update the 2009 plan and thereby assess a broad range of alternatives for meeting the agency’s needs. AOC officials stated that the 2014 plan was for replacing current equipment and is consistent with implementing the first phase of the 2009 plan. AOC officials stated they did not believe it was necessary to fully update the 2009 plan to implement a single energy conservation measure that replaces aging boilers—the cogeneration system. AOC officials added that they intend in fiscal year 2015 to fully update the 2009 long-term plan, after the agency has made a decision on implementing the proposed cogeneration project. By only considering a narrow range of alternatives, not accounting for the agency’s ongoing efforts to reduce its steam demand, or fully updating the long-term plan before undertaking a costly and risky project, AOC may be selecting a capital alternative that is not scaled to meet the agency’s long-term needs and therefore could cost more than necessary. AOC did not perform valid sensitivity or uncertainty analyses when assessing the cogeneration system and available alternatives for meeting the agency’s long-term demand for steam. The GAO Cost Estimating Guide calls for agencies, when considering capital projects, to conduct both sensitivity and uncertainty analyses to identify and quantify the cost drivers that pose the most risk of increasing project costs beyond expectations. Sensitivity analysis shows how changes in a key assumption affect the expected cost of a program or project, while holding all other assumptions constant. Uncertainty analysis captures the cumulative effect of various risks on the expected cost of a project by changing many assumptions at the same time. Such information can inform managers about whether their preferred choice remains superior among a group of alternatives. In the case of the proposed cogeneration project, the absence of valid sensitivity and uncertainty analyses makes it unclear whether the project will generate sufficient savings to cover its costs under a range of future conditions—raising questions on whether the project is more cost- effective than other alternatives. Furthermore, should AOC’s projections about the project’s expected savings prove inaccurate, Congress would likely need to appropriate more funds to cover a portion of AOC’s costs to own and operate the system—including the financing costs to be paid to the UESC vendor. Specifically, in its December 2014 draft plan, AOC did not vary a key cost driver when it performed a sensitivity analysis on the expected life cycle costs of the alternatives it considered. When conducting sensitivity analyses, the Cost Estimating Guide calls for agencies to vary the key cost drivers of a project’s life cycle costs, particularly those that are most likely to change over time. The expected life cycle costs of operating either a cogeneration system or a natural gas boiler depends, in part, on the demand for heating and cooling over time. However, as noted above, AOC did not vary demand for heating and cooling in its December 2014 draft plan and instead assumed 2013 levels throughout the forecast period. The Cost Estimating Guide also states that valid sensitivity analyses vary assumptions about key cost drivers in ways that are well-documented, traceable, and based on historical data or another valid basis. However, neither AOC nor a laboratory it engaged presented rationales for their variations of forecasted natural gas and electricity prices from the expected case. In its December 2014 draft plan, AOC varied its assumptions by applying a subjective 25 percent change over the 27-year forecast period. The plan provided no rationale for using 25 percent. In a separate analysis accompanying the December 2014 draft plan, a Department of Energy (DOE) laboratory engaged by AOC presented results of a sensitivity analysis assessing the impact of varying natural gas and electricity prices that varied their initial values. The analysis varied the starting values of both natural gas and electricity prices in a range based on the author’s professional judgment rather than empirical evidence. Furthermore, the analysis did not assess the impact of varying natural gas and electricity prices on the alternatives AOC considered. The Cost Estimating Guide states sensitivity analyses should test the sensitivity of the ranking of considered alternatives to changes in key assumptions. However, the analysis did not assess the potential impact of varying natural gas and electricity prices on the other considered alternative in AOC’s analysis—a natural gas boiler. AOC officials stated the laboratory is an acknowledged expert charged with administration of the federal government’s energy management program. Furthermore, in its December 2014 draft plan AOC relied on DOE forecasts of natural gas and electricity prices in its expected case, but AOC did not use DOE forecasts in its sensitivity analysis. Instead, the agency chose to vary the prices by 25 percent as discussed above. Using AOC’s 25 percent adjustment, instead of available DOE forecasts, to vary future natural gas and electricity prices raises questions about whether the project remains superior to other options under a range of possible outcomes. Specifically, in the Energy Information Agency’s Annual Energy Outlook 2014, DOE created numerous forecasts of natural gas and electricity prices to represent a range of possible future scenarios. When using several of these DOE forecasts, we found the expected savings of the proposed cogeneration project, when compared to other alternatives, changed significantly. Specifically, in AOC’s expected case the project financed using a UESC saves about $4.6 million more over the 27-year period than a boiler acquired with upfront appropriations. Using a DOE scenario where natural gas is more plentiful and prices are lower than in the expected case, however, the cogeneration project becomes less advantageous—saving $1.9 million more than a boiler. Conversely, using a DOE forecast where natural gas is relatively less available and prices are higher over time, the savings of the cogeneration project increases slightly to $5.0 million more than a boiler. In addition to a sensitivity analysis, the Cost Estimating Guide calls for agencies to perform an uncertainty analysis to capture the cumulative effect of various risks on the expected cost of a project. In an uncertainty analysis, project costs should involve a range of possible costs based on a specified probability, known as a confidence interval. Unlike sensitivity analysis, an uncertainty analysis looks at the effects of changing many assumptions at the same time. This involves, among other things, identifying key project cost drivers, modeling various types of uncertainty associated with the cost drivers, and using a simulation method, known as a Monte Carlo analysis. AOC performed an uncertainty analysis on the expected initial construction cost of the project, but did not perform a similar analysis for the life cycle costs of the options it considered. AOC developed an uncertainty analysis on the cogeneration project’s initial construction cost using a Monte Carlo simulation, and agency officials stated this helped them assess the risks that could cause the initial cost of constructing the cogeneration system to exceed the expected level. AOC officials also stated the analysis allowed them to calculate a confidence interval around the expected initial construction cost and therefore budget an appropriate amount of contingency funds. However, AOC did not present its estimates of the project’s savings, derived from its life cycle cost analysis, as a range of possible costs based on a specified probability. Instead, AOC presented a point estimate of the project’s life cycle cost without a confidence interval quantifying the degree of uncertainty. AOC officials said they did not believe an uncertainty analysis was required, based on their understanding of NIST’s handbook on life cycle costs that states uncertainty assessment is more complex and time consuming than sensitivity analysis and therefore the decision for doing so depends on an agency’s judgement of a variety factors, including the relative size of the project, availability of data, and availability of resources such as time, money, and expertise. However, the estimated life cycle cost of the project is determined, in part, on the forecasted prices for key inputs like natural gas and electricity that have historically been highly variable. Without a credible uncertainty analysis, AOC has not presented information on which cost drivers pose the most risk to the project’s life cycle cost. In addition to the capital planning guidance we cite above, our prior work recommends that federal agencies use independent panels of experts for conducting comprehensive, objective reviews of complex issues, such as those facing AOC. As mentioned above, AOC engaged the National Academies’ National Research Council (NRC) to review a draft of its 2009 long-term energy plan and the final version of the 2009 plan stated that it addressed NRC’s recommendations. However, unlike its 2009 plan, AOC has not engaged an independent panel like the NRC to review the subsequent iterations of its planning. AOC officials stated that they did not find it necessary to fully update its long-term plan before executing the contract for the cogeneration system, which the officials stated is a single energy conservation measure intended to replace aging boilers. However, the cogeneration system is relatively complex when compared to available alternatives such as boiler replacement and AOC has obligated about $16 million in design, preliminary site work, and management for the project—an amount that AOC’s data suggests could have procured a new natural gas boiler providing the same amount of steam. Using an independent panel to review AOC’s planning could have provided more assurance that AOC was positioning itself to cost-effectively meet its long-term energy needs. Since issuing its long-term energy plan in 2009, AOC has pursued an iterative planning approach without fully updating the long-term plan or following key leading practices. AOC officials said they were generally unaware of the applicability of the leading practices we cited. AOC officials said they instead relied on other sources of federal guidance, such as NIST’s handbook on determining the life cycle costs of energy conservation projects or DOE’s guidance for using UESCs to finance such projects, an approach that led them to believe that it was unnecessary to fully update the long-term energy plan before executing a contract for the cogeneration project since its intent is to replace aging boilers. However, the guidance AOC cited generally applies after an agency has conducted a needs assessment and conducted a capital- planning process using GAO, OMB, and other relevant guidance cited above. Thus, the guidance AOC officials said they followed does not substitute for first completing an up-to-date capital plan. Without following key leading capital practices, AOC’s planning could commit the agency to a project that does not fully and cost-effectively meet its needs—thereby not providing taxpayers or Congress with the most efficient use of funds in a time when the federal government faces significant financial challenges. In August 2014, we discussed with AOC shortcomings in its planning for the cogeneration project relative to leading practices and referred the agency to documents outlining these practices. AOC officials then provided the aforementioned set of planning documents in December 2014 that the agency stated were intended to address our concerns. AOC officials also provided several reasons why they needed to continue planning the project and quickly execute a contract. These included (1) that certain existing boilers were near the end of their useful life and that AOC might face challenges meeting demand for steam in the near future, and (2) that AOC needed to start construction soon or the Washington, D.C. government would retract the project’s construction and air quality permits. Our review did not identify valid support for these claims. Reports on the condition of the boilers provided by AOC did not identify the remaining useful life of the two boilers in question. Additionally, AOC did not provide documents supporting its statement that the permits for the project were at risk; AOC officials told us they believed the planning steps the agency had taken would be sufficient to keep the permits in effect. AOC has implemented many measures to manage the costs of heating and cooling the Capitol Complex and has achieved measurable results. The agency has additional opportunities to manage these costs through conservation. AOC and its contractors have identified hundreds of additional energy conservation measures, and the agency intends to act on some of them when resources become available. Related to this, AOC’s planning to evaluate the relative merits of the currently proposed cogeneration project has not followed key leading practices identified in OMB, GAO, and other relevant capital-planning guidance. These include not (1) fully updating the agency’s 2009 long- term energy plan to reflect changes in energy costs and demand that occurred since the plan was issued; (2) fully assessing long-term energy needs or the performance gap the project would address in light of changes in key variables that could affect its relative merits; (3) identifying a full range of alternatives for meeting future needs, including non-capital or conservation measures; (4) conducting valid sensitivity or uncertainty analyses; or (5) engaging an independent panel of experts to review AOC’s updates of its long-term plan. AOC officials said they were unaware of some of these leading practices and therefore did not follow them. AOC’s planning was insufficient for us to discern whether the cogeneration project would generate enough savings to cover its costs or prove more cost-effective than other options for meeting the agency’s needs. Thus, without addressing the shortcomings listed above, AOC’s planning does not provide confidence that the proposed project will decrease the need for future energy-related appropriations. GAO is making two recommendations to the Architect of the Capitol. We recommend that the Architect of the Capitol, prior to undertaking future major capital projects related to its energy needs, fully update its long-term energy plan while following key leading capital-planning practices. As part of this effort, the agency should: fully assess the complex’s long-term needs and identify any performance gaps, while taking into account the effects of possible changes in demand—including the impacts of ongoing and planned energy conservation measures and other factors that could affect the demand for CPP’s services; identify and evaluate a range of alternatives for how to best meet the agency’s needs, including non-capital options and energy conservation measures that could reduce the demand for CPP’s services; and identify key assumptions and risks of the alternatives considered and perform valid sensitivity and uncertainty analyses to determine which alternatives could prove the most cost-effective under a range of potential future conditions. As AOC updates its long-term energy plan, the Architect should seek a review of the plan by an independent panel of experts to ensure it follows key leading practices and provide the results of the review to Congress. We provided a draft of this report to the AOC for review and comment. In its written comments, included as appendix II, the Architect disagreed with our findings, conclusions, and recommendations. However, AOC also said that the agency has effectively implemented our recommendations in a “manner sufficient to move forward with the planned cogeneration project.” As we discuss below, AOC provided two new reports focusing on the need to replace its oldest boilers and potential risks and costs associated with the proposed cogeneration project. We did not review these reports because AOC did not provide them or make us aware of them until after we had completed our work. We plan to review these studies in the future and discuss them with Congress. While these reports may expand on the justification for the cogeneration project, we continue to believe that AOC should first update its overall long-term strategic energy plan and evaluate a full range of alternatives for best meeting its needs prior to undertaking major energy projects in the future. We also acknowledge that AOC may need to replace certain steam-generating equipment, in part or in whole, at some point in the future. AOC also provided technical comments, which we addressed as appropriate in the report. In its written comments, AOC stated that contrary to our recommendations and assertions in the draft report, AOC adhered to key leading capital-planning practices based on its 2009 long-term energy plan, 2014 revalidation efforts, and additional documentation. AOC’s written comments contradict statements by AOC officials in April 2015 that they were not aware of the key leading capital-planning practices cited in our draft report. At that time, these officials said that AOC instead followed NIST guidance on performing life-cycle cost analyses for energy conservation projects and DOE guidance for financing energy projects using non-appropriated funds. Furthermore, the agency did not provide evidence that contradicted our finding about it not adhering to these practices during our review. We therefore maintain that we reached the correct conclusion about AOC’s adherence to key leading capital- planning practices. As part of our first recommendation, we said that AOC should fully assess the complex’s long-term needs and identify any performance gaps. As part of its written comments, AOC provided additional documentation that the agency said fully explains how the agency has already assessed these needs through preparing a justification for replacing the complex’s aging boilers. The documentation expands on its efforts to support the proposed cogeneration project, including a report on the condition of two of its oldest boilers and an updated sensitivity analysis comparing the long-term benefits of installing new boilers or a cogeneration system. We did not assess the validity of these documents because AOC did not provide them or make us aware of them until after we had sent the draft report for comment. Moreover, AOC did not use this information as part of the basis for selecting the current planned cogeneration project. We maintain that AOC should conduct such an analysis prior to making a decision about energy projects, rather than as part of efforts to validate decisions made in 2009 and 2014. Another part of our first recommendation said that AOC should identify and evaluate a range of alternatives for how to best meet the agency’s needs, and identify key assumptions and risks of the alternatives. Regarding identifying and evaluating a range of alternatives, including non-capital options and energy conservation measures, AOC said that it did so in 2009 and selected cogeneration to replace the aging boilers. AOC added that it updated key assumptions used in the 2009 plan in 2014 and further evaluated the two technically feasible options—natural gas boilers and cogeneration—in extensive detail, which AOC stated validated that cogeneration remained the best option. We agree that the 2009 long-term energy plan broadly considered a range of alternatives for meeting the agency’s long-term energy needs, but the analysis conducted in 2014 focused solely on two options. From 2009 to the present, many factors have changed that could potentially lead AOC to reach a different, more cost-effective solution to meet any future performance gaps. For example, the costs of fuels, electricity, and labor have changed since 2009. In addition, the demand for AOC’s services has changed as the agency has pursued conservation and other energy-saving efforts. We therefore continue to believe that AOC should fully update its long-term energy plan, taking into account changes in key variables and the full range of options for how best to meet the agency’s needs, including non- capital options and energy conservation measures. The last part of our first recommendation said that AOC should identify key assumptions and risks and perform valid sensitivity and uncertainty analyses to identify cost-effective alternatives under a range of future scenarios. In its written comments, AOC said that it identified key assumptions and risks and subsequently performed valid sensitivity and uncertainty analyses. The Department of Energy’s National Renewable Energy Laboratory (NREL), as a third-party reviewer of the cogeneration validation effort, conducted a deterministic sensitivity analysis of the cogeneration project’s life-cycle cost, and AOC performed its own sensitivity analysis in its December 2014 draft plan. Our report identified shortcomings of these analyses, raising questions about their usefulness in identifying a cost-effective alternative. AOC also used a different third party to perform a probabilistic risk assessment of the project’s construction cost, which we acknowledged in our report. In addition, AOC said the agency also used another third party to complete an additional probabilistic risk assessment of the project’s life-cycle cost in May 2015. We did not assess the validity of this analysis because AOC did not provide it to us until after we had sent the draft report for comment. While AOC has conducted some sensitivity and uncertainty analyses, it did so to support a decision made in 2009, rather than to evaluate alternatives in the context of a full update of its long-term energy plan. We, therefore, continue to believe that AOC should fully update its long-term energy plan and follow leading practices for analyzing alternatives in that context. Our second recommendation states that, as AOC updates its long-term energy plan, the Architect should seek an independent review of the plan by an expert panel to ensure it follows key leading practices and provide the results of the review to Congress. In its written comments, AOC stated that it had engaged an outside entity to review AOC’s 2014 effort to validate its choice to pursue a cogeneration project. However, a review of a partial update to a 2009 plan does not address our recommendation that AOC fully update its long-term energy plan and then seek outside review by an independent panel of experts, as it did in 2009. AOC’s written comments included additional details about its disagreement with our findings, conclusions, and recommendations, which we address in appendix II. We are sending copies of this report to the appropriate congressional committees, the Architect of the Capitol, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Frank Rusco at (202) 512-3841 or [email protected] or Lori Rectanus at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributors to this report are listed in appendix III. Our work for this report focused on the Architect of the Capitol’s (AOC) Capitol Power Plant (CPP) and actions taken by AOC to manage the costs of providing heating and cooling services to the complex. In particular, this report examines: (1) measures AOC implemented since GAO’s 2008 report to manage the energy-related costs of the buildings served by CPP and opportunities, if any, to further manage these costs, and (2) how AOC decided to procure a cogeneration system and the extent to which AOC followed leading capital-planning practices. To identify measures AOC has implemented since 2008 to manage energy-related costs, we examined AOC and CPP appropriations, obligations, and expenditures data from 2009 to 2013 to identify the costs incurred by AOC related to production, distribution, and consumption of heating, cooling, and electricity by the complex. We assessed the reliability of these data—for example, by reviewing related documentation and interviewing knowledgeable AOC budget and finance officials—and found them sufficiently reliable for our reporting purposes. We also reviewed relevant AOC reports and documents, and interviewed AOC and CPP officials. To identify measures AOC could potentially implement to further manage its energy-related costs, we reviewed AOC reports and other documents, such as energy audits of CPP’s steam and chilled water systems. We assessed the reliability of the data in these audits by reviewing related documentation and interviewing knowledgeable AOC officials and found these data sufficiently reliable for our reporting purposes. We also interviewed eight operators of other district energy systems to learn about measures they have implemented to manage costs, as well as the benefits and costs associated with those measures. We identified these operators based on, among other things, our preliminary research; interviews with CPP staff and managers of other district energy systems; we selected the operators based on similarities to the CPP, such as whether the operators were located in climates similar to Washington, D.C. We selected eight operators: five in the Washington, D.C., area and three in the Boston, Massachusetts, area. Four of the operators are public entities and the remaining four are private, two of which are private universities (see table 7). The information collected during these interviews cannot be generalized to all district heating or cooling systems. To review AOC’s planning effort to further manage its energy-related costs, we reviewed AOC’s planning documents and recent updates, including (1) AOC’s 2009 Strategic Long-Term Energy Plan, (2) AOC’s draft Strategic Long-Term Energy Plan released in the summer of 2014, and (3) AOC’s draft Cogeneration at Capitol Power Plant Project Summary and accompanying consultant reports issued in December 2014. We identified four sources of federal guidance on capital planning and alternatives analysis and compared the guidance in those documents to AOC’s planning documents. We also interviewed AOC officials to discuss the agency’s planning documents and efforts. We conducted our work from December 2013 to September 2015 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this product. Comment 1: We agree that CPP has equipment that may need replacement, in part or in whole, at some point in the future. However, AOC has not provided information on the likelihood of any such failures. After we provided our draft report to AOC for comment, the agency provided a new report on justifying the replacement of some of its older boilers, dated July 17, 2015, that provides anecdotes on problems AOC has overcome in maintaining the boilers but did not provide information quantifying the operational or budget impacts of these problems or estimates of the likelihood of a sudden failure of the boilers in the near future. Furthermore, AOC has not provided us with information—other than condition reports we reviewed finding that the boilers were in good to fair condition for their ages—supporting AOC’s claims that the boilers are effectively “on life support.” Comment 2: We agree that AOC should operate and maintain CPP with the goal of meeting peak steam demand. However, AOC has not quantified any negative effects that would occur if CPP had to meet peak steam demand while operating its boilers only on natural gas and experiencing a temporary boiler outage. Furthermore, as AOC has noted, the proposed cogeneration system would not provide enough steam to allow AOC to meet its peak steam demand without using one of the two older boilers it intends to replace. Therefore, AOC will continue to incur some of the increased costs associated with infrequent use of one of the two older boilers that the agency stated the cogeneration project was meant to address. Furthermore, it is not clear when the agency intends to fully replace the capacity of the two oldest boilers. We therefore continue to believe that AOC should fully update its long-term energy plan while following leading capital-planning practices to ensure the agency fully assesses its needs and finds the most cost-effective ways to meet them. Comment 3: We agree that AOC’s 2009 long-term energy plan assessed a broad range of technical options for providing heating and cooling to the complex. However, given that many factors have changed that could potentially lead AOC to reach a different, more cost-effective solution to meet any future performance gaps, we continue to recommend that AOC fully update its long-term energy plan while following key leading capital-planning practices and seek an independent review of the plan and provide the results of this review to Congress. In its letter, AOC noted that the NRC committee that reviewed its 2009 plan stated that “electric generation (or Cogeneration) is the best long-term strategy for AOC to achieve its mission of reliable, cost-effective, efficient, and environmentally sound utility services.” However, we did not find this statement in the NRC committee’s 2009 report; instead, it is an AOC statement included in its final 2009 long-term energy plan. Comment 4: AOC sought to clarify the progression of its planning efforts, which we summarized in Table 6 in our report. However, it is unclear why AOC stated that we mischaracterized its July 2014 Strategic Long Term Energy Plan Update: Draft Final Report, which we described as a draft plan throughout our report. In August 2014, we discussed with AOC shortcomings in its planning for the cogeneration project relative to leading practices and referred the agency to documents outlining these practices. AOC officials later wrote that the agency addressed the presented shortcomings by completing the December 2014 draft plan and supporting documents, which called for a cogeneration system with a configuration that differed from the July 2014 draft plan. Comment 5: AOC stated that its 2014 revalidation addressed the key leading capital-planning practices we cited, but this revalidation focused on two technical options and did not, as called for in leading practices, fully assess the complex’s long-term needs and identify and evaluate a full range of options for best meeting those needs. We continue to maintain that, prior to undertaking major energy projects, AOC should fully update its 2009 long-term energy plan as called for in leading capital-planning practices, given that key factors have changed that could have changed the plan’s conclusions. Comment 6: AOC stated that it completed an evaluation and redeveloped its long- term steam demand forecasts to address the urgent need to replace its older coal- firing boilers. We did not assess the validity of this evaluation because AOC did not provide it, or make us aware of it, until after we had sent the draft report to the agency for its comments. This evaluation did not accompany the agency’s December 2014 draft plan, which AOC used to justify the need for and scope of the proposed cogeneration project. Comment 7: We agree that AOC reviewed a broad range of options for meeting its long-term needs in its 2009 long-term energy plan. However, AOC did not examine non-capital options in the 2009 plan—such as operational changes or conservation measures—and it is unclear how or when AOC assessed some of the capital or financing options it cited in its written comments. Since 2009, AOC has assessed two capital options—a cogeneration system or a natural gas boiler. From 2009 to the present, many factors have changed that could potentially lead AOC to reach a different, more cost-effective solution to meet its needs. Therefore, we continue to believe that AOC should identify and assess a wide range of options for meeting its needs in a full update of its long-term energy plan. Comment 8: We have not assessed AOC’s additional sensitivity analysis, as the agency provided it after we had completed our draft report. We do not know the basis for AOC's statement that the group of energy conservation measures it identified would reduce the complex’s steam demand by 20 percent or the basis for the statement that the cost of the measures—including some or all of the costs of the Cannon House Office Building Renewal project—would exceed $2 billion. Comment 9: AOC disagreed with our statement that the agency did not update its 2009 long-term plan in response to changes in key assumptions, citing the analyses it performed in 2014 and 2015 on the life cycle costs of the proposed cogeneration system and an alternative of a natural gas boiler. However, AOC did not update the key assumptions in the context of a full update of its 2009 plan, which assessed a broad range of options for meeting the complex’s heating and cooling needs. AOC stated that it included updated assumptions in its spreadsheets on the life cycle costs of the proposed cogeneration project and a natural gas boiler alternative, and stated that we declined its offers to discuss these spreadsheets. However, we reviewed these spreadsheets containing AOC’s life cycle cost analyses and identified shortcomings that we describe in our report. Comment 10: AOC stated that it completed a probabilistic risk assessment in May 2015 that was consistent with GAO’s Cost Estimating Guide, which identifies some key leading capital-planning practices. However, AOC did not make us aware of or provide this assessment until after we had completed our review and prepared our draft report. Comment 11: AOC stated that the Department of Energy’s National Renewable Energy Laboratory (NREL) provided an independent review of its December 2014 draft plan, which compared the proposed cogeneration system to an alternative of a natural gas boiler. NREL’s review of a partial update to a 2009 plan, rather than a full update, does not address our recommendation. AOC needs to fully update its long- term energy plan and then seek outside review by an independent panel of experts, as it did in 2009. Comment 12: We agree that cogeneration can offer benefits in certain settings. However, given the significantly higher upfront costs of cogeneration when compared to alternatives like a natural gas boiler, it is important that the planning involved in selecting the technology over viable alternatives exhibit the aspects of key leading capital-planning practices we cited—such as fully assessing needs, assessing a range of alternatives, and using valid sensitivity and uncertainty analyses to identify key risks and confirm the superiority of a chosen option over its alternatives. To ensure that AOC’s choices for meeting its long-term energy needs result from planning that exhibits these leading practices, we continue to believe that AOC should fully update its long-term energy plan while following the key leading practices we cited. Comment 13: AOC stated that the construction permit for the proposed cogeneration project will expire in June 2016 and that fully implementing our recommendations would introduce a delay of approximately two years to either option for obtaining additional steam generating capacity. We maintain it is important for AOC to make the correct decisions about its capital and long-term energy needs through planning that follows key leading capital-planning practices, regardless of when any permits may expire for a particular project. Furthermore, AOC did not provide a basis for its claim that fully updating its long-term energy plan would cause a delay of an additional two years to either option for adding new steam generating capacity, and if AOC’s claim is accurate then the agency should start the update as expeditiously as possible. Therefore, we continue to recommend that AOC fully update its long-term energy plan while following leading capital-planning practices before undertaking future major capital projects related to its energy needs. Comment 14: We agree that AOC faces limits on its continued use of coal at CPP and on its emission of air pollutants, and we believe AOC should factor in such constraints in a full update of its long-term energy plan. Comment 15: AOC stated in its letter that our report suggested that capital-planning guidance is clear and leaves no room for misunderstanding or misinterpretation by agencies. During the course of our review, and after receiving a preview of our report’s findings, AOC officials said they were generally unaware of the applicability of the leading practices we cited. We identify in our report GAO’s prior work that recommends the use of independent panels by agencies when addressing complex issues such as those facing AOC, and as the agency itself used in 2009 to review its draft long-term energy plan. As part of fulfilling our recommendation that the agency fully update its long-term energy plan while following leading capital-planning practices, we continue to believe AOC should submit the plan for review by an independent panel of experts and submit the results to Congress. Comment 16: AOC did not assess the proposed cogeneration project using its capital planning prioritization process for projects to be funded with upfront appropriations, stating that it is the agency’s strategy to use a UESC to finance the proposed cogeneration project—thereby allowing AOC to request appropriations to fund other critical infrastructure projects for which AOC stated such alternative funding sources are not available. As we stated in our report, by not assessing the proposed project using the agency’s capital planning prioritization, AOC did not analyze the project relative to other projects for which the AOC was seeking appropriated funding using the agency’s pre-determined criteria for capital planning. Comment 17: We agree that, like the proposed cogeneration project, AOC would have incurred some pre-construction obligations for design and project management to replace the steam-generating capacity of one or both of its older coal-firing boilers with a natural gas boiler. AOC’s draft December 2014 plan shows that a natural gas boiler providing the same amount of steam as the proposed cogeneration system would cost approximately $9.3 million. It is not clear to what extent this estimate includes pre-construction obligations, which for the cogeneration project totaled about $16 million as of March 2015. Comment 18: We agree that CPP may not be able maintain adequate capacity to meet peak demand should both older coal-firing boilers fail at the same time, but this does not change the need for AOC to fully assess its long-term energy needs and evaluate a range of alternatives for meeting them in the context of a full update of its long-term energy plan. Comment 19: AOC officials stated appropriations would likely not be available for the cogeneration project and therefore selected a UESC to finance the project. Because the agency did not intend to use upfront appropriations to acquire the system, AOC did not assess the project using its capital planning prioritization process. As we reported, acquiring the system using a UESC results in more upfront costs and financing costs than if the agency used upfront appropriations. AOC stated that it discussed its funding challenges with GAO, but it is not GAO’s role to advise agencies as they seek funding for their proposed capital projects. Comment 20: AOC stated that its selection of the proposed cogeneration project and its revalidation efforts have followed key leading practices. However, as we state in our report and our response, we remain unconvinced that AOC’s planning followed key leading capital-planning practices and therefore AOC has not demonstrated whether the proposed cogeneration project will prove more cost-effective than other alternatives for meeting the agency’s needs. We therefore continue to recommend that AOC, prior to undertaking major energy projects, fully update its 2009 long-term energy plan while following key leading capital-planning practices, including: fully assessing its energy needs, identifying and evaluating a range of alternatives for meeting its needs, and identifying key assumptions and risks and performing valid sensitivity and uncertainty analyses. We also continue to recommend, given the complexity of the issues it is facing, that AOC seek a review by an independent panel of experts as it fully updates its long-term energy plan and provide the results of this review to Congress. In addition to the individuals names above, Michael Armes (Assistant Director); Michael Hix (Assistant Director); John Delicath; Philip Farah; Cindy Gilbert; Geoff Hamilton; Dan Paepke; Mick Ray; and Shep Ryen made key contributions to this report. | AOC's CPP heats and cools 25 buildings in the complex, including the Capitol and House and Senate office buildings. CPP does not have the infrastructure to distribute electricity to the buildings it serves. CPP buys fossil fuels (mostly natural gas) to run boilers that make steam and buys electricity to run chillers that make chilled water. CPP distributes the steam and chilled water for heating and cooling using a network of tunnels. AOC seeks to install a ‘cogeneration' system that would produce steam and electricity. The House of Representatives report accompanying the Legislative Branch Appropriations Bill, 2014 included a provision for GAO to analyze potential cost savings at CPP. GAO analyzed (1) measures AOC implemented since 2008 to manage the energy-related costs of the complex and opportunities, if any, to further manage these costs, and (2) how AOC decided to procure a cogeneration system and the extent to which AOC followed leading capital- planning practices. GAO analyzed AOC budgets and plans; reviewed federal guidance on capital planning; and interviewed AOC staff and other stakeholders, including other heating and cooling plant operators. The Architect of the Capitol (AOC) implemented many measures since 2008 to manage the energy-related costs of the Capitol Complex (the complex) and has opportunities to further manage these costs. AOC updated some of the Capitol Power Plant's (CPP's) production and distribution systems to reduce energy use and increase efficiency. AOC also implemented measures to reduce energy consumption in the complex, such as conservation projects improving lighting and air-handling systems that yielded monetary savings. AOC has opportunities to implement other conservation measures in the complex. For example, energy audits by contractors identified additional opportunities to implement similar measures or other upgrades to lighting, mechanical, and plumbing systems to achieve additional energy and monetary savings. However, AOC officials said they have not implemented these measures but intend to act as resources become available. AOC decided to procure a cogeneration system to produce electricity and steam based on a 2009 long-term plan and subsequent partial updates but did not follow key leading federal capital-planning practices. In 2009, AOC issued a long-term energy plan that stated it should pursue cogeneration to meet future steam demand and provide a new source of electricity for its chillers, enabling the agency to decrease electricity purchases. Partial updates to the plan in 2014 sought to justify the choice of a cogeneration system. However, AOC's planning did not follow key leading capital-planning practices developed by GAO and the Office of Management and Budget (OMB). First, though called for by leading federal planning practices, AOC has not fully updated the 2009 long-term plan, although changes in key planning assumptions, such as on fuel prices and the complex's demand for energy, have occurred. Instead, AOC intends to make a decision on implementing an $85 million cogeneration system before updating its long-term plan later in fiscal year 2015. Second, the 2014 partial updates to its 2009 plan that AOC has used to justify the project did not include complete information on the need or problem that the project would address. Third, the 2014 updates did not identify a full range of options for cost-effectively meeting projected future needs, including non-capital measures such as conservation. Fourth, the updates did not have valid sensitivity or uncertainty analyses to test key assumptions about whether the system would achieve sufficient savings over time—from decreased electricity purchases—to justify its costs. Related to this, AOC officials said that since upfront appropriations would likely not be available to procure the system, they had decided to use a third party to finance the project, thereby increasing its costs. These officials also said they relied on federal guidance for analyzing and financing energy projects. However, such guidance does not substitute for first completing an up-to-date capital plan. Finally, GAO's prior work has recommended using independent panels of experts to review complex projects such as a cogeneration system, but AOC has not engaged such a panel to review its 2014 updates to its long-term plan. AOC officials said they were unaware of some of these practices and that they needed to sign a contract quickly to avoid the risk of losing construction and air quality permits. Without updating its long-term energy plan and obtaining independent review, AOC may pursue a project that does not cost-effectively meet its needs. AOC should (1) update its long-term energy plan while following key leading practices, including considering a full range of measures to further manage costs, before committing to major energy projects at CPP, and (2) seek independent review of its plan. AOC disagreed with GAO's recommendations; GAO continues to believe they are valid, as discussed further in this report. |
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DOD’s Joint Exercise Program provides an opportunity for combatant commanders to (1) train to the mission capability requirements described in the Joint Mission-Essential Task List and (2) support theater or global security cooperation requirements as directed in theater or in global campaign plans. All nine of the combatant commands, as well as the four military services, conduct exercises as a part of the Joint Exercise Program. The mission for the four combatant commands we visited are as follows: NORTHCOM conducts homeland defense, civil support, and security cooperation to defend and secure the United States and its interests. PACOM, with assistance from other U.S. government agencies, protects and defends the United States, its people, and its interests. In conjunction with its allies and partners, PACOM’s goal is to enhance stability in the Indo-Asia-Pacific region by promoting security cooperation, responding to contingencies, deterring aggression, and when necessary, fighting to win. STRATCOM conducts global operations in coordination with other combatant commands, military services, and appropriate U.S. government agencies to deter and detect strategic attacks against the United States, its allies, and partners. TRANSCOM provides a full-spectrum of global mobility solutions and related enabling capabilities for supported customers’ requirements in peace and war. The key players with roles and responsibilities in the Joint Exercise Program are as follows: Principal Deputy Assistant Secretary of Defense for Readiness, whose responsibilities include administering the Combatant Commanders Exercise Engagement and Training Transformation account; Director for Joint Force Development Joint Staff (J7), whose responsibilities include managing the Combatant Commanders Exercise Engagement and Training Transformation account and providing enabling capabilities that support combatant commands’ and the military services’ training; combatant commands, who develop, publish, and execute command Joint Training Plans and joint training programs for command staff and assigned forces; and military services, whose responsibilities include providing trained and ready forces for joint employment and assignment to combatant commands. In fiscal year 2016, the Combatant Commanders Exercise Engagement and Training Transformation account provided approximately $600 million dollars to fund more than 150 training events. Funding from this account covers items such as personnel travel and per diem for planning conferences and exercise support events, transportation of cargo, airlift, sealift and port handling, intra-theater transportation for participating units, consultant advisory and assistance service, equipment and supplies, and operation and maintenance for training support facilities and equipment. From fiscal year 2013 through fiscal year 2016, funding for this account decreased by about $149 million, or by 20 percent, while the number of exercises conducted remained relatively unchanged (see fig. 1). DOD officials told us that in part as a result of reduced funding for the Joint Exercise Program they have at times reduced the scope of exercises or sought alternative methods, such as relying on organic lift capabilities of Service components or partnering with another combatant command to execute exercises. Other factors that could impact the ability of combatant commands to execute exercises include the availability of forces; diplomatic (political and military) considerations; and real world events, such as natural disasters. Though DOD officials stated that these factors are largely outside of the sphere of combatant commander influence and therefore are not included in the original planning of the exercises, officials stated that they use various approaches to try to mitigate the effect these factors have on their ability to carry out their respective joint exercise programs. If these factors cannot be mitigated, the combatant command might cancel a joint exercise, a mitigation strategy of last resort. DOD has developed a body of guidance for the Joint Exercise Program and is working to update a key outdated guidance document that identifies overarching roles and responsibilities for military training in accordance with a congressional requirement in a House Committee on Armed Services report accompanying the National Defense Authorization Act for Fiscal Year 2017. DOD-wide guidance, policies, and procedures addressing various aspects of the Joint Exercise Program are contained in the following documents: DODD 1322.18, Military Training, (Jan. 13, 2009), is the overarching guidance for military training and identifies the roles and responsibilities for training military individuals; units; DOD civilian employees; and contractors, among others. The Program Goals and Objectives document provides guidance for all programs and activities that utilize funds from the Combatant Commanders Exercise Engagement and Training Transformation account. CJCSI 3500.01H, Joint Training Policy for the Armed Forces of the United States, (April 25, 2014), establishes guidance for the Joint Training System—an integrated, requirements-based, four-phased approach that is used to align a combatant commander’s Joint Training Strategy with assigned missions to produce trained and ready individuals, staff, and units. The Joint Training System is used by combatant commanders to execute the Joint Exercise Program as shown in figure 2. See appendix II for a more detailed description of the Joint Training System. CJCSN 3500.01, 2015-2018 Chairman’s Joint Training Guidance, (Oct. 30, 2014), provides the Office of the Chairman of the Joint Chiefs of Staff’s joint training guidance to all DOD components for the planning, execution, and assessment of joint individual and collective training for fiscal years 2015 through 2018. CJCSM 3500.03E, Joint Training Manual for the Armed Forces of the United States, (April 20, 2015), provides guidance and procedures for the Joint Training System. Specifically, it focuses on determining joint training requirements, planning and executing joint training, and assessing joint training. CJCSM 3511.01, Joint Training Resources of the Armed Forces of the United States, (May 26, 2015), provides detailed guidance on joint funding, joint transportation, and joint training support resources for joint training exercises. CJCSI 3150.25F, Joint Lessons Learned Program, (June 26, 2015), provides guidance for gathering, developing, and disseminating joint lessons learned for the armed forces for joint training exercises. Each of the combatant commands we visited had developed their own implementation guidance, which is consistent with DOD’s guidance for the Joint Exercise Program. While DOD has a body of guidance for the Joint Exercise Program, DODD 1322.18 – key overarching guidance for military training that identifies roles and responsibilities for training, including the for the Joint Exercise Program–is outdated. Specifically, this directive assigns significant roles and responsibilities relevant to the Joint Exercise Program to U.S. Joint Forces Command, a combatant command that has not existed since August 2011. For example, according to DODD 1322.18, U.S. Joint Forces Command is responsible for working through the Office of the Chairman of the Joint Chiefs of Staff to manage joint force training, accredit joint training programs for designated joint tasks, and provide Combatant Commanders Exercise Engagement and Training Transformation funds to support the Joint Exercise Program. According to subsequent guidance issued in April 2014, the Office of the Chairman of the Joint Chiefs of Staff was assigned the roles and responsibilities formerly performed by U.S. Joint Forces Command. Additionally, the Office of the Assistant Secretary of Defense for Readiness, instead of U.S. Joint Forces Command, now administers the Combatant Commanders Exercise Engagement and Training Transformation account, which funds the Joint Exercise Program. In House Report 114-537, the House Committee on Armed Services also noted that DODD 1322.18 is outdated and does not account for significant organizational changes that have occurred within the department—specifically, the disestablishment of U.S. Joint Forces Command and the establishment of the Assistant Secretary of Defense for Readiness. Consequently, the report directs DOD to update its guidance and brief the committee on its progress updating the guidance by December 1, 2016. According to an official from Office of the Assistant Secretary of Defense for Readiness, the office responsible for DODD 1322.18, the department is aware that the directive is outdated and is working on updating it but is unsure of when the update process will be completed. Specifically, according to this DOD official, the department is working to determine whether the directive can be updated through an administrative update, which requires less coordination and time to process than doing so through a total reissuance of guidance. When DOD completes the update and includes information on current roles and responsibilities, the key guidance regarding the Joint Exercise Program should be consistent with other guidance. DOD has implemented an approach to assess the return on investment for the Joint Exercise Program. The Director of the Joint Assessment and Enabling Capability office stated that officials from that office provide the combatant commands with guidance for how to develop performance measures to assess the effectiveness of the Joint Exercise Program. Specifically, the combatant commands, in conjunction with this office, develop performance measures using an approach that is aimed at ensuring the performance measures are specific, measurable, achievable, realistic, and time-phased (commonly referred to as the SMART rubric). The Director of the Joint Assessment and Enabling Capability office reviews the performance measures created by the combatant commands against the SMART rubric and provides input and coaching on improving the measures through an ongoing and collaborative process. See appendix III for a more detailed explanation of DOD’s approach for assessing individual joint exercises. The Joint Assessment and Enabling Capability office is working with individual combatant commands to develop measures to assess the return on investment of the Joint Exercise Program using the SMART rubric approach. For example, NORTHCOM officials told us that they are working with the Joint Assessment and Enabling Capability office to develop a better method to measure the return on investment for NORTHCOM joint exercises because the ones they currently use, such as the number of joint mission-essential tasks in an exercise, do not reveal any information that would be helpful for decision making. The officials stated that they are still trying to determine the threshold for the amount of information that is necessary to measure return on investment for their joint exercises. Further, officials stated that they were drafting performance measures to assess return on investment to submit to their leadership for approval. Additionally, TRANSCOM officials told us that they too are working with the Joint Assessment and Enabling Capability office but have not yet determined how to effectively gauge return on investment for training dollars spent on its exercises. According to DOD and combatant command officials we interviewed, readiness is their key performance measure and they have ongoing efforts to develop more tangible, quantifiable measures to determine the return on investment for conducting exercises. However, according to combatant command officials, return on investment is sometimes intangible and may not be seen immediately. Officials stated that it could take years to recognize the return on investment for conducting an exercise. For example, PACOM officials told us that they conducted two multinational planning exercises and a multinational force standard operating procedures workshop designed to increase the speed of initial response forces to an emergent issue and enhance relationships with partner countries for several years. According to PACOM officials, the return on that investment, however, was not realized until April 25, 2015, when a region northwest of Kathmandu, Nepal, was devastated by a 7.8 magnitude earthquake and the after-action report for that earthquake indicated that PACOM’s exercises were vital in preparing the Nepal Army for its response. DOD uses two key information technology systems—JTIMS and the Execution Management System—to manage the execution of the Joint Exercise Program, but DOD does not have assurance that the Execution Management System produces quality information. DOD uses JTIMS as the system of record for the Joint Exercise Program and combatant commanders plan and manage their joint training exercises through JTIMS. JTIMS automates the management of joint exercise training data through a web-based system and supports the application of the four phases of the Joint Training System. Specifically, JTIMS, which is managed by the Office of the Chairman of the Joint Chiefs of Staff, is used, among other things, to (1) request and track forces for joint training exercises, (2) publish the Joint Training Plan, (3) document and manage joint training programs, and (4) capture the assessments of exercises. Chairman of the Joint Chiefs of Staff policy requires the use of JTIMS for a number of fields. For example, guidance requires, among other things, that the combatant commands enter key information about a training exercise, such as its objectives, intended audience (i.e., the joint forces being trained), lessons learned, and observations on performance, and costs. However, the extent to which these fields are used, and the quality of the data entered varies by combatant command. Combatant commands and other DOD entities rely on the information entered in JTIMS to both conduct their exercises and participate in exercises sponsored by other combatant commands. However, during the course of our review, we were informed of and observed significant variation in the type and quality of information entered in JTIMS. For example, officials from one combatant command stated that an exercise description entered by another combatant command did not provide sufficient detail, therefore making it difficult to understand the focus of the exercise. In addition, TRANSCOM officials randomly selected exercises in JTIMS to show us the type of information entered in the system and we noted that the level of detail provided sometimes varied significantly by combatant command. Furthermore, officials from two of the four combatant commands we visited stated that sometimes the information captured in JTIMS is not useful and could negatively affect their ability to coordinate training with other combatant commands or extract pertinent information about exercises from the system that would be helpful in planning them. According to an Office of the Chairman of the Joint Chiefs of Staff official, it is important that combatant commands enter information in JTIMS in a consistent and standardized manner so that the information is easily understood and useful for all joint exercise training participants and planners. The Office of the Chairman of the Joint Chiefs of Staff and combatant command officials told us that the lack of standardized information in JTIMS is due to the absence of detailed instructions in guidance on inputting information into JTIMS. Consequently, to help improve the consistency and standardization of information across combatant commands, the Office of the Chairman of the Joint Chiefs of Staff published a user guide for JTIMS that is intended to mitigate inconsistencies in the information entered there, standardize the use of the system across DOD, and improve the overall understanding of the system. According to this official, the user guide was completed in October 2016. The Office of the Chairman of the Joint Chiefs Staff plans to periodically update the user guide to keep pace with joint training policy updates, JTIMS software upgrades, and joint training enterprise business rule modifications. In addition to providing step-by-step instructions on using JTIMS, the guide also provides examples of the type of information that should be entered in specified fields. Such information should help improve the overall understanding of and bring consistency to the use of JTIMS across the combatant commands. DOD uses the Execution Management System, a web-based database, to track and oversee the most recent execution performance data, hereafter referred to as data, for the Joint Exercise Program. The Execution Management System is intended to capture the most recent data for the Joint Exercise Program. According to officials, it is important to have accurate and current data in the Execution Management System because it provides instant status of the over- and underexecution of funds for the Joint Exercise Program, which is critical to the efficient and effective execution of the Joint Exercise Program. Moreover, officials from the Assistant Secretary of Defense for Readiness office stated that data from this system are used to report how funds are being expended for the Joint Exercise Program to both DOD decision makers and Congress. In April 2016, the Office of the Assistant Secretary of Defense for Readiness issued guidance on the use of the Execution Management System to the combatant commands. This guidance, referred to as the Execution Management System Standard Operating Procedure and User Guide, states that Joint Exercise Program managers are required to (1) enter the most recent obligation and expenditure amounts for any transactions funded through the Combatant Commanders Exercise Engagement and Training Transformation account on a monthly basis and (2) upload supporting documentation for transactions. The guide also specifies the type of supporting documents that should be uploaded into the Execution Management System, such as awarded contracts, invoices, and travel payments. Prior to issuing guidance in April 2016, an official responsible for administering the Combatant Commanders Exercise Engagement and Training Transformation account stated that the combatant commands were informed of the requirement to upload supporting documentation into the Execution Management System in 2011. NORTHCOM, STRATCOM, and PACOM officials told us that they were aware of this requirement prior to April 2016. TRANSCOM officials initially stated that they were unaware of the requirement; however, our review of the Execution Management System revealed that they were uploading supporting documentation for some fiscal years prior to the guidance being issued. During our review of the Execution Management System, we found that the combatant commands we visited had not fully implemented the guidance and that the quality of information in the system was questionable. Specifically, we found that: The Execution Management System is missing supporting documentation. Based on our review, we found that two— STRATCOM and NORTHCOM—of the four combatant commands we visited had uploaded supporting documentation, as required by the Execution Management System guidance, for fiscal years 2013-16. A third combatant command, TRANSCOM, uploaded supporting documentation for fiscal years 2013, 2014, and 2016, but did not upload supporting documentation for fiscal year 2015. The fourth combatant command, PACOM, did not upload supporting documentation for fiscal years 2013, 2014, and 2015, but began uploading supporting documentation in August 2016 for fiscal year 2016 after we informed an official in the Office of the Assistant Secretary of Defense for Readiness that the command had not been uploading supporting documentation in accordance with the Execution Management System guidance. TRANSCOM and PACOM officials stated that one of the reasons they did not upload supporting documentation, as required by guidance, was due to the volume of travel and other related documents generated in executing joint training exercises. Officials stated that it was overly burdensome to upload all of these documents. Nonetheless, an official from the Office of the Assistant Secretary of Defense for Readiness stated the combatant commands need to do their due diligence in uploading supporting documentation in order to ensure proper accountability of Combatant Commanders Exercise Engagement and Training Transformation funds. This official further stated that efforts are underway, that includes establishing a new method for how funds are distributed to stakeholders, to identify approaches that will reduce the data entry burden at the stakeholder level. Documentation for expenditures uploaded into the Execution Management System did not match reported total expenditures for any of the four combatant commands we visited. Based on our review of a nongeneralizable sample of supporting documentation for fiscal years 2014 through 2016 that was uploaded into the Execution Management System, we found that the sum of the individual expenditures reported in supporting documentation did not match the corresponding total expenditures entered in the system for any of the four combatant commands we visited. According to one combatant command official familiar with this system, individual expenditures reported in supporting documents should be reconcilable to yearly cumulative totals for expenditures. However, when we attempted to link the sum of individual expenditures reported in uploaded supporting documentation to total expenditures data entered into the Execution Management System by combatant command officials, we were unable to do so for three of the four combatant commands we visited. For example, in fiscal year 2015, NORTHCOM uploaded more than 100 documents that supported how funds were obligated or committed. Our review found that the uploaded documentation supported approximately $12.7 million in funds that were committed. However, the figure entered in the Execution Management System was about $11.9 million. Similarly, in fiscal year 2014, TRANSCOM supporting documentation showed that commitments totaled approximately $66.8 million while the figure entered in the Execution Management System was approximately $4.6 million. Officials stated that the reason that the supporting documentation does not match the figures entered in the Execution Management System is that some supporting documentation had not been uploaded. Nonetheless, the inability to reconcile supporting documentation with the expenditures entered in the Execution Management System undermines the quality of the data in the system and inhibits DOD decision makers, particularly those in the Office of the Assistant Secretary of Defense for Readiness, from providing adequate oversight of how funds are being expended in support of the Joint Exercise Program goals. Moreover, the inconsistent uploading of the required supporting documentation and difficulty in reconciling individually reported transactions with cumulative values entered into the system suggests that weaknesses exist in the Execution Management System data entry procedures, which impacts the quality of the data entered in the system. Therefore, it calls into question the use of the Engagement Management System which, according to DOD officials, had been established to provide real-time, accurate information on the execution of Joint Exercise Program funds to decision makers. DOD has not implemented key processes to help ensure that the Execution Management System produces quality information. Further weakening the quality of the reporting, tracking, and reconciliation of data recorded in the Execution Management System is that none of the four combatant commands we visited, the Office of the Chairman of the Joint Chiefs of Staff, and the Office of the Assistant Secretary of Defense for Readiness had instituted key systemic processes to help ensure that the data entered in the Execution Management System produce quality information—that is, information that is appropriate, current, complete, accurate, accessible, and timely. Standards for Internal Control in the Federal Government states that a variety of control activities should be used for information systems to support the completeness, accuracy, and validity of information processing, and the production of quality information. In addition, management should evaluate information processing to ensure that it is complete, accurate, and valid. Further, these standards state that appropriate documentation of transactions should be readily available for examination. Using these internal controls could reduce to an acceptable level the risk that a significant mistake could occur and remain undetected and uncorrected. Individuals from all four of the combatant commands we visited stated that only one person at their combatant command was responsible for entering data into the Execution Management System for their respective command and that, although they believed their entries were reliable, no quality assurance oversight was conducted on their work. An official from the Office of the Assistant Secretary of Defense for Readiness stated that periodic reviews are conducted on data entered in the Execution Management System but that these reviews are mainly focused on the execution rates of funds and not on whether the data entered produces quality information. Further, according to an official from the Office of the Chairman of the Joint Chiefs of Staff, the checks they perform on the data entered in the Execution Management System are similar to those conducted by the Office of the Assistant Secretary of Defense for Readiness, in that they are focused on whether or not monthly expenditures have been entered into the system in order to ensure that monthly benchmarks are met and less on whether or not the data entered produces quality information. According to officials from two of the four combatant commands we visited, sometimes they receive phone calls from the Office of the Chairman of the Joint Chiefs of Staff or the Office of the Assistant Secretary of Defense for Readiness to validate certain data entries because they seemed erroneous based on an informal review. However, no officials at the combatant commands we visited, the Office of the Chairman for the Joint Chiefs of Staff, or the Office of the Assistant Secretary of Defense for Readiness could demonstrate systemic processes for ensuring that the Execution Management System produced quality information. The absence of quality assurance processes can affect the quality of the information produced by the system that DOD uses to determine its most recent execution rates and defend the Joint Exercise Program’s budget. As previously discussed, the combatant commands are not following guidance requiring them to upload supporting documentation, and DOD lacks effective internal controls to help ensure the reliability of the data in the system. DOD officials acknowledged the issues we identified regarding inadequate supporting documentation and data reliability within the Execution Management System. A senior DOD official from the Office of the Assistant Secretary of Defense, Readiness (Resources) stated that DOD plans to address these control weaknesses with respect to the Combatant Commander Exercise Engagement and Training Transformation account for the Joint Exercise Program as part of its implementation of DOD’s FIAR Guidance beginning in fiscal year 2018 to ensure that the account is audit ready. DOD established the FIAR Plan as its strategic plan and management tool for guiding, monitoring, and reporting on the department’s ongoing financial management improvement efforts and for communicating the department’s approach to addressing its financial management weaknesses and achieving financial statement audit readiness. To implement the FIAR Plan, the DOD Comptroller issued the FIAR Guidance, which provides a standard methodology for DOD components to follow to assess their financial management processes and controls and to develop and implement financial improvement plans. These plans, in turn, are intended to provide a framework for planning, executing, and tracking essential steps and related supporting documentation needed to achieve auditability. We believe that if DOD appropriately follows the steps outlined in FIAR guidance when executing the Combatant Commander Exercise Engagement and Training Transformation account, it may help improve the quality of funds execution data from this account and make the account audit ready. However, as previously stated, FIAR guidance will not be implemented with the Joint Exercise Program until fiscal year 2018 and the effectiveness of the guidance cannot be fully determined until after that time. In the meanwhile, according to a senior DOD official, DOD plans to continue using the Execution Management System which is intended to capture the most recent data for the Joint Exercise Program and inform management decision-making regarding joint exercise investments. Without ensuring the required supporting documentation is uploaded and implementing effective internal controls to ensure that data entered in the Execution Management System produces quality information, DOD and other key decision makers may not have the correct financial execution information to defend the Joint Exercise Program’s budget. DOD has developed a body of guidance for the Joint Exercise Program. In addition, DOD has implemented an approach to develop performance measures to assess the effectiveness of the Joint Exercise Program. Further, DOD uses JTIMS and the Execution Management System to manage the Joint Exercise Program. JTIMS is the system of record for executing the Joint Exercise Program and the Office of the Chairman of the Joint Chiefs of Staff officials developed a user guide intended to help bring more standardization to the system, thereby making the information more useful to other combatant commands. The Execution Management System is used to oversee and report on most recent execution performance data for Joint Exercise Program funding. However, not all of the combatant commands were following guidance requiring them to upload supporting documentation, making it difficult for DOD to have oversight on expenditures for the Joint Exercise Program. Finally, DOD and the combatant commands lack systemic processes for ensuring that the Execution Management System produces quality information. Without ensuring that supporting documentation is uploaded and implementing effective internal controls to ensure the completeness and accuracy of financial information captured for the Joint Exercise Program, DOD and other key decision makers may not have the correct financial information to defend the Joint Exercise Program’s budget. To better ensure quality financial execution information is available to guide the Joint Exercise Program, we recommend that the Secretary of Defense direct the Office of the Assistant Secretary of Defense for Readiness to take the following two actions: direct the combatant commanders to take steps to comply with current Execution Management System guidance to upload supporting documentation that is reconcilable to funds executed from the Combatant Commanders Exercise Engagement and Training Transformation account; and as the department implements financial improvement plans in accordance with the FIAR guidance, it should include specific internal control steps and procedures to address and ensure the completeness and accuracy of information captured for the Joint Exercise Program’s Combatant Commanders Exercise Engagement and Training Transformation account. We provided a draft of this report to DOD for review and comment. In its written comments, which are summarized below and reprinted in appendix IV, DOD partially concurred with both recommendations. DOD also provided technical comments, which we incorporated as appropriate. DOD partially concurred with our recommendation to direct the combatant commanders to take steps to comply with current Execution Management System guidance to upload supporting documentation that is reconcilable to funds executed from the Combatant Commanders Exercise Engagement and Training Transformation account. In its comments, DOD stated that the Execution Management System is not a system of record but rather a “desk-side” support tool that relies on manual inputs and uploads and that the reconciliation of obligation and execution related to Joint Exercise Program funding occurs elsewhere. DOD further noted that the Office of the Assistant Secretary of Defense for Readiness (OASD(R)) issued guidance and routinely reinforces the best practices use of the Execution Management System tool to ensure it produces quality information. Lastly, DOD noted in its comments that that it may not continue using the Execution Management System beyond fiscal year 2017. We recognize that the Execution Management System is not a system of record. However, as we also note in the report, it is a tool used by DOD to make decisions regarding the Joint Exercise Program because the Defense Finance and Accounting Services (DFAS) Accounting Report Monthly 1002, the system of record, lags behind. Additionally, we acknowledge that DOD issued guidance for the Execution Management System in April 2016, but our work found that the guidance was not routinely reinforced. For example, as we identified in our report, two of the four combatant commands we visited had not, in fact, uploaded supporting documentation, as required by the Execution Management System guidance, for fiscal years 2013-2016. While the Execution Management System may not be funded beyond fiscal year 2017, we continue to believe that as long as the Execution Management System remains in use and for the reasons discussed in the report, combatant commanders should take the necessary steps to comply with existing guidance that requires the uploading of supporting documentation into the Execution Management System so that when DOD managers make decisions regarding the Joint Exercise Program funding, they use information from a financial data system that is reconcilable and auditable. DOD partially concurred with our recommendation that states that as the department implements financial improvement plans in accordance with the FIAR guidance, it should include specific internal control steps and procedures to address and ensure the completeness and accuracy of information captured for the Joint Exercise Program’s Combatant Commanders Exercise Engagement and Training Transformation account. In its comments, DOD described OASD(R) as having a supporting role in the execution of FIAR plans, which are implemented by Washington Headquarters Services and the Office of Secretary of Defense-Comptroller, and that these agencies provide specific internal controls, processes and procedures for ensuring completeness and accuracy of obligation and execution data. DOD also stated that the Execution Management System is not a component of FIAR and may not be funded after fiscal year 2017, and that moving toward audit readiness, necessary steps and procedures will be put into place to strengthen auditability. As we stated in the report, the FIAR guidance provides a standard methodology and framework for assessing and developing a system of internal controls to achieve auditability. However, as we recommended, DOD still needs to implement specific internal control steps and procedures as it implements this guidance to ensure the completeness and accuracy of the Joint Exercise Program’s Combatant Commanders Exercise Engagement and Training Transformation account’s financial information. Further, as we reported the FIAR guidance will not be implemented in the Joint Exercise Program until fiscal year 2018 and the effectiveness of the guidance cannot be fully determined until after that time. Accordingly, we continue to believe that the recommendation remains valid. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Under Secretary of Defense for Personnel and Readiness; the Chairman of the Joint Chiefs of Staff; and the Commanders of U.S. Northern Command, U.S. Pacific Command, U.S. Strategic Command, and U.S. Transportation Command. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5431 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. This report (1) describes guidance the Department of Defense (DOD) has developed for its Joint Exercise Program and DOD’s approach to assess the effectiveness of the program and (2) evaluates the extent to which DOD uses two key information systems—the Joint Training Information Management System (JTIMS) and the Execution Management System–to manage the Joint Exercise Program. DODD 1322.18, Military Training (January 13, 2009) CJCSI 3500.01H, Joint Training Policy for the Armed Forces of the United States (April 25, 2014) CJCSM 3150.25A, Joint Lessons Learned Program (September 12, 2014) CJCSN 3500.01, 2015-2018 Chairman’s Joint Training Guidance (October 30, 2014) CJCSM 3500.03E, Joint Training Manual for the Armed Forces of the United States (April 20, 2015) CJCS Guide 3501, The Joint Training System: A Guide for Senior Leaders (May 5, 2015) CJCSM 3511.01H, Joint Training Resources for the Armed Forces of the United States (May 26, 2015) CJCSI 3150.25F, Joint Lessons Learned Program (June 26, 2015) NORAD and NORTHCOM, Joint Training System (JTS) Handbook (May 1, 2013) NORAD and NORTHCOM Instruction 16-166, Lessons Learned Program and Corrective Action Program (September 19, 2013) NORAD and NORTHCOM, JTPs, (December 10, 2015) PACOM Instruction 0509.1, Joint Lessons Learned and Issue Resolution Program (April 7, 2010) PACOM Instruction 0508.12, Joint Training Enterprise in U.S. Pacific Command (October 15, 2012) SI 508-09, Exercise Program (May 3, 2013) SI 509-01, After Action, Issue Solution/Resolution and Lessons Learned Program, October 14, 2015) SI 508-03, JTIMS Procedures (November 8, 2015) USTRANSCOM Pamphlet 38-1, Organization and Functions (May 1, 2008) USTRANSCOM Instruction 36-13, Training, Education, and Professional Development Program (May 23, 2013) USTRANSCOM Instruction 36-36, Joint Training and Education Program (August 29, 2014) USTRANSCOM Instruction 10-14, Joint Lessons Learned Program (November 9, 2015) We judgmentally selected these combatant commands for our site visits to achieve a mix of geographical and functional commands, as well as the funds that had been apportioned to the combatant commands in fiscal year 2016 from the Combatant Commanders Exercise Engagement and Training Transformation account, size of command, and location. We reviewed DOD’s approach to make performance measures specific, measurable, achievable, realistic, and time-phased (commonly referred to as the SMART rubric) to assess the return on investment for the Joint Exercise Program. In addition, we reviewed performance measures reportedly used to assess the ability of the training audience to accomplish training objectives for exercises, as well as measures used to assess the return on investment for conducting an exercise. We also reviewed performance documentation and information captured in JTIMS, as well as a nongeneralizable sample of commander summary reports or after-action reports from seven combatant command joint exercises to understand the content of these reports. Finally, we interviewed senior officials from the Office of the Assistant Secretary of Defense for Readiness, including the Joint Assessment and Enabling Capability office, the Office of the Chairman of the Joint Chiefs of Staff, as well as officials from the four selected combatant commands. We did not review or evaluate the quality of any assessments that DOD has conducted for its joint exercises. We reviewed the assessments to the extent that it was possible to ensure that an assessment process existed. To evaluate DOD’s use of JTIMS and the Execution Management System to manage the Joint Exercise Program, we reviewed guidance for JTIMS and the Execution Management System. In addition, we observed data associated with a nongeneralizable sample of joint exercises maintained in JTIMS. We also reviewed and analyzed a nongeneralizable sample of cumulative financial data and supporting documentation, if any, entered by combatant command users in the Execution Management System for the Joint Exercise Program during fiscal years 2013-16 to examine the internal controls that were in place. We reviewed a nongeneralizable sample of supporting documentation uploaded into the Execution Management System for fiscal years 2014 through 2016 to make a determination about compliance with guidance issued by DOD for the Execution Management System and the Standards for Internal Control in the Federal Government. Further, we compared individual transactions reported in the supporting documentation with the corresponding cumulative data entered into the system. We also reviewed the FIAR plan— DOD’s strategic plan and management tool for guiding, monitoring, and reporting on the department’s ongoing financial management improvement efforts and for communicating the department’s approach to addressing its financial management weaknesses and achieving financial statement audit readiness— and guidance. Additionally, we spoke with cognizant officials from the four combatant commands we visited, the Office of the Chairman of the Joint Chiefs of Staff, and the Office of the Assistant Secretary of Defense for Readiness about the systems used to execute and manage the Joint Exercise Program. Further, we attended sessions at the 3-day Annual Review for the Combatant Commanders Exercise Engagement and Training Transformation Enterprise on the budget for fiscal years 2018 through 2022. We attended sessions that were most pertinent to this engagement. For example, since the services were not included in the scope of our review, we did not attend their sessions. We conducted site visits to collect testimonial and documentary evidence about DOD’s Joint Exercise Program at the following locations: Cost Assessment and Program Evaluation Office, Arlington, Virginia Force Readiness and Training in the Office of the Assistant Secretary of Defense for Readiness, Arlington, Virginia Joint Assessment and Enabling Capability office, Alexandria, Virginia Joint Staff (J7), Arlington, Virginia Joint Staff (J7) Suffolk, Virginia U.S. Northern Command, Peterson Air Force Base, Colorado U.S. Pacific Command, Camp H. M. Smith, Hawaii U.S. Strategic Command, Offutt Air Force Base, Nebraska U.S. Transportation Command, Scott Air Force Base, Illinois We conducted this performance audit from June 2015 to February 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. Guidance from the Office of the Chairman of the Joint Chiefs of Staff outlines the process that is used by the combatant commands to develop joint training programs, plan and execute joint training, and assess training for the Department of Defense’s (DOD) Joint Exercise Program. This process, referred to in the guidance as the Joint Training System, is characterized as an integrated, requirements-based, four-phased methodology used to align the Joint Training Strategy with assigned missions to produce trained and ready individuals, staff, and units. According to the guidance, the Joint Training System has four phases through which the combatant commands execute the Joint Exercise Program. Phase I—Requirements. During this phase, an ordered listing of tasks is developed describing the armed force’s ability to perform activities or processes that combatant commanders require to execute their assigned missions. This listing is referred to as the Universal Joint Task List and it provides a common language to describe warfighting requirements for combatant commanders. From this list, the most essential mission capability tasks—mission-essential tasks—are identified by the combatant commander. Using the commander’s criteria, mission-essential tasks are prioritized to form the Joint/Agency Mission-Essential Task List. In addition to combatant commanders’ priority, key documents pertinent to U.S. national strategy, such as the Unified Command Plan, Guidance for Employment of the Force, and other joint doctrine, are analyzed to determine the most essential mission capability requirements for the combatant command. The Joint/Agency Mission-Essential Task List provides the foundation for deriving joint training requirements used to develop Joint Training Plans and training and exercise inputs to theater campaign plans. Training requirements are derived from training proficiency assessments, mission training assessments, and lessons learned that result from the Phase IV (Assessment) of the Joint Training System. Phase II—Plans. The plans phase is initiated by conducting an assessment of current capability against the Joint Mission-Essential Task List and relevant lessons learned to identify gaps in training. To address those gaps, the Joint Training Plan is established and identifies who is to be trained; what they will be trained in; what the training objectives are; and when, where, and how the training will occur. Joint Training Plans, along with training and exercise inputs into theater campaign plans, are developed, coordinated, and published in the Joint Training Information Management System (JTIMS) to identify a commander’s training guidance, audiences, objectives, events, and support resources, and to identify the coordination needed to attain the required levels of training proficiency. Phase III—Execution. During this phase, events planned in the Joint Training Plan are conducted and the training audience’s performance objectives are observed and evaluated. Joint training events are developed and executed using the five-stage Joint Event Life Cycle methodology captured and reviewed in JTIMS. Task Performance Observations—which identify whether the training audience achieved the stated level of performance to the standards specified in the training objectives—and the Training Proficiency Evaluations for each training objective associated with the training event are also captured in JTIMS. Further, facilitated after-action reports are developed to highlight potential issues or best practices to support the assessments in Phase IV (Assessment). Validated observations from the training event are exported into JTIMS. Phase IV—Assessment. During this phase, leadership within the combatant command determines which organizations within the command are able to perform at the level required to meet the task standards and which missions the command is trained to accomplish. Assessments are a commander’s responsibility. To complete Task Performance Assessments for each task, commanders consider Task Performance Evaluations, lesson learned, and personal observations of the joint training exercise. An assessment ranking of trained, partially trained, or untrained is assigned to each task listed under a training objective. JTIMS supports the assessment of joint training by automating the ability of joint organizations to produce Task Performance Assessments. The Task Performance Assessments are analyzed to create the mission training assessment that is provided to a combatant commander on a monthly basis. The mission training assessment is on how well the command can execute its assigned missions. These training assessments provide input into the next training cycle. Lessons learned, after-action reports, and issues requiring resolution outside of the command are identified during this phase. Combatant command officials we visited stated that, in accordance with guidance from the Chairman of the Joint Chiefs of Staff, they used the Joint Training System as the process for conducting training assessments of individual joint exercises to determine each command’s overall readiness to perform command missions. These assessments occur during Phases III (Execution) and IV (Assessment) of the Joint Training System. During Phase III, for example, command trainers collect task performance observations for each training objective identified in the Joint Training Information Management System (JTIMS). These task performance observations identify whether the individuals and units participating in the training exercise achieved the level of performance stated in standards specified in the training objectives. Training proficiency evaluations are conducted for each training objective associated with the exercise. During Phase IV, combatant commanders consider the proficiency evaluations, as well as after-action and commander summary reports, to determine a combatant command’s ability to perform assigned missions at the minimum acceptable level under a specified set of conditions. According to an official from the Joint Assessment and Enabling Capability office, a subordinate office to the Office of the Assistant Secretary of Defense for Readiness that provides strategic- level assessments of joint training and joint training enablers throughout the Department of Defense (DOD), including to combatant commands, performance measures that are specific, measurable, achievable, realistic, and time-phased (commonly referred to as the SMART rubric) are used to assess the Joint Exercise Program. DOD officials stated that developing performance measures for joint exercises has not been an easy task and that they are constantly working to improve their performance measures. Specifically, in an effort to develop, improve, and provide quality assurance for specific performance measures, the Joint Assessment and Enabling Capability office works with the combatant commands to ensure that they are using the right measures to evaluate the training audience’s ability to perform tasks to specific standards. In addition, the Joint Assessment and Enabling Capability office hosts monthly meetings with combatant command stakeholders to discuss assessment topics, including performance measures. Additionally, the Joint Assessment and Enabling Capability office hosts at least one working group meeting at the annual worldwide joint training conference to conduct face-to-face discussions and reviews of assessment-related tasks for joint training. According to an annual report from the Joint Staff Director for Joint Force Development, the Joint Assessment and Enabling Capability office is available to assist combatant command stakeholders with assessment-related tasks for the Joint Exercise Program, as requested. Guy A. LoFaro, Assistant Director; Patricia Donahue; Pamela Nicole Harris; Amie Lesser; Sabrina Streagle; Sonja S. Ware; and Cheryl A. Weissman made key contributions to this report. Civil Support: DOD Needs to Clarify Its Roles and Responsibilities for Defense Support of Civil Authorities during Cyber Incidents. GAO-16-332. Washington, D.C: April, 4, 2016. Military Base Realignments and Closures: More Guidance and Information Needed to Take Advantage of Opportunities to Consolidate Training. GAO-16-45. Washington, D.C.: February 18, 2016. Operational Contract Support: Actions Needed to Enhance the Collection, Integration, and Sharing of Lessons Learned. GAO-15-243. Washington, D.C.: March 16, 2015. Defense Headquarters: DOD Needs to Reevaluate Its Approach for Managing Resources Devoted to the Functional Combatant Commands. GAO-14-439. Washington, D.C.: June 26, 2014. Defense Headquarters: DOD Needs to Periodically Review and Improve Visibility of Combatant Commands’ Resources. GAO-13-293. Washington, D.C.: May 15, 2013. Defense Management: Perspectives on the Involvement of the Combatant Commands in the Development of Joint Requirements. GAO-11-527R. Washington, D.C.: May 20, 2011. Homeland Defense: U.S. Northern Command Has a Strong Exercise Program, but Involvement of Interagency Partners and States Can Be Improved. GAO-09-849. Washington, D.C.: September 9, 2009. National Preparedness: FEMA Has Made Progress, but Needs to Complete and Integrate Planning, Exercise, and Assessment Efforts. GAO-09-369. Washington, D.C.: April 30, 2009. Homeland Defense: Steps Have Been Taken to Improve U.S. Northern Command’s Coordination with States and the National Guard Bureau, but Gaps Remain. GAO-08-252. Washington, D.C.: April 16, 2008. Homeland Defense: U.S. Northern Command Has Made Progress but Needs to Address Force Allocation, Readiness Tracking Gaps, and Other Issues. GAO-08-251. Washington, D.C.: April 16, 2008. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. GAO-07-835T. Washington, D.C.: May 15, 2007. Military Training: Management Actions Needed to Enhance DOD’s Investment in the Joint National Training Capability. GAO-06-802: Washington, D.C.: August 11, 2006. Military Training: Actions Needed to Enhance DOD’s Program to Transform Joint Training. GAO-05-548: Washington, D.C.: June 21, 2005. | The Joint Exercise Program is the principal means for combatant commanders to maintain trained and ready forces, exercise contingency and theater security cooperation plans, and conduct joint and multinational training exercises. These exercises are primarily aimed at developing the skills needed by U.S. forces to operate in a joint environment and can also help build partner-nation capacity and strengthen alliances. House Report 114-102 included a provision for GAO to review DOD's Joint Exercise Program. This report (1) describes guidance DOD has developed for its Joint Exercise Program and DOD's approach to assess the effectiveness of the program and (2) evaluates the extent to which DOD uses two information technology systems to manage the program. GAO observed data in JTIMS and analyzed fiscal years 2014-16 financial data and supporting documentation in the Execution Management System. The Department of Defense (DOD) has developed a body of guidance for the Joint Exercise Program and has implemented an approach to assess the effectiveness of the program. In addition to the body of guidance for the program, DOD is working to update a key guidance document for military training in accordance with a congressional requirement. DOD's approach to assess the effectiveness of the Joint Exercise Program is aimed at ensuring that its performance measures are specific, measurable, achievable, realistic, and time-phased (commonly referred to as the SMART rubric). The Joint Assessment and Enabling Capability office reviews the performance measures created by the combatant commands against this rubric and provides input and coaching on improving the measures through an ongoing and collaborative process. DOD uses two key information technology systems—the Joint Training Information Management System (JTIMS) and the Execution Management System—to manage the execution of the Joint Exercise Program, but does not have assurance that funding execution data in the Execution Management System are reliable. JTIMS is the system of record for the Joint Exercise Program that combatant commanders use to plan and manage their joint training exercises. GAO observed significant variation in the type and quality of information entered in JTIMS. Combatant command and Joint Staff officials stated that information in JTIMS lacked consistency in the level of detail provided, sometimes making it difficult to coordinate training with other combatant commands or extract pertinent information about exercises from the system that would be helpful in planning other exercises. Consequently, to help improve the consistency and standardization of information across combatant commands, the Joint Staff published a user guide for JTIMS. Regarding the Execution Management System, a web-based database DOD uses to track the most recent funding execution data for the Joint Exercise Program, GAO found that DOD does not have assurance that the system produces quality information because supporting documentation is not consistently uploaded into the system and, when it is uploaded, it is not reconcilable to the data entered there. Only U.S. Strategic Command and U.S. Northern Command uploaded supporting documentation for fiscal years 2013-16 as required by the Execution Management System guidance. Reviewing a nongeneralizable sample of uploaded supporting documentation for fiscal years 2014-16, GAO found that the sum of the individual expenditures reported in supporting documentation did not match corresponding total expenditures entered in the system for any of the four combatant commands included in GAO's review. Further, the four combatant commands GAO visited, the Office of the Chairman of the Joint Chiefs of Staff, and the Office of the Assistant Secretary of Defense for Readiness had not implemented effective internal controls similar to those identified in the Standards for Internal Control in the Federal Government to ensure the completeness and accuracy of financial information captured for the Joint Exercise Program. Without such internal controls, DOD and other key decision makers may not have the financial information of sufficient quality to defend the Joint Exercise Program's budget. GAO recommends that DOD comply with current guidance to upload supporting documentation in the Execution Management System and implement effective internal controls to ensure the completeness and accuracy of financial information. DOD partially concurred with both recommendations, noting existing controls in other related systems of record. GAO believes the recommendations remain valid, as discussed in this report. |
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Medicare claims can be denied on a prepayment basis (i.e., before the claim is paid) or on a postpayment basis (i.e., after the claim is paid and the payment is identified as improper). Many appeals originate from claims denied on a prepayment basis, but the same appeal rights exist for either scenario. To conduct a prepayment claim review, CMS contractors conduct several checks to determine whether a claim received from a provider should be paid. These checks include verifying that the provider is enrolled in Medicare, the beneficiary is eligible to receive Medicare benefits, and the service is covered by Medicare. In limited cases, before paying a claim, contractors review the supporting medical documentation for a claim to ensure the service was medically necessary. As a result of these checks or reviews, CMS’s contractors may deny Medicare payment for the claim. Most prepayment reviews are conducted by MACs, which are responsible for processing and paying FFS claims within 16 geographic jurisdictions. To conduct a postpayment review, contractors generally select claims from among those that have already been processed and paid, request and review documentation from providers to support Medicare coverage of the services identified in those claims, and apply Medicare coverage and coding requirements to determine if the claims were paid properly, reviewing, for example, whether the service was medically necessary or provided in the appropriate setting. The majority of the postpayment reviews are conducted by RAs. The Medicare administrative appeals process allows appellants who are dissatisfied with decisions at one level to appeal to the next level. The entities tasked with resolving appeals are referred to as appeals bodies. The statutory time frames for submitting and issuing appeal decisions can vary by level. (See table 1.) When an appeals body cannot render a decision within the applicable statutory time frame at levels 2 through 4, the appellant has the opportunity to escalate the appeal to the next level of appeal. CMS may also refer certain decisions made at Level 3 to Level 4. Each level of appeal follows similar steps. First, the appellant files an appeal and submits supporting documentation. The appeals body then assigns the appeal to an adjudicator who reviews the appeal, including the relevant Medicare policies and documentation. Adjudicators at all four levels generally conduct what are known as de novo reviews, meaning they conduct an independent evaluation of the claim(s) at issue and are not bound by the prior findings and decisions made by other adjudicators. Next, the appeals body issues the appeal decision and notifies the appellant. If the appellant files an appeal at the next appeal level, the documentation associated with the prior appeal is sent to the next appeal level. Appeals must meet certain requirements in order to be reviewed. For example, the appeal must be filed by an appropriate party, such as by the provider who furnished the service to the beneficiary and submitted a claim to Medicare for that service. In addition, the appeal must be filed within the required time frame. To be reviewed at Level 3, an appeal must meet or exceed a minimum dollar amount, known as the amount in controversy. Under certain circumstances, appellants may combine claims to meet the amount in controversy requirement, which is $150 in calendar year 2016. Some differences exist in the criteria appeals bodies use to make their decisions. While all levels are bound by statutes, regulations, national coverage determinations, and CMS rulings, only Level 1 is subject to local coverage determinations (LCD) and CMS program guidance, such as program memoranda and manual instructions. In comparison, Levels 2 through 4 are required to give substantial deference to LCDs and other CMS program guidance if they are applicable to a particular appeal. However, unlike Level 1, Levels 2 through 4 may exercise discretion to decline to follow LCDs and CMS program guidance when issuing an appeal decision, and must explain in the decision the basis for doing so. Levels 1 and 2 can also accept and consider new evidence submitted by appellants to support their appeals. For example, to pay claims related to certain durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS), CMS requires providers to submit a certificate of medical necessity. If this document was not submitted with the original claim, the provider may submit it as part of the appeal. At Levels 3 and 4, new evidence can generally be accepted only with “good cause.” Unlike Levels 1, 2, and 4, which decide appeals generally by reviewing the documentation upon which the initial denial was based as well as any supporting documentation the appellant submitted with the appeal, Level 3 Administrative Law Judges (ALJ) conduct hearings during which appellants are permitted to explain their positions, present evidence, and submit into the record a written statement of the facts and law material to the issue. All four appeals bodies may issue appeal decisions that do not address the merits of the case: Dismiss: The appellant withdraws the request for an appeal or the appeals body determines that the appellant or appeal did not meet certain procedural requirements; for example, the appellant did not file the request within the required time frame. Remand: An action that can be taken at Level 2, 3, or 4 which vacates a lower level appeal decision, or a portion of the decision, and returns the case, or a portion of the case, to that level for a new decision. Appeal decisions for Levels 1 through 3 include the following categories for decisions issued on the merits based upon a consideration of the facts of the appeal: Fully reverse: The appeals body fully reverses a prior decision denying coverage and all of the claim(s) in dispute are paid. Partially reverse: The appeals body partially reverses a prior decision denying coverage, and those parts of the claim(s) in dispute are paid. Not reverse: The appeals body upholds a prior decision denying coverage, and payment of the claim(s) in dispute is denied. Level 4 uses different categories for decisions issued on the merits. In addition to dismissing or remanding a Level 3 decision, Level 4 appeal decisions can affirm, reverse, or modify a Level 3 decision. Additional information about Level 4 appeal categories is discussed in appendix I. To help manage the Medicare appeals process and track appeal decisions, the appeals bodies use various data systems. (See table 2.) In 2005, CMS implemented MAS, which at the time was intended to support Levels 1 through 4. However, currently, three data systems are used to collect appeals data across the four levels of the Medicare appeals process. The total number of Medicare appeals filed and the number of appeal decisions that were issued after statutory time frames at Levels 1 through 4 increased from fiscal years 2010 through 2014, with the largest rate of increase at Level 3. Reversal rates also decreased during this time for most levels of appeals. Between fiscal years 2010 and 2014, the number of filed appeals at all levels of Medicare’s appeals process increased significantly, with the rate of increase varying across levels. For example, during this period, the number of Level 1 appeals, which represented the vast majority of all appeals, increased from 2.6 million to 4.2 million—an increase of 62 percent—which was the slowest rate of increase among the four levels. While Level 3 handled fewer appeals overall, it experienced the largest rate of increase in appeals from 41,733 to 432,534 appeals—936 percent—during this period. (See table 3.) For most levels, the largest annual growth over the 5-year period occurred between fiscal years 2012 and 2013, and between fiscal years 2013 and 2014 the rate of growth slowed at all levels. For all appeal levels, appeals of claim denials for Medicare Part A (Part A) services showed the most dramatic increase. Among the four levels, Level 3 experienced both the largest increase in appeals overall, as well as the largest increase in Part A appeals, which increased over 2,000 percent between fiscal years 2010 and 2014. (See fig. 1.) Appeals of denied DMEPOS claims also grew substantially during this time at all levels. For example, DMEPOS-related appeals increased the most at Level 3 at over 1,000 percent. HHS attributed the increases in appeals overall to several factors. For example, HHS fiscal year 2016 budget justification materials noted that CMS’s increased focus in recent years on expanding new program integrity activities to ensure proper payment has resulted in more denied claims and, therefore, more appeals. Specifically, appeals resulting from RA claim denials began entering the appeals process in fiscal year 2011 after Congress enacted legislation that expanded the RA program from a demonstration operating in six states to a permanent national program, which CMS implemented in fiscal year 2009. In expanding nationally, the RA program added a new set of contractors with the specific purpose of reviewing postpayment claims to identify improper payments. In addition to the large volume of postpayment reviews conducted by the RAs, there was also an increase in overall claim denials from fiscal years 2011 to 2014, according to HHS’s June 2015 Process Improvement and Backlog Reduction Plan. The number of overall claim denials during this time period for Part A and B claims increased 12.5 and about 9 percent, respectively. For all levels, we found that appeals related to RA denials were a larger contributor to the increase in Part A appeals compared to Part A appeals not related to RAs. For example, at Level 3, RA-related appeals of Part A services grew from 1 percent (140 appeals) of filed Part A appeals in fiscal year 2010 to 78 percent (216,271 appeals) in fiscal year 2014. HHS also attributed the increase in appeals to a greater propensity among providers to appeal denied claims. From fiscal year 2010 to fiscal year 2014, the proportion of appeals filed by providers increased at Levels 2 through 4. The proportion of appeals filed by state Medicaid agencies also increased at Levels 2 and 4, while the proportion of appeals filed by beneficiaries at Levels 2 through 4 declined. According to HHS agency officials, a small number of providers and state Medicaid agencies were responsible for a large share of the appeals. For example, at Level 2, CMS noted that three DMEPOS suppliers filed 12 percent of DMEPOS appeals in calendar year 2012 and 33 percent of Level 2 DMEPOS appeals in calendar year 2014. Similarly, at Level 3, OMHA reported that four DMEPOS providers and one state Medicaid agency filed 51 percent of appeals in the first quarter of fiscal year 2015. In addition, the number of appeals filed by state Medicaid agencies more than doubled at Levels 2 through 4 from fiscal year 2010 to fiscal year 2014. At Level 3, state Medicaid agency appeals increased from 2,617 to 25,195 during that time period. According to HHS’s Process Improvement and Backlog Reduction Plan, appeals filed by state Medicaid agencies that relate to home health care services provided to beneficiaries eligible for both Medicare and Medicaid services have contributed to the growth in Level 3 appeals, and CMS officials told us that four state Medicaid agencies (Connecticut, Massachusetts, New York, and Vermont) generated the majority of these appeals. (For more information on appeals by appellant type, see app. II.) The number of appeal decisions that were issued after statutory time frames generally increased from fiscal years 2010 through 2014. Among the four appeal levels, Levels 1 and 2 had a smaller proportion of decisions exceeding statutory time frames over the period. For example, CMS data show that in fiscal years 2010 and 2011, MACs generally issued less than 10 percent of their Level 1 appeal decisions after the statutory time frame (see table 4). In fiscal year 2012, MACs issued a greater percentage of decisions after statutory time frames and, notably, CMS data show that in the fourth quarter of that year, MACs issued about 68.5 percent of their appeal decisions related to DMEPOS claims after the statutory time frame. CMS officials told us that the delays resulted from two factors: two MACs received a high volume of appeals filed by seven suppliers and one of those MACs also experienced challenges implementing a new tool used to generate correspondence with appellants. In fiscal year 2014, MACs again issued less than 10 percent of Part A and DMEPOS appeals after statutory time frames, though nearly 21 percent of Medicare Part B (Part B) appeal decisions were issued after statutory time frames in one quarter. Like the MACs, the Qualified Independent Contractors (QIC) also generally had a relatively small proportion of Level 2 decisions exceeding the statutory time frame during this time. CMS data show that the QICs began issuing appeal decisions after the statutory time frame in fiscal year 2011, and the percentage of such appeal decisions increased to 44 percent (345,049 appeals) in fiscal year 2013. However, in fiscal 2014, the QICs issued less than 5 percent of their appeal decisions after the statutory time frame. In contrast, the increase in appeal decisions issued after statutory time frames and the proportion of those appeal decisions were greater at Levels 3 and 4. For example, OMHA data show that in fiscal year 2014, ALJs issued 96 percent of their Level 3 appeal decisions after the statutory time frame. Similarly, Departmental Appeals Board (DAB) data show that in fiscal year 2014 the Council issued 91 percent of its Level 4 appeal decisions after the statutory time frame. (See fig. 2.) In fiscal year 2014, Levels 3 and 4 issued decisions within the statutory time frames for a greater percentage of beneficiary-filed appeals than appeals filed by providers or state Medicaid agencies. Recognizing that delays in issuing appeal decisions affects this population most acutely, both levels have instituted processes to move beneficiary appeals to the front of their queues. Between the two appeals bodies, Level 3 ALJs took longer to issue decisions. In fiscal year 2014, ALJs issued 93 percent of their Level 3 appeal decisions in 180 days or more—the statutory time frame is generally 90 days—while the Council issued 67 percent of Level 4 appeal decisions in 180 days or more. According to HHS’s Process Improvement and Backlog Reduction Plan, the increase in late appeal decisions for Levels 3 and 4 from fiscal year 2010 through 2014 resulted from the increase in the number of appeals filed, as well as the relatively flat budgets of OMHA and the Council, which have prevented the hiring of sufficient staff to address the growing workload. For example, as previously noted, the number of filed appeals at Level 3 increased over 900 percent from fiscal year 2010 to fiscal year 2014, while OMHA’s budget during the same period increased from about $71 million to about $82 million (16 percent). (See table 5.) In addition, HHS noted that neither HHS agency receives funds from recoveries made by the RA program, although they review appeals of claims denied by RAs. The increase in the number of decisions made after statutory time frames at Levels 3 and 4 also increases the amount of interest paid by CMS to providers whose postpayment claim denials are reversed upon appeal, thus increasing Medicare’s costs. Currently, CMS is prohibited by statute from collecting overpayments from providers who file appeals until after a Level 2 decision is made. CMS is also required to pay providers interest on the overpayments it initially collects after the Level 2 decision is made and then returns when the appellant wins appeals at Level 3 or higher. In 2014, the annual interest rate paid by CMS to these providers ranged from 9.625 percent to 10.375 percent. As a result, CMS interest payments have increased. Specifically, CMS officials estimate that from fiscal years 2010 through 2015, the agency paid $17.8 million in interest payments to Part A and B providers that it would not have paid had Level 3 issued appeal decisions within statutory time frames. Moreover, CMS estimates that the agency paid about 75 percent of this interest ($13 million) in fiscal years 2014 and 2015, when delays in issuing decisions have been the longest. From fiscal years 2010 through 2014, fully favorable reversal rates decreased for Levels 1 through 3, but varied across levels, with appeals reaching Level 3 the most likely to be reversed. (See fig. 3.) For example, in fiscal year 2014, ALJs fully reversed the prior decision in 54 percent of Level 3 appeal decisions issued on the merits. In contrast, Level 1 and Level 2 adjudicators fully reversed prior decisions in 36 and 19 percent, respectively, of appeal decisions issued on the merits in fiscal year 2014. At different times, HHS has attributed the relatively high reversal rates at Level 3, in part, to the opportunity for hearings and presentation of new evidence at Level 3, and ALJs’ exercise of discretion in declining to follow LCDs and CMS program guidance. More specifically, HHS has noted the following: ALJs conduct hearings, which provide an opportunity for appellants to explain the rationale for the medical treatment. ALJs may consider new evidence admitted for good cause—for example, documentation required for the claim to be approved that the appellant did not submit for consideration at Levels 1 or 2. While neither CMS nor OMHA collect data in MAS that would allow us to substantiate to what extent ALJs declining to follow LCDs or CMS program guidance contribute to Level 3 reversals, HHS noted in its Process Improvement and Backlog Reduction Plan that this is a factor, and a 2012 HHS Office of Inspector General (OIG) report reached similar conclusions. Furthermore, OMHA’s most recent quality assurance evaluation, completed in 2013, identified compliance with and understanding of the role of LCDs and other program guidance as a key issue for improvement. According to HHS’s Process Improvement and Backlog Reduction Plan, the qualified decisional independence afforded ALJs may result in a more favorable result for appellants at Level 3. Furthermore, as anticipated by the federal law governing administrative procedures, qualified decisional independence leaves substantial room for subjectivity in ALJs’ application of policy to the facts of a given case, and consequently, two reasonable reviewers can review the same facts and come to two legally defensible conclusions. Similarly, OMHA’s 2013 quality assurance evaluation found that of 60 reviewed cases that were decided after a hearing that involved an LCD or other CMS program guidance, in 30 cases the policy was applied differently than how it was applied at the lower level. While reversal rates declined across Levels 1 through 3 from fiscal years 2010 through 2014, reversal rates varied by type of service, with Part B appeals having the highest reversal rates. (See fig. 4.) In addition, fully favorable reversal rates at Levels 1 and 3 during this time generally varied depending upon whether the appeal was RA-related. At Level 1, RA-related appeals often had lower fully favorable reversal rates than did non-RA appeals, though differences exist when rates are compared by type of service. In contrast, RA-related appeals at Level 3 generally had higher fully favorable reversal rates than did non-RA appeals, both overall and for each of Part A and Part B services. (For more information on reversal rates for Levels 1 through 3, see app. III.) Our analysis of Level 4 appeals data shows that from fiscal years 2010 through 2014, the Council affirmed the Level 3 decision in about two- thirds of appeals, and reversed, dismissed, or remanded the remaining one-third of the decisions. Level 4 decisions on appeals filed by providers, beneficiaries, and state Medicaid agencies were more likely to affirm ALJ decisions compared to decisions on appeals referred by CMS, meaning that the Council’s decisions were more likely to uphold lower level decisions to deny Medicare payment for those claims. Specifically, Level 4 decisions affirmed the Level 3 decision in 73 percent of appeals filed by appellants and in only 15 percent of appeals filed by CMS. (For more information on reversal rates for Level 4, see app. III.) HHS agencies use appeals data to monitor the Medicare appeals process, but do not collect information on the reasons for Level 3 appeal decisions or the amounts of allowed Medicare payments in dispute. Further, we identified several instances of inconsistent data across the three data systems used by HHS to monitor appeals. HHS agencies use data collected in CROWD, MAS, and MODACTS to monitor the Medicare appeals process for Levels 1 through 4. These data systems collect information such as the date when the appeal was filed, the type of service or claim appealed, and the length of time taken to issue appeal decisions. Among other things, HHS agencies use these data to identify emerging trends, such as increases in appeals among certain service categories and changes in reversal rates; determine the extent to which the agencies or their contractors decide appeals within the statutory time frames; and help HHS estimate resource needs. For example, CMS officials told us that using data collected in MAS the agency observed that the largest increases in filed DMEPOS appeals were related to oxygen supplies and diabetic glucose testing supplies. As a result, the agency developed a strategy to help reduce the growth in these types of appeals. CMS and OMHA are also in the process of making changes to these appeals data systems, and according to agency officials, these changes will improve their monitoring activities. Specifically, CMS plans to transition the collection of all Level 1 appeals data from CROWD into MAS, a process that CMS officials expect could take a minimum of 27 months and is dependent on the receipt of additional funding. CROWD currently collects the majority of Level 1 appeals data, which has less specificity than MAS. For example, CROWD collects only aggregate monthly totals of the number of appeals filed, which does not, for example, enable the tracking of individual Level 1 appeal decisions. Additionally, OMHA is developing the Electronic Case Adjudication and Processing Environment (ECAPE) to help the agency transition from a paper-based business process to a fully electronic one, enabling OMHA officials to automate many aspects of the agency’s appeals processes, such as generating appellant correspondence. ECAPE will exchange Level 3 data with MAS and MAS will continue to be the data system of record for Level 3 decisions in order to enable the sharing of common appeals data across the first three levels. According to OMHA officials, the new system will also provide the agency with additional data with which to monitor appeals at Level 3. For example, officials told us that ECAPE will allow the tracking of the time it takes to conduct discrete processes in Level 3, such as the time between when an ALJ provides written instructions to an attorney to when an attorney completes the decision letter draft. Additionally, OMHA officials told us that the data from ECAPE will also provide the agency with additional functionalities not present in MAS that could improve the efficiency with which Level 3 appeals are decided, such as the ability to allow appellants to view on a website the documentation included in their appeal file. Officials expect such a website could reduce the amount of redundant documentation from prior appeal levels submitted by appellants that must be reviewed by OMHA staff. However, MAS does not collect other information contained in ALJs’ appeal decisions issued at Level 3, which is one data source CMS uses to monitor Level 3 appeal decisions. Level 3 decision letters generally document the facts of the case and the rationale for an appeal decision, but MAS does not collect detailed information related to the reasons for the appeal decisions that could be useful to HHS. For example, MAS does not contain information on whether LCDs or other CMS program guidance were among the issues disputed as part of the appeal, whether the ALJ declined to follow such guidance in issuing the decision, whether the ALJ admitted new evidence, or whether other factors contributed to the Level 3 decision. While some information on the reasons for Level 3 denials is collected by a CMS contractor, this information is not maintained in MAS. Of the three Medicare appeals systems, only MAS collects information on the amount at stake in an appeal. In MAS, the amount is tied to the amount billed by the provider, but this amount can vary substantially from the Medicare allowed amount. According to HHS officials, CMS and OMHA data analyses suggest that, on average, billed amounts are about three times higher than the Medicare allowed amounts, but for some types of service, such as DMEPOS, the billed amount can be as much as eight times higher than the Medicare allowed amount. The Medicare allowed amount is a better approximation of what Medicare will actually pay if the item or service at issue in the appeal was covered. For example, according to CMS data, we found that inpatient hospitals in the United States billed Medicare an average of $6.3 billion for the top 100 diagnoses and procedures in fiscal year 2013, but the Medicare allowed amount for these services averaged $1.4 billion. CMS officials told us that MAS does not track the Medicare allowed amount for prepayment claim denials because the MACs do not compute this amount for those claims. CMS officials also indicated that tracking allowed amounts for all appealed claims at Levels 1 and 2 would be extremely resource intensive and the benefits would be minimal. However, several MACs told us that they compute an estimate of the Medicare allowed amount to determine the Medicare savings associated with their prepayment medical reviews. Additionally, CMS officials told us that MAS currently collects the data that would be used to calculate the Medicare allowed amount, such as procedure codes. The collection of these types of data, specifically reasons for ALJ decisions and the Medicare allowed amount associated with an appeal, could help HHS agencies strengthen their existing monitoring and data collection activities. This would be consistent with the federal standards for internal control that require agencies to conduct ongoing monitoring to assess the quality of performance over time to ensure operational effectiveness, and to run and control agency operations using relevant, reliable, and timely information. If HHS agencies collected information on the key characteristics that contributed to the Level 3 appeal decision in the appeals data systems, they would have information that could help identify appeal trends, which could help identify payment or claim review policies in need of clarification or additional guidance for appeals bodies or appellants. Similarly, by not collecting the Medicare allowed amount for all pending appeals, HHS agencies are lacking information that could be useful in three ways. OMHA officials told us that the agency would like to base the amount in controversy on the Medicare allowed amount, as they believe that doing so could help reduce the number of Level 3 appeals filed in two ways. First, by using the Medicare allowed amount, some appeals might fall below the amount in controversy, and, therefore, would not be appealed. Second, appellants could choose to aggregate appeals that individually fall below the amount in controversy, which could also reduce the number of appeals filed. Currently, per regulation, the amount in controversy is computed using the provider billed amount. HHS agencies could use the Medicare allowed amount to calculate reversal rates based upon the potential Medicare dollars payable. Currently, HHS agencies calculate reversal rates based upon the number of appeals or appealed claims. Such a methodology does not account for differences in the dollar value of those appeals. Monthly reports from 2014 prepared for CMS on the Medicare appeals process state that the Level 3 reversal rate is higher when it is calculated based upon the amount in controversy, which according to monthly reports indicates that higher value claims are more likely to be reversed on appeal. Without the Medicare allowed amount or an approximation of it, HHS agencies do not know the amount of money at issue in the Medicare appeals process. Our review found data inconsistencies across the three appeals data systems and within the appeal levels that use MAS, such as variation in how appeal decisions are recorded at the claim level and how HHS agencies track appeal decisions. These data inconsistencies limit HHS agencies’ ability to monitor emerging trends in appeals using consistent and reliable data. Federal standards for internal control call for agencies to establish and control operations using reliable information. First, our review found variation in how appeal decisions at the claim level are recorded across CROWD, MAS, and MODACTS. Specifically, MAS has the capability to track appeal decisions by each claim, as well as by each line item in a claim, while CROWD and MODACTS do not. A claim for Medicare payment may identify a single procedure or item, or multiple procedures or items. For example, a claim for a continuous positive airway pressure device, a DMEPOS item, can have multiple line items that represent the device, tubes, filters, and mask included on the claim. Payment for some or all of these line items can be denied and then appealed. We also found variation within MAS in how the Level 1 through 3 appeals bodies record appeal decision data at the claim level. The Level 1 and 2 adjudicators that report appeals data in MAS record an appeal decision for each line item within a claim. MAS then derives a claim-level decision, that reflects the totality of decisions made for each of the claim lines included in the appeal. Using the claim-level decision, CMS can calculate a claim-level reversal rate. For example, the fully favorable reversal rate at the claim-level for an appeal composed of 10 claims, where 4 are fully reversed, would be 40 percent. In contrast, OMHA officials told us that ALJ teams vary in how they record claim-level decisions in MAS. Specifically, OMHA officials told us that while some ALJ teams record the actual decision for every claim included in the appeal, others record the decision for the appeal overall as the decision for each claim in the appeal. In such a circumstance, a comparable claim- level reversal rate cannot be calculated using the hypothetical example of the 10-claim appeal referenced above because all claims would be coded as partially reversed even though 4 claims were reversed and 6 claims were not reversed. Additionally, claim-level reversal rates cannot be compared across Levels 2 and 3. These differences in how data are entered into MAS limit HHS’s ability to compare claim-level reversal rates consistently across all appeal levels. Secondly, we found inconsistencies in how appeals are tracked by appeal level in the three data systems. Specifically, the three data systems use different categories to track the type of Medicare service at issue in the appeal, such as whether the appeal relates primarily to an inpatient hospital claim or a transportation claim. For example, Levels 1 and 3 cannot identify appeals submitted by hospice providers because these appeals at Level 1 are categorized as “other” and at Level 3 they are combined with home health appeals, even though hospice is tracked as its own category at Levels 2 and 4. Some efforts are being made to track appeals across appeal levels more consistently at Levels 2 and 3 in MAS. For example, according to an OMHA official, the agency plans to begin using the same appeal categories to track appeals at Level 3 that are used at Level 2, but has not determined when it will implement this planned change. There are also differences in how each appeal level assigns the appeal category to each appeal. For example, for Level 2 appeals, MAS assigns the appeal category using an algorithm based principally upon the type of claim filed. In contrast, Level 4 staff manually assign and enter the Level 4 appeal category in MODACTS, generally based upon information provided by the appellant in filing the appeal or from the Level 3 decision, according to Council officials. Such differences in how appeal categories are assigned can contribute to differences in how appeals are classified across appeal levels. Finally, another inconsistency we identified across the appeals data systems is the tracking of whether appeals are related to claims reviewed by the different Medicare review contractors. This is information that CMS can use to monitor the performance of its medical review contractors by tracking their appeal reversal rates. Although CROWD, MAS, and MODACTS track whether an appeal is RA-related, there are inconsistencies in whether appeals related to other medical review contractors are tracked in these systems. For example, only MAS tracks appeals related to the contractor that investigates fraud, and none of the three systems track whether the appeal was related to an improper payment identified by a MAC or by another of CMS’s review contractors, the Supplemental Medical Review Contractor. CMS and OMHA officials told us that they agree that greater data consistency across the Medicare appeals data systems and among the appeal levels using MAS would be beneficial for monitoring purposes. CMS officials told us that the agency awarded a contract in September 2015 to evaluate Levels 1 through 4 of the Medicare appeals process and that the evaluation, which is due in spring 2016, could also identify ways in which the appeals data could be improved. The specific objectives of this evaluation are to identify any changes that could streamline the Medicare appeals process, reduce the backlog of appeals, and reduce the number of filed appeals or the number of appeals reaching Levels 3 and 4. CMS officials told us they also expect the evaluation to identify additional appeals data that should be collected to improve the appeals process; however, this activity was not identified as an objective in the evaluation’s statement of work, and therefore, we do not know to what extent the evaluation will focus on the data in the appeals systems. While conducting such an evaluation is a good first step and may allow HHS to make improvements to the data systems that collect appeal information, it is unclear what findings the evaluator will recommend related to data consistency as this topic appears to be a small component of the overall evaluation. HHS agencies have taken several actions to reduce the total number of Medicare appeals filed and the current appeals backlog. However, the Medicare appeals backlog is likely to persist despite actions taken to date, and HHS efforts thus far do not address inefficiencies with the way certain repetitive claims are adjudicated. In order to provide more timely adjudication of appeals of Medicare claim denials, HHS agencies have taken various actions, which can be grouped into three categories: 1. changes to Medicare prepayment and postpayment claims reviews, which may reduce claim denials and, therefore, the number of filed appeals; 2. actions aimed at reducing the number of decisions at lower appeal levels that lead to appeals at Levels 3 and 4; and 3. actions aimed at resolving the current backlog of undecided appeals at Levels 3 and 4. CMS has made some changes to Medicare prepayment claims reviews, which may reduce the number of claim denials, and as a result, the number of filed appeals. For example, due to concerns about improper payments for certain services, CMS has established four prior authorization models in which providers submit documentation to support a claim for Medicare payment before rendering services, instead of submitting that documentation after the service was provided at the time the claim is submitted for payment. According to CMS officials, this practice allows providers to work with MACs to address potential issues with claims before the services are performed. Since 2012, CMS has implemented three demonstrations that require providers in certain states to obtain prior authorization for power wheelchairs and scooters, repetitive scheduled non-emergent ambulance transports, and non- emergent hyperbaric oxygen therapy. In addition, CMS established a prior authorization process for certain other DMEPOS items on February 29, 2016. In February 2016, a CMS official said that a recent decline in the number of Level 1 and 2 appeals of denied DMEPOS claims is due, in part, to the power mobility devices and non-emergent hyperbaric oxygen therapy prior authorization demonstrations. CMS also made changes to the inpatient hospital coverage policy and the RA program, which have reduced the number of Part A filed appeals at Levels 1 and 2. For example, on October 1, 2013, CMS implemented a rule intended to clarify the circumstances under which Medicare would cover short stays in inpatient hospitals in an effort to help reduce the number of providers billing inappropriately for inpatient care instead of outpatient services. As a result of these new coverage policies, CMS prohibited the RAs from conducting reviews of short-stay inpatient hospital claims with dates of admission after October 1, 2013. After several extensions imposed by CMS and Congress, the prohibition ended in January 2016, at which time CMS allowed the RAs to conduct a limited number of short-stay inpatient admission reviews. The number of appeals filed related to hospital and other inpatient claims at Levels 1 and 2 declined in 2014 and 2015 from a high in 2013. In addition, in 2015, CMS limited the RA look-back period to 6 months from the date of service for certain patient status reviews instead of 3 years, which reduces the number of claims eligible for RA review and possible denial. RAs are also required to allow for a discussion period, in which providers who receive an improper payment determination can discuss the rationale for the determination and submit additional information that may substantiate payment of their claim prior to the claim adjustment process. CMS has also taken actions aimed at reducing the number of appeals filed at Levels 3 and 4. In a demonstration that began in January 2016, the QIC responsible for processing DMEPOS appeals will engage in formal discussions with certain providers that are appealing two items— oxygen supplies and diabetic glucose testing supplies—before issuing an appeal decision. CMS officials predict that these discussions will enable the QIC to reverse more claim denials at Level 2, thereby reducing the number of appeals that reach Levels 3 and 4. In future years, CMS plans to expand the demonstration to providers with appeals related to other DMEPOS services. In another change, effective August 2015, CMS instructed MACs and QICs to focus their reviews of appeals of postpayment claim denials on only the reason(s) for the denial at issue in the original appeal, without introducing new reasons that appellants would need to address in further appeals. Prior to this change, MACs and QICs reviewing appeals involving prepayment and postpayment claim denials were able to identify new claim denial reasons. CMS’s policy change will address stakeholder concerns that when MACs and QICs conducted independent reviews of claims, they often found new reasons to deny the claim, and as a result, appellants would have to file an appeal and provide evidence to address the new denial reason(s) at the next level of appeal. In February 2016, a CMS official reported that the agency believes this policy change has already resulted in an increase in the Level 2 reversal rate, which should reduce the number of appeals reaching Levels 3 and 4. CMS and OMHA have also taken steps to reduce the number of undecided appeals at Level 3 and Level 4. Under the global settlement CMS offered to hospitals from August to October 2014, CMS agreed to pay 68 percent of the inpatient net payable amount on Part A claims denied because the inpatient setting was determined to be medically unnecessary. In exchange, the hospital withdrew its pending appeals and waived its right to file a future appeal related to the claims. As of June 1, 2015, CMS paid approximately $1.3 billion to providers through the settlement. We estimate that it reduced the number of undecided appeals by 31 percent at Level 3 and 37 percent at Level 4. (See table 6.) In addition, OMHA has implemented three pilot programs—the settlement conference facilitation pilot, the statistical sampling pilot, and the senior attorney pilot—which focus on resolving appeals at Level 3 more efficiently. OMHA’s settlement conference facilitation pilot, which began in June 2014, allows eligible appellants to have their appeals at Level 3 settled through an alternative dispute resolution process rather than an ALJ hearing. OMHA offered the pilot to a limited number of providers initially, and, according to OMHA officials, as of January 2016, had settled with 10 appellants involving about 2,400 appeals. The agency expanded the scope of appeals eligible for participation in the pilot to include appeals of additional Part B claim denials in October 2015 and appeals of certain Part A claim denials in February 2016. OMHA officials told us they are also exploring expansion of the pilot in 2016 to appeals filed by state Medicaid agencies that relate to home health services provided to dually eligible beneficiaries. As noted earlier, appeals from these state Medicaid agencies have increased. We identified approximately 47,000 pending Level 3 appeals as of our June 2015 data extract that are related to this issue, which could take over half of OMHA’s ALJs at least a year to adjudicate through a traditional hearing process. OMHA’s statistical sampling pilot began in July 2014 and aims to reduce the appeal backlog by deciding multiple appeals filed by a single appellant using statistical sampling and extrapolation. Under this pilot, an ALJ reviews and issues decisions on a random sample of the appellant’s eligible denied claims. The ALJ’s decision is then extrapolated to the universe of the appellant’s claims in question. As of August 2015, the pilot’s success has been limited—according to HHS, only one appellant had elected to participate in this process that would resolve its 405 pending appeals, which equates to about 40 percent of the annual workload of one ALJ. OMHA representatives said the office has conducted outreach to encourage more providers to participate in the pilot and plans to increase the number of claims eligible for the pilot, although as of February 2016, OMHA had not announced any specific plans or time frames to do so. According to HHS officials, OMHA’s senior attorney pilot, which began in July 2015, uses senior attorneys to conduct on-the-record reviews of appeals if the appellant waived the right to an oral hearing. Under this pilot, the senior attorney determines whether an on-the-record decision is warranted, and if so, drafts the decision for an ALJ to review and issue. HHS officials reported that as of March 2016, 671 appeals at Level 3 have been resolved through this initiative and that they plan to increase the number of senior attorneys participating in this program. Despite actions HHS agencies have taken, the Medicare appeals backlog will likely persist. While it is too early to predict the ultimate effect many of HHS’s current efforts will have on the Medicare appeals backlog, their effect thus far, with the exception of the global settlement, has been limited and the backlog continues to grow at a rate that outpaces the adjudication capacities at Levels 3 and 4. According to OMHA representatives, in fiscal year 2015, the number of incoming appeals at Level 3 declined to 235,543 from a high of 432,534 in fiscal year 2014. While this was a significant decrease, it was still three times the number of appeals decided in fiscal year 2015. Further, HHS reported that it expects the number of incoming appeals to increase again when new RA contracts are awarded and the RA program resumes full operation. A similar challenge exists at Level 4. The Council reported that it can adjudicate almost 2,680 appeals each year, which includes both its FFS and non-FFS workload; however, the Council’s pending appeals workload as of February 2016 was more than six times that amount and, in fiscal year 2015, it received more than three times the number of appeals it adjudicated in the same year. OMHA and Council representatives said that the fiscal year 2016 appropriations are unlikely to mitigate the growing appeals backlog at Levels 3 and 4. OMHA received a 20 percent increase in funding in its fiscal year 2016 appropriation, which HHS officials said will allow OMHA to hire 15 additional ALJs as well as expand other efforts to improve the appeals process. However, HHS representatives told us that even with this increase, OMHA will not have the adjudication capacity to stem the growing number of appeals at Level 3. The Council did not receive a funding increase in the fiscal year 2016 appropriations, and Council representatives said that at its present funding levels the Council is unlikely to keep pace with any increases in decisional output at Level 3. In the fiscal year 2017 HHS budget justification materials, several budgetary and legislative changes were requested to improve the Medicare appeals process and reduce the backlog. For example, additional funding for OMHA and the Council was requested to increase their adjudication capacity, as well as additional funding to CMS to increase QIC participation in Level 3 hearings, which the agency expects will reduce the reversal rate at Level 3. Legislative authority was also requested to allow OMHA and the Council to use a portion of the overpayments collected through the RA program to increase their adjudication capacity. (See app. IV for a description of the legislative proposals included in the President’s fiscal year 2017 budget related to the Medicare appeals process.) HHS’s efforts to reduce the number of filed Medicare appeals and the appeals backlog have not addressed inefficiencies regarding the way appeals of certain repetitive claims for ongoing services are decided, although doing so could lead to fewer appeals. According to representatives from one MAC that reviews DMEPOS appeals, under the current process, once a provider submits an initial claim for a recurring service—such as DMEPOS claims for monthly oxygen equipment rentals—and it is denied, all subsequent claims for the service are also denied, requiring providers to file multiple appeals for the recurring service. A beneficiary’s one year supply of oxygen, for example, could generate 12 claims, and therefore, 12 denials and possibly 12 appeals. If the appeal for the initial claim is later reversed in favor of the appellant, the appeals of the subsequent claims must continue to go through the appeals process, awaiting separate decisions, because the favorable appeal decision on the initial claim cannot generally be applied to the other appeals of subsequently denied claims. Representatives from some MACs, OMHA, and a provider group we interviewed said that this process is inefficient and suggested approaches to change the way these repetitive claims are adjudicated. In addition, two of the MACs we spoke to had developed their own processes to adjudicate some of these appeals more efficiently. For example, representatives from one of the MACs said that if a decision on an initial repetitive claim is reversed at Level 1, the MAC will apply that decision to related appeals pending within its jurisdiction. Given that these claims are for recurring services that are typically appealed individually, they could contribute substantially to the number of appeals related to DMEPOS. Furthermore, OMHA representatives told us that addressing this issue would achieve major efficiencies for the Medicare appeals process. Doing so is also consistent with internal controls that call for agencies to establish control activities that are effective and efficient in accomplishing the agency’s stated goals. HHS officials told us that the department could address this issue if granted certain statutory authority described in the HHS fiscal year 2017 budget justification materials. Specifically, HHS requested legislative authority to consolidate appeals into a single administrative appeal. While the authority is requested to allow appeals bodies to consolidate appeals for the purposes of sampling and extrapolation, HHS officials said that they could also use this authority to consolidate appeals of certain repetitive claims and decide them jointly. It is unclear whether HHS will be granted this authority. However, department officials acknowledged HHS currently has the authority to promulgate regulations that could help address this issue through the reopening process, although at the time we discussed our findings with department officials, they told us that they prefer to address this issue through the statutory change requested in the President’s proposed fiscal year 2017 budget. The reopening process could allow appeals bodies discretion to give deference to a decision made at a higher appeal level upon determining that the beneficiary’s condition or other facts and circumstances of the appeal had not changed. For example, an appeals body could apply a decision of a higher appeal level that the appellant met medical necessity requirements, although it would still need to verify certain components of the claim, such as verification of service delivery, in order to prevent fraud and abuse. In doing so, the review of the claim or claims in question could require a less intensive analysis than a de novo review. Significant growth in the number of appeals at all administrative appeal levels has posed several challenges to the Medicare appeals process. These challenges are particularly pronounced at Levels 3 and 4, which had the largest proportion of decisions issued after the statutory time frames from fiscal year 2010 through fiscal year 2014 and the greatest backlog of pending appeals. This backlog shows no signs of abating as the number of incoming appeals continue to surpass the adjudication capacity at Levels 3 and 4. The current situation whereby Levels 3 and 4 decide a substantial number of appeals after statutory time frames is likely to persist without additional actions. HHS could take more steps to improve its oversight of the appeals process and its understanding of the characteristics of appeals contributing to the increased volumes and the current appeals backlog. As HHS takes action aimed at reducing the appeals backlog, HHS will need reliable and consistent data to monitor the appeals system, including the effect of any actions taken. Currently, HHS data systems are not collecting additional information that would assist HHS agencies in their monitoring efforts. HHS is awaiting results of an evaluation of the Medicare appeals process that may address data inconsistencies within the three appeals data systems and among levels using MAS. While the evaluation is a good first step to identifying and modifying the data systems, it is unclear how well the evaluation will address these issues because it is not a specific objective of the evaluation. Without more reliable and consistent information, HHS will continue to lack the ability to identify issues and policies contributing to the appeals backlog, as well as measure the funds tied up in the appeals process. Finally, the manner in which appeals of certain repetitive claims are adjudicated is inefficient, which leads to more appeals in the system than necessary. With the appeals backlog as large as it is at Levels 3 and 4, HHS would benefit from a change in the process that could consolidate these appeals and reduce the number of appeals that require decisions. HHS has requested legislative authority to achieve this. Department officials acknowledged HHS currently has the authority to promulgate regulations that could help address this issue through the reopening process, although at the time we discussed our findings with them, we were told that they prefer to address this issue through the statutory change requested in the President’s proposed fiscal year 2017 budget. To reduce the number of Medicare appeals and to strengthen oversight of the Medicare FFS appeals process, we recommend that the Secretary of Health and Human Services take the following four actions: 1. Direct CMS, OMHA, or DAB to modify the various Medicare appeals a. collect information on the reasons for appeal decisions at Level 3; b. capture the amount, or an estimate, of Medicare allowed charges at stake in appeals in MAS and MODACTS; and c. collect consistent data across systems, including appeal categories and appeal decisions across MAS and MODACTS. 2. Implement a more efficient way to adjudicate certain repetitive claims, such as by permitting appeals bodies to reopen and resolve appeals. HHS provided written comments on a draft of this report, which are reprinted in appendix V, and provided technical comments, which we incorporated as appropriate. HHS generally agreed with four of the five draft recommendations and outlined a number of initiatives it is taking to improve the efficiency of the Medicare appeals process, reduce the backlog of pending appeals, and mitigate the possibility of future backlogs. HHS also expressed its willingness to modify the appeal data systems in order to collect consistent data across the appeal data systems and to implement a more efficient way to adjudicate certain repetitive claims. In commenting, HHS provided further information for two of the recommendations with which it generally agreed. Regarding our recommendation to collect information on the reasons for appeal decisions at Level 3, HHS indicated that collecting this information in the planned ECAPE system instead of MAS, as we recommended, would be more cost effective. We agree with the department’s rationale and modified our recommendation to remove the language specifying that this information be collected in MAS. Regarding our recommendation that HHS capture the amount of Medicare allowed charges; in its technical comments, the department indicated that it would not do this for all appeals. Specifically, HHS indicated that it has no plans to collect the Medicare allowed amount for Levels 1 and 2 because doing so would require changes to the claims processing system or require manual pricing of all appeals, which would require additional funding for the MACs. We believe that there may be less resource intensive options for implementing the recommendation, and we modified the language of the recommendation to clarify that obtaining an estimate of the Medicare allowed amount would be a way to fulfill the recommendation. In contrast, HHS disagreed with a recommendation related to determining the costs and benefits of delaying CMS’s collection of overpayments until after a Level 3 decision is made, stating that such a change would increase the number of appeals filed at Level 3. We agree that this change might increase the number of filed appeals and, therefore, we did not include the recommendation in the final 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 to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, the Chief Administrative Law Judge of the Office of Medicare Hearings and Appeals, the Chair of the Departmental Appeals Board, 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 has 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 VI. This appendix provides additional details regarding our analysis of (1) trends in Medicare fee-for-service (FFS) appeals for fiscal years 2010 through 2014; (2) differences in claim-level and appeal-level reversal rates; (3) appeals resolved by the Centers for Medicare & Medicaid Services’ (CMS) global settlement; (4) CMS’s estimate of interest paid by the agency to certain providers; and (5) data reliability. To examine trends in appeals for fiscal years 2010 through 2014, we analyzed extracts of three data systems obtained from CMS, the Office of Medicare Hearings and Appeals (OMHA), and the Departmental Appeals Board (DAB). (See table 7.) To determine the number of Medicare FFS appeals filed for each level overall, by the type of appellant, by type of service, by subcategory of service, and by whether the appeal resulted from a claim review conducted by a Recovery Auditor (RA), we took a number of steps that varied by level due to differences in the systems. Level 1. While the Contractor Reporting of Operational and Workload Data (CROWD) system extract contained data on most Level 1 appeals filed during the period of our analysis, the Medicare Appeals System (MAS) extract contained Level 1 appeals data for six of the seven Medicare Administrative Contractor (MAC) jurisdictions that reported their Medicare Part A (Part A) appeals data to MAS in fiscal year 2014. Using the CROWD data, we determined the number of appeals filed by counting the number of requests received less the number of misrouted requests. CMS officials indicated that this approach will likely produce an approximate number of filed appeals for our purposes. However, agency officials also noted that CMS uses the number of requests cleared instead of requests received when representing appeals workload, because the requests received line could overestimate the number of filed appeals. For example, it could count duplicate requests or requests for reopenings as opposed to appeals. CMS officials noted that the agency has made changes, effective in January 2016, to improve the quality of the requests received data. Using MAS data for the Part A appeals data for the remaining six MAC jurisdictions, we also counted appeals filed and excluded misrouted and misfiled appeals. To determine the total number of Level 1 appeals filed, we added counts derived from CROWD and MAS. Our analysis excludes Level 1 appeals decided by Quality Improvement Organizations because MACs are responsible for handling Level 1 appeals of denials related to most claims. Type of appellant: We did not determine the number of appeals filed by the type of appellant because this information is not captured in the CROWD system. Type of service: To determine the number of appeals that were related to durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) items, using CROWD data we categorized all appeals decided by the four MAC jurisdictions that decide DMEPOS appeals as DMEPOS services. We categorized appeals of Part B services and appeals of Medicare Part B (Part B) services whose claims were decided by the Part A MACs (referred to as Part B of A) as Part B services. Subcategory of service: We report the number of appealed claims decided by subcategory of service because CROWD does not track filed appeals or filed appealed claims by subcategory of service. Using the CROWD data, we determined the number of appealed claims decided using the number of claims cleared. CROWD uses the following subcategories: inpatient hospital, DMEPOS, home health, laboratory, other, outpatient, physician, skilled nursing facility, and ambulance, which we refer to as transportation. Using the MAS data, we determined the number of appealed claims decided by counting the number of claims. Primarily using a crosswalk provided by CMS, we mapped MAS appeal categories to the CROWD subcategories. (See table 8.) RA-related: We report the number of RA-related appeals decided using the number of RA redeterminations cleared because CROWD does not have this information for filed appeals. In MAS, we considered an appeal as RA-related if the field RA name was not missing. Level 2. In analyzing MAS data, we excluded combined, deleted, and misrouted appeals, but included reopened appeals. Our analysis also excludes Level 2 appeals decided by Quality Improvement Organizations because Qualified Independent Contractors (QIC) are responsible for handling Level 2 appeals of denials related to most claims. Type of appellant: To determine the type of appellant that filed the appeal, we used the field “appeal appellant type.” Type of service: To determine whether the appeal was for Part A, Part B, or DMEPOS, we used two MAS fields—“Medicare type” and the name of the QIC. In general, we categorized appeals of Part B services and appeals of Part B of A services as Part B services using “Medicare type.” Subcategory of service: To determine the subcategory of service, we used the field “appeal category.” Using appeal category, we mapped Level 3 appeal categories to Level 2 appeal categories generally using a crosswalk provided by OMHA. Using that crosswalk, we grouped services into 10 subcategories. (See table 9.) RA-related: We considered an appeal as RA-related if the field “RAC flag” was equal to “yes.” Level 3. In analyzing MAS data, we excluded appeals that had been combined or deleted, but included reopened appeals. Type of appellant: To determine the type of appellant that filed the appeal, we used the MAS field “requester type;” a field created by OMHA for us that indicates that the MAS appeal record included a beneficiary identification number, thus indicating the appeal was filed by a beneficiary; and a file provided to us by OMHA that identified appeals filed by a state Medicaid agency that could not be identified using the field “requester type.” Type of service: To determine whether the appeal was for a Part A, Part B, or DMEPOS service, we used two MAS fields—“Medicare type” and the name of the QIC. In general we categorized appeals of Part B services and appeals of Part B of A services as Part B services using “Medicare type.” Subcategory of service and RA-related: We used the same approach described for Level 2 above. Level 4. In analyzing Medicare Operations Division Automated Case Tracking System (MODACTS) data, we excluded appeals resulting from CMS referrals, and appeals in which the record indicated a final action of lost file or tape as Level 4 did not review the appeal. We counted as one appeal any appeals in which the appellant filed one appeal but the Medicare Appeals Council (the Council) issued separate appeal decisions. Type of appellant: To determine the type of appellant that filed the appeal, we used the fields “appellant type” and the name of the appellant, where the field “workload” indicated that CMS had not filed the appeal. Type of service: To determine whether the appeal was for a Part A or Part B service, we used the field “claim type.” We used the field “type of service”—specifically, values of durable medical equipment, orthotic, prosthetic, or surgical dressing—to identify whether the appeal was for a DMEPOS item. We did not take additional steps to categorize appeals of Part B of A services as Part B services as Council officials told us that those services are already categorized as Part B claims. Subcategory of service: To determine the subcategory of service, we used the field “type of service.” We grouped type of service into 10 subcategories. (See table 10.) RA-related: An appeal was RA-related if the field “overpayment” was set to “RAC.” For all appeal levels, we determined the percentage of appeal decisions issued after the statutory time frames. This analysis is based on the fiscal year that the appeal was decided. Thus, appeals in which no appeal decision had been issued from fiscal year 2010 through fiscal year 2014 are excluded from our analyses. Level 1. Our analysis for Level 1 is different from those for Levels 2, 3, and 4. Specifically, the Level 1 analysis presents information on a quarterly basis by type of service (i.e., Part A, Part B, and DMEPOS) and the percentages of Part B of A services are included in totals for Part A services. We derived this information from CMS’s “Appeals Fact Sheets,” which contain the percentage of appealed claims decided on-time on a quarterly basis by type of service. Using these data, which are presented on a calendar year basis, we determined the percentage of appealed claims on a fiscal year basis that were not issued on-time. Level 2, Level 3, and Level 4. To determine the percentage of appeals issued after the statutory time frame, we determined the number of appeals issued after the deadline date overall and by type of appellant for Levels 3 and 4. The deadline date is captured and adjusted in MAS (Levels 2 and 3) and MODACTS (Level 4) to reflect any reasonable changes to the deadline, such as if the appellant submitted additional documentation after the appeal was filed. We found that the deadline date was missing in MODACTS for over one-third of appeals that had been decided during the time frame of our analysis. As a result, we set the deadline date for these appeals to 90 days after the appeal start date. DAB officials indicated this approach was generally appropriate. For Levels 2 and 3, we limited this analysis to appeal decisions issued on the merits. As a result, appeals with the following appeal decisions are excluded from the calculation: dismissed or escalated at Level 2; and dismissed, escalated, remanded, or in which no decision on the denied claim was made at Level 3. For Level 4, we excluded appeals referred to the Council by CMS, as well as appeals that were dismissed by the Council under the circumstances set forth in 42 C.F.R. §405.1114 at Level 4. We also calculated the percentage of appeal decisions issued on the merit that were issued after at least twice the statutory time frame, which we report for Levels 3 and 4, by determining the number of appeals in which decisions were issued 90 or more days after the deadline date. We excluded from these calculations appeals that were put on hold during CMS’s global settlement process. We estimated the number of Levels 2, 3, and 4 appeals resolved through the global settlement based on information as provided to us by CMS, OMHA, and DAB. Specifically, for Levels 2 and 3 we used fields in MAS, and for Level 4 we used a file provided to us by the Council within DAB on November 6, 2015. HHS officials noted that as of February 2016, OMHA and DAB were still in the process of dismissing appeals included in CMS’s global settlement. The dismissal process includes a review by OMHA and DAB of each settlement agreement which could result in the identification of appealed claims that were inadvertently included in the settlement. Therefore, our estimates may differ from the number of appeals settled once the dismissal process is complete. For Levels 1 through 3, we determined the proportion of appeals in which the appeals body reversed a coverage denial. For Level 4, we separated appeal decisions into different categories to better understand how the Level 4 appeal decision affected the Level 3 appeal decision. Level 1, Level 2, and Level 3. We report the number of appeals in which a decision was issued on the merits and the percentage of appeals that fully reversed, partially reversed, or did not reverse the coverage denial. In calculating those percentages, we do not reflect decisions based on other grounds, such as dismissals. As noted above, for Levels 1 through 3, we categorized appeals of Part B of A services as Part B services. As a result, the reversal rates we present may differ from reversal rates that categorize appeals of Part B of A services as Part A services. We calculated reversal rates overall, by type of service, and by whether or not the appeal was RA-related. For comparison purposes, we also report the total number of appeals in which a decision was issued, which is not limited to decisions issued on the merit. Level 4. We report the number of appeals that affirmed, reversed, dismissed, or remanded Level 3 decisions as well as the percentage of those appeals in each category. We calculated these percentages overall and by whether an appellant filed an appeal or whether CMS referred the appeal. For comparison purposes, we also report the total number of appeals in which a decision was issued, which is not limited to the four final action categories. Because the following Level 4 decisions do not comment on the Level 3 decision, we excluded them from our analysis: appeal decisions of other, special disposition, and dismiss request for review. Similarly, we excluded appeals that were escalated from OMHA because Level 3 did not issue a timely appeal decision and appeals in which the Council was asked to reopen an appeal it already decided. Our categorization of Level 4 decisions is as follows. Affirmed the Level 3 decision: (a) a final action of affirm; (b) a final action of modify; (c) if CMS did not refer the appeal, a final action of denial of request for review; and (d) if CMS referred the appeal, decline protest. Reversed the Level 3 decision: a final action of reverse decision. Dismissed the Level 3 decision: a final action of dismiss request for hearing. Remanded appeal to Level 3: a final action of remand to the Administrative Law Judge (ALJ), which has the effect of vacating the Level 3 decision and generating a new Level 3 appeal, according to Council officials. To report on the effect of CMS’s global settlement on the number of appeals pending decisions at Levels 3 and 4, we determined the number of appeals pending a decision as of the dates of our extract files. To determine the number of those appeals pending after the global settlement, we subtracted the number of appeals we estimated to be included in the global settlement from the number of pending appeals. To better understand the effect of late appeal decisions on the amount of interest paid by CMS to certain providers who have their postpayment claim denials reversed upon appeal, we asked CMS for (a) the amount of interest CMS paid to providers on the overpayments the agency initially collected and then returned after the appellant won a Level 3 appeal; and (b) the amount of interest that CMS would have paid to those providers if Level 3 had adhered to the 90-day statutory time frame for issuing appeal decisions. CMS officials told us that their data system did not enable them to create similar estimates for appeals reversed at Levels 4 or 5. To report on the amount of interest that CMS would not have paid if Level 3 had issued decisions within the statutory time frame, we subtracted estimate (b) from (a). To respond to our inquiry, CMS developed an estimate, which is based on several assumptions and is subject to certain limitations. To report on the amount of interest paid, CMS identified transactions in its Healthcare Integrated General Ledger Accounting System (HIGLAS) that were categorized as related to this type of interest payment. To report on the amount of interest that CMS would have paid if Level 3 had adhered to a 90-day time frame for issuing appeal decisions, CMS created an estimated date whereby the ALJ would have issued the appeal decision, because this information is not calculated in HIGLAS. This date was set equal to 180 days after HIGLAS indicated the overpayment collection was initiated by the MAC, and accounts for the following: the time it would take the MAC to collect the overpayment after the appellant lost the Level 2 appeal, the time it took for the appellant to file a Level 3 appeal, and the 90-day time frame for Level 3 to issue an appeal decision. Because overpayments can be collected over multiple dates, CMS set the date of the recoupment equal to the median date of all recoupment dates. CMS officials acknowledged that their estimate has limitations. First, CMS officials told us that the recording of overpayment adjustments, the assignment of codes which categorize types of accounts receivable, and the determination of interest payments is a manual process conducted by the MACs and that MACs may not, for example, be using the appropriate codes. Second, use of a median date to estimate the interest that would have been payable results in different estimates than if CMS were able to apply the interest rate separately for each recoupment made based on the actual date the overpayment was recouped. Third, CMS’s estimate is limited to Part A and Part B appeals and excludes any interest associated with DMEPOS appeals because CMS officials told us they did not have the necessary data in-house to conduct the analysis and obtaining access to the necessary data would have been administratively burdensome. To assess the reliability of the data used in this report, we performed manual and electronic testing to identify and correct for missing data and other anomalies; interviewed or obtained written information from CMS, OMHA, and DAB officials to confirm our understanding of the data; and reviewed related documentation. We determined that the data were sufficiently reliable for our purposes. Tables 11 through 14 provide information on the number and characteristics of appeals filed and decided at Levels 1 through 4 of the Medicare fee-for-service appeals process from fiscal year 2010 to fiscal year 2014. Tables 15 through 18 provide information on appeal reversal rates by type of service and whether the appeal was Recovery Auditor-related at Levels 1 through 4 of the Medicare fee-for-service appeals process for appeals decided from fiscal year 2010 to fiscal year 2014. This proposal would expand the authority of the Secretary of Health and Human Services to retain a portion of RA recoveries for the purpose of administering the RA program and allows RA program recoveries to fully fund RA‐related appeals at OMHA and DAB. This proposal would institute a refundable filing fee for Medicare Parts A and B appeals for providers, suppliers, and state Medicaid agencies, including those acting as a representative of a beneficiary, and requires these entities to pay a per‐claim filing fee at each level of appeal. According to the Department of Health and Human Services’ (HHS) budget justification materials, this filing fee will allow HHS to invest in the appeals system to improve responsiveness and efficiency. Fees will be returned to appellants who receive a fully favorable appeal determination. This proposal would extend the Centers for Medicare & Medicaid Services’ (CMS) prior that are at the highest risk for improper payment. The proposal observes that CMS currently and services. authorization authority to all Medicare fee‐for‐service items and services, in particular those has authority to require prior authorization for only specified Medicare fee‐for‐service items This proposal would allow the Secretary to withhold payment to an RA if a provider has filed an appeal at Level 2 and a decision is pending. According to HHS’s budget justification materials, aligning the RA contingency fee payments with the outcome of the appeal will ensure that CMS has assurance of the RA’s determination before making payment. This proposal would allow the Secretary to adjudicate appeals through the use of sampling and extrapolation techniques. Additionally, this proposal authorizes the Secretary to consolidate appeals into a single administrative appeal at all levels of the appeals process. Parties who are appealing claims included within an extrapolated overpayment or consolidated previously will be required to file one appeal request for any such claims in dispute. This proposal would remand an appeal to Level 1 when new documentary evidence is submitted into the administrative record at Level 2 or above. Exceptions may be made if evidence was provided to the lower level adjudicator but erroneously omitted from the record, or an adjudicator denies an appeal on a new and different basis than earlier determinations. According to HHS’s budget justification materials, this proposal incentivizes appellants to include all evidence early in the appeals process and ensures the same record is reviewed and considered at subsequent levels of appeal. This proposal would increase the minimum amount in controversy for ALJ adjudication to the federal court (Level 5) amount in controversy requirement ($1,500 in calendar year 2016). According to HHS’s budget justification materials, this will allow the amount at issue to better align with the amount spent to adjudicate the claim. This proposal would allow OMHA to use attorneys called Medicare magistrates to adjudicate appealed claims of lower amounts in controversy—specifically, amounts that fall below the federal district court amount in controversy threshold. This proposal would allow OMHA to issue decisions without holding a hearing if there is no material fact in dispute. These cases include appeals, for example, in which Medicare does not cover the cost of a particular drug. Kathleen M. King, (202) 512-7114 or [email protected]. In addition to the contact named above, Lori Achman, (Assistant Director), Todd Anderson, Susan Anthony, Christine Davis, Julianne Flowers, Krister Friday, Shannon Legeer, Amanda Pusey, Lisa Rogers, Cherie’ Starck, and Jennifer Whitworth made key contributions to this report. | In fiscal year 2014, Medicare processed 1.2 billion FFS claims submitted by providers on behalf of beneficiaries. When Medicare denies or reduces payment for a claim or a portion of a claim, providers, beneficiaries, and others may appeal these decisions through Medicare's appeals process. In recent years there have been increases in the number of filed and backlogged appeals (i.e., pending appeals that remain undecided after statutory time frames). GAO was asked to examine Levels 1 through 4 of Medicare's appeals process. This report examines (1) trends in appeals for fiscal years 2010 through 2014, (2) data HHS uses to monitor the appeals process, and (3) HHS efforts to reduce the number of appeals filed and backlogged. GAO analyzed data from the three data systems used to monitor appeals, reviewed relevant HHS agency documentation and policies, federal internal control standards, and interviewed HHS agency officials and others. The appeals process for Medicare fee-for-service (FFS) claims consists of four administrative levels of review within the Department of Health and Human Services (HHS), and a fifth level in which appeals are reviewed by federal courts. Appeals are generally reviewed by each level sequentially, as appellants may appeal a decision to the next level depending on the prior outcome. Under the administrative process, separate appeals bodies review appeals and issue decisions under time limits established by law, which can vary by level. From fiscal years 2010 and 2014, the total number of filed appeals at Levels 1 through 4 of Medicare's FFS appeals process increased significantly but varied by level. Level 3 experienced the largest rate of increase in appeals—from 41,733 to 432,534 appeals (936 percent)—during this period. A significant portion of the increase was driven by appeals of hospital and other inpatient stays, which increased from 12,938 to 275,791 appeals (over 2,000 percent) at Level 3. HHS attributed the growth in appeals to its increased program integrity efforts and a greater propensity of providers to appeal claims, among other things. GAO also found that the number of appeal decisions issued after statutory time frames generally increased during this time, with the largest increase in and largest proportion of late decisions occurring at appeal Levels 3 and 4. For example, in fiscal year 2014, 96 percent of Level 3 decisions were issued after the general 90-day statutory time frame for Level 3. The Centers for Medicare & Medicaid Services (CMS) and two other components within HHS that are part of the Medicare appeals process use data collected in three appeal data systems—such as the date when the appeal was filed, the type of service or claim appealed, and the length of time taken to issue appeal decisions—to monitor the Medicare appeals process. However, these systems do not collect other data that HHS agencies could use to monitor important appeal trends, such as information related to the reasons for Level 3 decisions and the actual amount of Medicare reimbursement at issue. GAO also found variation in how appeals bodies record decisions across the three systems, including the use of different categories to track the type of Medicare service at issue in the appeal. Absent more complete and consistent appeals data, HHS's ability to monitor emerging trends in appeals is limited and is inconsistent with federal internal control standards that require agencies to run and control agency operations using relevant, reliable, and timely information. HHS agencies have taken several actions aimed at reducing the total number of Medicare appeals filed and the current appeals backlog. For example, in 2014, CMS agreed to pay a portion of the payable amount for certain denied hospital claims on the condition that pending appeals associated with those claims were withdrawn and rights to future appeals of them waived. However, despite this and other actions taken by HHS agencies, the Medicare appeals backlog continues to grow at a rate that outpaces the adjudication process and will likely persist. Further, HHS efforts do not address inefficiencies regarding the way appeals of certain repetitious claims—such as claims for monthly oxygen equipment rentals—are adjudicated, which is inconsistent with federal internal control standards. Under the current process, if the initial claim is reversed in favor of the appellant, the decision generally cannot be applied to the other related claims. As a result, more appeals must go through the appeals process. GAO recommends that HHS take four actions, including improving the completeness and consistency of the data used by HHS to monitor appeals and implementing a more efficient method of handling appeals associated with repetitious claims. HHS generally agreed with four of GAO's recommendations, and disagreed with a fifth recommendation, citing potential unintended consequences. GAO agrees and has dropped that recommendation. |
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States provide health care coverage to low-income uninsured children largely through two federal-state programs—Medicaid and SCHIP. Since 1965, Medicaid has financed health care coverage for certain categories of low-income individuals—over half of whom are children. To expand health coverage for children, the Congress created SCHIP in 1997 for children living in families whose incomes exceed the eligibility limits for Medicaid. Although SCHIP is generally targeted at families with incomes at or below 200 percent of the federal poverty level, each state may set its own income eligibility limits within certain guidelines. As of February 2002, 16 states have created Medicaid expansion programs, 16 states have separate child health programs, and 19 states have combination Medicaid expansions and separate child health components. (See figure 1.) SCHIP offers significant flexibility in program design and benefits provided by allowing states to use existing Medicaid structures or create child health programs that are separate from Medicaid. Medicaid expansions must follow Medicaid eligibility rules and cost-sharing requirements, which are generally not allowed for children. A Medicaid expansion also creates an entitlement by requiring a state to continue providing services to eligible children even when its SCHIP allotment is exhausted. In contrast, a state that chooses a separate child health program approach may introduce limited cost-sharing. Additionally, a state with a separate child health program under SCHIP may limit its own annual contribution, create waiting lists, or stop enrollment once the funds it budgeted for SCHIP are exhausted. States choosing combination programs take both approaches. For example, Connecticut’s combination SCHIP program has a limited Medicaid expansion—increasing eligibility for 17 to 18 year olds up to 185 percent of the federal poverty level. Additionally, the state created a separate child health program, which covers all children in families with incomes over 185 percent, up to 300 percent of the federal poverty level. With regard to program benefits, the choices states make in designing SCHIP have important implications. For example, a state opting for a Medicaid expansion under SCHIP must provide the same benefits offered under its Medicaid program. These benefits are quite broad and include Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services for most children. EPSDT services are designed to target health conditions and problems for which children are at risk, including iron deficiency, obesity, lead poisoning, and dental disease. These services are also intended to detect and correct conditions that can hinder a child’s learning and development, such as vision and hearing problems. In contrast, states opting for separate child health programs may depart from Medicaid requirements and provide benefits based on coverage standards in the SCHIP legislation. SCHIP separate child health programs generally cover basic benefits, such as physician services, inpatient and outpatient hospital services, and laboratory and radiological services. Other benefits, such as prescription drugs and hearing, mental health, dental, and vision services, may be provided at the states’ discretion. States also may place limits on services provided and require cost-sharing, while Medicaid generally does not permit cost-sharing for children. In addition to having flexibility in program design and benefits offered, states participating in SCHIP have a larger proportion of their program expenditures paid by the federal government than for Medicaid. A state’s Medicaid program expenditures are matched by the federal government using a formula that is based on a state’s per capita income in relationship to the national average. Federal matching rates for SCHIP are “enhanced”—they are established under a formula that takes 70 percent of a state’s Medicaid matching rate and adds 30 percentage points, with an overall federal share that may not exceed 85 percent. For 2001, federal shares of SCHIP expenditures ranged from 65 to 84 percent, with the national average federal share equaling about 72 percent. In contrast, 2001 federal shares for Medicaid ranged from 50 to 77 percent of expenditures, with the national average at about 57 percent. The SCHIP statute requires states to screen all SCHIP applicants for Medicaid eligibility and, if they are eligible, enroll them in Medicaid. BBRA included a mandate that the OIG conduct a study every 3 years, beginning in fiscal year 2000, to (1) determine the number, if any, of enrollees in SCHIP who are eligible for Medicaid and (2) assess states’ progress in reducing the number of uninsured low-income children, including progress in achieving the strategic objectives and performance goals in their SCHIP plans, which set forth how states intend to use their SCHIP funds to provide child health assistance. BBRA directed the OIG to review states with approved SCHIP programs that do not provide health benefits under Medicaid; consequently, the OIG focused on the 15 states that in 1999 operated separate child health programs under SCHIP. Of these 15 states, the OIG excluded 2 states— Washington and Wyoming—because the delayed start-up of their programs resulted in no enrollees in fiscal year 1999, the year that the OIG reviewed. From the remaining 13 states, the OIG used a two-stage sampling plan to select 5 states for review. The OIG first divided the 13 states into two strata, selecting Pennsylvania separately as stratum I because it had a large number of children—81,758—enrolled in its program in fiscal year 1999. Enrollment across the remaining 12 states ranged from 1,019 in Montana to 57,300 in North Carolina. The OIG randomly selected 4 of the 12 states (North Carolina, Oregon, Utah, and Vermont) for inclusion in its study. (See table 1.) For the 5 sample states, the OIG reviewed a variety of documents the states submitted to HCFA, such as their SCHIP plans and SCHIP evaluation reports, which are states’ assessments of the effectiveness of their programs. OIG staff conducted site visits and met with officials responsible for administering SCHIP in all 5 states. The OIG also randomly selected 100 active SCHIP case files from each of the 5 states in order to evaluate whether Medicaid-eligible children were incorrectly enrolled in SCHIP. The OIG did not verify accuracy and completeness of the state case files; rather, it focused on whether the information in each file supported the conclusion reached by the state. In determining whether Medicaid-eligible children were improperly enrolled in SCHIP, the OIG reported that, based on a sample of 5 states, SCHIP enrollees in the 13 states with separate child health programs were generally appropriately enrolled. However, because of variations in the administration of state programs, generalizing from the 5 states to the 13 states may not be appropriate. In addition, focusing on only those states with separate SCHIP programs does not capture the experience of the majority of states or the majority of SCHIP-enrolled children. Ensuring appropriate enrollment in SCHIP is important regardless of a state’s SCHIP design, because any child eligible for Medicaid that is incorrectly enrolled in SCHIP results in a state receiving a higher federal matching rate. Reviewing states, for example, that operate separate child health programs as part of a combination program would have increased the proportion of children under consideration from 16.5 percent to 65 percent of all SCHIP children enrolled in 1999, and thus provided more comprehensive information regarding states’ enrollment practices. To determine whether states were improperly enrolling Medicaid-eligible children in SCHIP, the OIG separated the 13 states with separate child health programs into two strata. The first stratum was the state of Pennsylvania, which the OIG intentionally selected because it had the most children enrolled in SCHIP among the 13 states. Four states were then randomly selected from the remaining 12 states. Among the 5 states it reviewed, the OIG identified only a few cases in which Medicaid-eligible children were inappropriately enrolled. For example, it reported that 1 state had a single case in which a Medicaid-eligible child was enrolled in SCHIP, while 2 other states had three and five such cases. The report also found that 2 states did not have any Medicaid-eligible children enrolled in SCHIP. The OIG concluded from these findings that most SCHIP enrollees were correctly enrolled in the 13 states administering separate child health programs. Variations in states’ enrollment practices, however, raise questions about the extent to which results from a sample of 5 states can be generalized to 13 states. Had the OIG drawn its random sample of active SCHIP cases across the 13 states in its sampling universe, it would have been better able to generalize its results. An OIG official told us that the office chose to analyze a sample of 5 states rather than all 13 states because of time and resource constraints. Recognizing that analyzing a pure random sample of cases across a large number of states may be too resource intensive, choosing a stratified sample of states may provide more information on the extent to which accurate enrollment may vary with different states’ practices. Even with a stratified sample, however, generalization to all states may be problematic. The OIG did select a stratified sample and chose one characteristic—size of a state’s SCHIP program—to develop two strata. While dividing states in terms of size is potentially useful, additional distinctions may be important because program characteristics vary considerably from state to state. For example, states with differing administrative structures (New York uses health plans to determine eligibility and enroll eligible individuals, Colorado uses an enrollment contractor, and Oregon uses its Medicaid staff to determine SCHIP eligibility) could be grouped by certain characteristics for review. This could help determine whether such differences in administrative structures have a bearing on appropriate enrollment in SCHIP. To examine whether the OIG’s sampling approach reflected variations in states’ administrative structures, we categorized the 12 states in the second stratum based on whether they had the same program staff determine eligibility for both the SCHIP and Medicaid programs, which can help achieve consistency in eligibility decisions. We found that the random sample of 4 states did not include any states where different employees were responsible for determining SCHIP and Medicaid eligibility, thus raising concerns as to whether conclusions could be generalized. (See table 2.) Because the scope of the study was limited to the 13 states with separate child health programs, the OIG examined 322,534, or 16.5 percent, of the approximately 2 million children enrolled in SCHIP in fiscal year 1999. A review that also included separate SCHIP programs in states that opted for a combination approach under SCHIP would have expanded the available universe to 26 states and to 65 percent of all SCHIP children enrolled in 1999. Moreover, using the OIG’s general audit authority, the scope of future reviews could include states with SCHIP Medicaid expansions, which would provide the Congress with more complete information on the extent to which states are enrolling low-income children in the appropriate programs. If this approach had been used in 1999, 23 states and almost one-fourth of all children enrolled in SCHIP would have been added. (See table 3.) The OIG identified important limitations to states’ evaluations that made it unable to conclude whether states were making progress in reducing the number of uninsured children and in meeting the objectives and goals that they established under SCHIP. For example, the OIG found that states made inappropriate assumptions in reporting data about the relationship of SCHIP enrollment to the rates of uninsured, which undermined the credibility of states’ results, and that states often had poor baseline data against which to measure progress. The OIG also found that states set goals without considering how to evaluate progress, and that little emphasis was placed on evaluation by the states. As a result, the OIG made recommendations to both HCFA and HRSA on ways that the federal government could assist and guide states in making improvements in their analyses. While the initial OIG reviews were inconclusive due to weaknesses in states’ evaluations, future efforts may benefit from federal initiatives under way aimed at improving state-level data and analyses of SCHIP. These initiatives, however, may not have been in place long enough to benefit the OIG’s next review, since results are due in 2003. As a result, the OIG may wish to select a different approach—such as identifying states with more rigorous practices in evaluation, or augmenting its review with other sources beyond those provided by the states. The OIG identified limitations to the 5 states’ SCHIP evaluations and thus was unable to draw conclusions about states’ progress in reducing the number of uninsured children or meeting their stated objectives and goals. For example, the OIG cited concerns regarding the reliability of states’ reports of reductions in the number of uninsured, including inadequate data and evaluation practices. In cases in which states were unable to measure objectives that were established at the beginning of their SCHIP programs, their evaluations generally provided descriptive information on activities but did not assess the effect that such activities had on achieving specific goals. (See table 4.) For example, the OIG reported that none of the 5 states it reviewed attempted evaluations of their outreach programs or offered explanations of how such programs affected their measurable progress in enrollment or the number of uninsured children. Of particular concern were limitations in measuring how well states are meeting the primary objective of the SCHIP program—reducing the number of uninsured. As noted by the OIG, states—and other researchers—have been hampered by limited reliable state-level data regarding children’s insurance status. When SCHIP was enacted, estimates of the number of low-income uninsured children were derived from the annual health insurance supplement to the Current Population Survey (CPS), the only nationwide source of information on uninsured children by state. CPS is based on a nationally representative sample and is considered adequate to produce national estimates. However, CPS data have well- recognized shortcomings, particularly with regard to state-level estimates, which can be unreliable and exhibit volatility from year to year because of small samples of uninsured low-income children, particularly in states with smaller populations. For example, using the 1994 through 1996 CPS data, estimates of the number of uninsured children in Delaware ranged from 12,000 to 32,000. In part because of these data limitations, some states—including 3 of the states sampled by the OIG—moved to special surveys or studies that were conducted locally in an effort to develop more precise estimates of the number of uninsured children. Despite efforts by states to better estimate the number of uninsured children, the OIG cited concerns regarding states’ analyses. For example, the OIG reported that some states estimated reductions in the number of uninsured children by subtracting the number of SCHIP enrollees from their original baseline estimates. However, such an approach does not ensure that increases in SCHIP lead to reductions in the number of uninsured because increases in SCHIP enrollment can result from children moving from private insurance coverage to public insurance under SCHIP, an effect known as “crowd-out.” Additionally, changing economic factors can further complicate assessments of a state’s progress in reducing the number of uninsured children. For example, a state may significantly increase enrollment in SCHIP but—because of declines in the economy and increased unemployment—continue to see an increase in the number of uninsured. Under these circumstances, “progress” in reducing the number of uninsured may be more difficult to identify. Based on its findings, the OIG recommended that HCFA identify a core set of evaluation measures that will enable all SCHIP states to provide useful information. It further recommended that HCFA and HRSA provide guidance and assistance to states in conducting useful evaluations of their programs. The OIG noted that SCHIP staffs would benefit from assistance and training regarding the type of data to collect and how to conduct evaluations. HCFA concurred with these recommendations and cited efforts under way to improve states’ evaluations of their SCHIP programs. Several federal efforts are under way that should help improve states’ data sources and their evaluations of the extent to which their SCHIP programs are reducing the number of uninsured children. If implemented on a timely basis, efforts such as the following should help inform the OIG’s subsequent evaluations. The Congress appropriated $10 million each year beginning in fiscal year 2000 to increase the sample size of CPS. Beginning in 2001, larger sample sizes are being phased into CPS, which should help improve the accuracy of state-level CPS estimates of uninsured children. CMS is working with states to develop consistent performance measures for SCHIP, with a focus on ensuring appropriate methodology and consistency of data. As a condition of their state SCHIP plans, some states are required to assess whether the SCHIP program is “crowding out” private health insurance in their states. These studies could help assess the extent to which SCHIP is drawing its enrollment from uninsured children—or from children who were previously insured. BBRA requires HHS to conduct an evaluation of SCHIP to determine the effectiveness of the program and to provide information to guide future federal and state policy. To comply with BBRA, HHS plans a series of reports addressing a variety of major topic areas, ranging from program design to access and utilization; the first report is expected in spring 2002. HHS plans to use multiple research strategies, including case studies, surveys, and focus groups, to address questions of interest. As the OIG continues to analyze states’ progress in SCHIP, its future reviews are likely to benefit from improvements in state-level estimates of the number of uninsured children and evaluations of program implementation. Moreover, improvements in states’ analyses and available data should help the OIG identify and address areas in need of additional review. However, to the extent that these improvements are not in place by the time the OIG undertakes its second analysis due in 2003, it may benefit from expanding its scope of work to identify and assess states with more rigorous analyses. The OIG may also wish to review other sources that have assisted states in making evaluation improvements. For example, while some states have received private grant funds to help with SCHIP enrollment, they have also received technical assistance for the purpose of conducting evaluations on the success of their enrollment strategies. Other states have paired with universities or research organizations to improve their information on the uninsured. By also drawing on the experience of states with strong evaluations or data sources, the OIG will be better able to identify approaches that could further strengthen federal and states’ approaches and inform the Congress on progress in implementing SCHIP. Through its periodic evaluations of states’ efforts to ensure appropriate SCHIP enrollment and to reduce the number of uninsured children, the OIG is in a position to provide objective information to the Congress and others about the program’s operation and success. To better capture the experience of all states, regardless of the design of their SCHIP programs, the OIG should expand its scope beyond the 13 states in its first review to also include states that operate separate child health programs within SCHIP combination programs and consider including Medicaid expansion programs as well. This would provide a broader base for understanding how well states are screening for Medicaid eligibility and identifying issues related to reducing the number of uninsured children. Such an expansion of scope may also help identify states with more rigorous evaluations of their SCHIP programs, and thus provide information on effective approaches to SCHIP evaluation as well as more complete information for the Congress. In order to better inform the Congress on states’ efforts to implement SCHIP, we recommend that the HHS inspector general expand the scope of the statutorily required periodic reviews to include all states with separate child health programs, including those with combination programs, and consider using its general audit authority to explore whether issues of appropriate SCHIP enrollment also exist among states that have opted for Medicaid expansions under SCHIP, and should therefore be included in future OIG reviews. We provided the inspector general of HHS an opportunity to comment on a draft of this report. In its comments, the OIG concurred with our recommendations, and agreed that expanding the scope of its inspections to include combination programs that include separate child health programs would give a greater breadth of information. It also agreed that including SCHIP Medicaid expansions would broaden the perspective and present more conclusive information regarding the status of states’ SCHIP programs. The OIG also provided general comments regarding its approach and possible approaches to designing future reviews. For example, the OIG stated that it would consider including differing state processes as a factor in its next sample design. The OIG also noted the importance of focusing on states’ measurement of their own program performance. We agree with the OIG that properly conducted state evaluations serve a vital function and we believe that continued review of these efforts by the OIG is an important contribution to better understanding states’ progress under SCHIP. In response to the OIG’s oral and written comments, we revised the report to better clarify the scope of the BBRA mandate. The full text of the OIG’s written comments is reprinted in appendix I. We are sending copies of this report to the inspector general of the Department of Health and Human Services and other interested parties. We will also make copies available to others on request. If you or your staffs have questions about this report, please contact me on (202) 512- 7118 or Carolyn Yocom at (202) 512-4931. JoAnn Martinez-Shriver and Behn Miller also made contributions to this report. Medicaid and SCHIP: States’ Enrollment and Payment Policies Can Affect Children’s Access to Care. GAO-01-883. Washington, D.C.: Sept. 10, 2001. Children’s Health Insurance: SCHIP Enrollment and Expenditure Information. GAO-01-993R. Washington, D.C.: July 25, 2001. Medicaid and SCHIP: Comparisons of Outreach, Enrollment Practices, and Benefits. GAO/HEHS-00-86. Washington, D.C.: April 14, 2000. Children’s Health Insurance Program: State Implementation Approaches are Evolving. GAO/HEHS-99-65. Washington, D.C.: May 14, 1999. | Congress created the State Children's Health Insurance Program (SCHIP) in 1997 to reduce the number of uninsured children in families with incomes that are too high to qualify for Medicaid. Financed jointly by the states and the federal government, SCHIP encourages state participation by offering a higher federal matching rate than the Medicaid program. Concerns have been raised that states might inappropriately enroll Medicaid-eligible children in SCHIP and thus obtain higher federal matching funds than allowed under Medicaid. The Department of Health and Human Services Office of Inspector General (OIG) concluded that Medicaid-eligible children were not being enrolled in SCHIP by the 13 states that administer separate child health care programs. Furthermore, the issue of appropriate enrollment is not limited to states with completely separate child health programs but also applies to those states with combination programs and Medicaid expansions, which also receive the higher SCHIP matching rate. The OIG could not conclude whether states were reducing the number of uninsured children and meeting the objectives and goals they established in their SCHIP programs. The OIG found that some states had set program goals without considering how they might be measured and that states' staffs often lacked adequate evaluation skills. |
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DOD has acknowledged that process and system weaknesses impair its ability to account for the full cost of military equipment and that these weaknesses impede its ability to achieve financial statement auditability. DOD is required by various statutes to improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the information needs of agency management and oversight bodies, and to produce annual audited financial statements prepared in accordance with generally accepted accounting principles (GAAP) on the results of its operations and its financial position. Federal accounting standards, which are GAAP for federal government entities, require that the full cost of outputs (e.g., military equipment assets acquired) be reflected on agencies’ financial statements. As stated earlier, full cost is the sum of direct and indirect costs to produce the output. The standards require that the cost of property, plant, and equipment, which includes military equipment, shall include all costs incurred to bring the asset to a form and location suitable for its intended use. Examples of these costs include amounts paid to vendors; labor and other direct or indirect productions costs; and direct costs of inspection, supervision, and administration of construction contracts and construction work. Federal accounting standards allow reporting entities to use reasonable estimates of historical cost to value their property, plant, and equipment while encouraging them to establish adequate controls and systems to reliably capture asset costs in the future. DOD is also required by law to provide, at least annually, Selected Acquisition Reports (SARs) to congressional defense committees on the status of its MDAPs. SARs are the primary means by which DOD reports the status of these programs to Congress. These reports are intended to provide Congress the information needed to perform its oversight functions. In general, SARs contain information on the cost estimates, schedule, and performance of a major acquisition program in comparison with baseline values established at program start. Specific information contained in the SARs includes: program description, including the reasons for any significant changes in the total program cost for development and procurement reported in the previous SAR; schedule milestones; quantity of items to be purchased; procurement unit cost; contractor costs (initial contract price, the current price, and the price at completion); and technical and schedule variances. Congressional reporting through the SAR ceases after 90 percent of the items related to a particular MDAP have been delivered to the government, or after 90 percent of the planned expenditures under the program or subprogram have been made. After the program reaches the 90 percent threshold, the items are no longer categorized as MDAPs and enter what is referred to as the sustainment period in which the cost of the units are categorized as Operations and Support. A program can be redesignated as an MDAP if planned modifications or upgrades to an asset meet the criteria for MDAP designation. Our review of prior reports, studies, and analyses to identify weaknesses in DOD’s operations identified the following seven categories of weaknesses that impaired the department’s ability to account for the cost of military equipment: (1) support for the existence, completeness, and cost of recorded assets is needed; (2) more detail is needed in DOD contracts to allocate costs to contract deliverables; (3) additional guidance is needed to help ensure consistency for asset accounting; (4) monitoring is needed to help ensure compliance with department policies; (5) departmentwide cost accounting requirements need to be defined; (6) departmentwide cost accounting capabilities need to be developed; and (7) systems integration is needed. DOD has begun actions to address these previously reported weaknesses; however, it acknowledges that additional actions are needed before these weaknesses are fully addressed. DOD officials—including the Deputy Director, Financial Improvement and Audit Readiness (FIAR) Directorate, Office of the Under Secretary of Defense (Comptroller), and the Deputy Director of Property and Equipment Policy within the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L)— stated that the size and complexity of the department’s operations make it difficult to reach consensus on how best to address the weaknesses. They acknowledged that the department is currently focused on verifying the reliability of information, other than cost, recorded in its property accountability systems. These officials told us that until the department fully addresses the weaknesses that prevent it from accurately and completely accounting for the cost of its military equipment, it will continue to rely on a methodology to estimate the cost of its military equipment assets for financial reporting purposes. The availability of timely, reliable, and useful financial information on the full costs associated with acquiring assets is an essential tool that assists both management and Congress in effective decision making such as determining how to allocate resources to programs. It also provides an important monitoring mechanism for evaluating program performance that can help strengthen oversight and accountability. The seven categories of weaknesses and DOD’s actions to address them are as follows. Support for the existence, completeness, and cost of recorded assets is needed. DOD has not maintained the documentation needed to support the existence, completeness, and full cost of its military equipment assets. There were instances in which the department could not (1) trace assets recorded in its property accountability systems to actual physical assets, or (2) locate the records supporting the actual physical assets. Further, for assets included in the accounting system, DOD could not substantiate that all costs (e.g., acquisition, freight, inspection, and modification) had been captured and reported because of the lack of documentation (e.g., invoices). Standards for internal control call for transactions and other significant events to be accurately and timely recorded, as well as clearly documented, with the documentation being readily available for examination. In addition, DOD policy requires that the components maintain all financial records documenting the acquisition of property, plant, and equipment in support of the department’s Records Management Program. The components are also required to establish and maintain the Records Management Program, as well as periodically evaluate compliance. DOD stated that it has three ongoing initiatives to address this weakness—the military equipment valuation (MEV), the Proper Financial Accounting Treatment for Military Equipment (PFAT4ME), and the Wide Area Work Flow (WAWF). As allowed by federal accounting standards, DOD is using its MEV methodology to estimate the historical cost of its military equipment assets. The MEV methodology uses a combination of available data (budgetary and expenditure) to estimate the historical cost of military equipment assets. These estimated values were reported on the department’s fiscal year 2006 through 2009 financial statements. However, the results of several DOD Inspector General (IG) audits and an evaluation by the Under Secretary for AT&L identified implementation issues that impaired the reliability of the derived cost estimates in part, because DOD was unable to provide documentation to substantiate the universe of assets subject to its valuation methodology. For example, both reported that, in some cases, assets were included in the valuation that no longer existed, and assets that existed were improperly excluded from the valuation. To address these concerns, in 2009 DOD initiated efforts—primarily physical inventories—to verify the reliability of information recorded in its property accountability systems. In May 2010, the DOD Comptroller issued guidance for the performance of the physical inventories and internal control testing. This guidance states that the components should verify critical information, such as individual item identifier, category/asset type, location, condition, utilization rate, and user organization. It also identifies the need to perform internal control testing. However, it does not specifically require verification that a unique identifier has been assigned to the asset and recorded in the Item Unique Identification (IUID) registry as required by DOD policy. The guidance also does not provide specific guidance to perform tests of internal controls (e.g., does not identify which controls to test or how to do so). DOD officials, including the Deputy Director, Financial Improvement and Audit Readiness (FIAR) Directorate, Office of the Under Secretary of Defense (Comptroller) agreed with our assessment. The FIAR Deputy Director further stated that it is difficult to provide specifics on the internal control testing to be performed in the above guidance so the department intends to establish a 2-day training course by the summer of 2010 that will provide instruction on how to identify and test controls. DOD plans to complete the verification of the existence and completeness of its military equipment property accountability records in fiscal year 2015. Previously estimated military equipment values reported on its financial statements will be reassessed upon completion of verification efforts at each military department. In addition, the department issued its PFAT4ME policy in June 2006 that requires all contracts be structured at the level of detail needed to provide supporting documentation regarding the cost of individual items delivered. The contract-related documentation (e.g., invoices, and receipt and acceptance documents) received electronically that results from performance of a contract is then to be input into a central repository within the WAWF, which became operational in fiscal year 1999, where it is maintained and available to help support full cost determinations. However, these efforts do not adequately address this weakness because they do not address the lack of supporting documentation for noncontract- related costs such as program management costs incurred. As stated earlier, DOD policy requires components to maintain supporting documentation for the full cost of acquired military equipment assets; however, DOD has not enforced components’ compliance with its record management policy. Because it does not have the needed supporting documentation, the department has to rely on an estimation methodology to derive these assets’ values. More detail is needed in DOD contracts to allocate costs to contract deliverables. DOD had not structured contracts at the level of detail needed to identify and assign costs to individual military equipment assets. Specifically, the contracts were not structured in a manner that facilitated application of the appropriate accounting treatment for costs, including the identification of those costs that should be captured as part of the full cost of a deliverable. Standards for internal control require that the agency identifies, captures, and distributes information at the sufficient level of detail that permits management to carry out its roles and responsibilities. DOD stated that the PFAT4ME and the Item Unique Identification (IUID) initiatives will address this weakness. PFAT4ME requires program managers to structure all contracts entered into after October 2006 in a manner to facilitate the appropriate accounting treatment of contract costs. To implement this initiative, DOD developed a training course on how to comply with the requirements outlined in its PFAT4ME policy. However, it is not a core or required course and DOD has not established a process to ensure that acquisition personnel affected by this policy, including program managers and business/financial management analysts, complete the course. In 2009, AT&L began to perform oversight activities to verify that the components were properly structuring the contracts; however, AT&L officials stated that they were not verifying whether program management offices were appropriately accounting for the cost of each deliverable. In addition, we found that DOD has not developed guidance for these oversight activities, including how often these reviews are to be performed, roles and responsibilities for this oversight, the steps to be performed, and the basis for selecting contracts for review. In addition, DOD policy requires contract deliverables, including military equipment, that meet predefined criteria, be assigned a unique item identifier. According to DOD officials responsible for the IUID initiative, the purpose of the unique item identifier is to facilitate asset accountability and tracking, including the identification and aggregation of related costs to derive the full cost of a contract deliverable. The department expected to fully implement IUID by fiscal year 2015; however, according to DOD officials, the department is not on target for achieving its timeline. These officials told us that the department has encountered difficulty in obtaining consensus from the components in implementing this initiative primarily due to the applicability of the IUID requirement to controlled inventory items. The Deputy for Program Development and Implementation, Defense Procurement and Acquisition Policy within AT&L explained that controlled inventory items—which encompass items such as ammunition and threaded fasteners and number in the hundreds of millions—were never intended to be assigned individual unique item identifiers. The department is currently in the process of clarifying this requirement. DOD has determined that if it does not modify the IUID policy to eliminate this requirement, it will not be able to fully implement IUID until fiscal year 2023. If the IUID requirements are revised to exclude these items, DOD expects to fully implement IUID by 2017. DOD officials acknowledged that they have not yet developed policies and procedures that define how IUID will be used to identify and aggregate asset costs. Additional guidance is needed to help ensure consistency for asset accounting. DOD had not developed a policy and procedures requiring the components to account for the full costs of military equipment assets. Standards for internal control call for agencies to develop and implement appropriate policies, procedures, techniques, and mechanisms to ensure that management’s directives are consistently carried out. DOD stated that the PFAT4ME, IUID, and the MEV methodology will address this weakness. AT&L officials, including the Deputy Director of Property and Equipment Policy, told us that they are working with the Federal Accounting Standards Advisory Board’s Accounting and Auditing Policy Committee (AAPC) to develop full cost guidance. They also noted that AT&L has drafted guidance intended to supplement its PFAT4ME policy memorandum to assist managers in identifying the types of contract costs that should be included in determining the full cost of an asset, such as military equipment. According to these officials, this policy has not been finalized because the department has had difficulty reaching consensus regarding its cost accounting requirements. These officials stated that this draft guidance does not yet address noncontract-related costs, such as program management costs incurred directly by the military services and indirect costs. They did not provide a time frame for completing these efforts. As stated earlier, the department is currently relying on an estimation methodology referred to as MEV to report the cost of its military equipment. In order for management and auditors to rely upon the results of the methodology it is important that the methodology be implemented consistently. To help ensure consistency in the application of its estimating methodology, DOD developed business rules in 2005. In addition to the MEV implementation issues identified by the DOD IG, we identified inconsistencies in the business rules for estimating the cost of military equipment, which further impact the reliability of reported estimates. For example, the MEV full cost business rule states that all costs incurred to acquire and bring military equipment to a form and location for its intended use should be capitalized, including the direct costs of maintaining the program management office. However, the MEV program management office business rule states that program management office costs are immaterial and should be expensed. DOD officials agreed that there are inconsistencies in the business rules and acknowledged the need to revisit them. Monitoring is needed to help ensure compliance with department policies. DOD has not established adequate monitoring controls to assess compliance with applicable policies or the extent to which actions taken are achieving their intended objectives. For example, although DOD property accountability policies and regulations require DOD components to (1) perform periodic physical inventories and to reconcile the results to the associated property accountability records, and (2) track and maintain records for all government-furnished property in the possession of contractors, DOD management has not established needed monitoring controls to help ensure compliance. Standards for internal control require agencies to develop and implement ongoing monitoring activities over the internal control system to ensure adherence with policies and procedures. DOD financial management and AT&L officials, including the Deputy Director of Property and Equipment Policy within AT&L, stated that weaknesses in the department’s ability to ensure compliance with property accountability requirements have impacted its ability to substantiate reported military equipment costs. As a result of the breakdowns in compliance with policies and regulations for recording and tracking property, property records used by the components for valuing its military equipment included assets that no longer existed, and did not include other assets that did exist. To address this concern, DOD is in the process of verifying its property accountability records by conducting physical inventories and internal control testing. As stated earlier, DOD has issued guidance, but it does not provide specifics as to the internal control testing to be performed. The DOD Comptroller told us that the department plans to complete this effort in fiscal year 2015. After completing this effort, effective ongoing monitoring activities are needed to ensure departmentwide compliance with policies designed to help maintain reliable property accountability records. Departmentwide cost accounting requirements need to be defined. DOD has not defined its requirements for the identification and aggregation of cost information, which will be the foundation for its development of departmentwide cost accounting and management capabilities. Federal accounting standards require that the full cost of resources, which directly or indirectly contribute to the production of outputs (e.g., military equipment acquired), be reflected on an agency’s financial statement. To ensure that costs are identified and accumulated in a consistent and comparable manner, entities should define their requirements and procedures for identifying, measuring, analyzing, and reporting costs. Since DOD has stated that it intends to support the identification, aggregation, accounting, and reporting of cost information through the implementation of the Enterprise Resource Planning (ERPs), it is important that DOD define its cost accounting requirements to ensure that these systems provide these capabilities. Institute of Electrical and Electronics Engineers (IEEE) and the Software Engineering Institute at Carnegie Mellon recommend that organizations define their requirements, which are the specifications that system developers and program managers use to develop or acquire, implement, and test a system. This process should identify user requirements, as well as those needed for the definition of the system. It is critical that requirements be carefully defined and that they reflect how the organization’s day-to-day operations are or will be carried out to meet mission needs. Improperly defined or incomplete requirements have been commonly identified as a root cause of system failure and systems that do not meet their cost, schedule, or performance goals. DOD Comptroller and Business Transformation Agency officials stated that the implementation of the ERPs and its Standard Financial Information Structure (SFIS) are intended to address this weakness. Comptroller and Business Transformation Agency and military department financial management and comptroller officials stated that most of the ERPs under development within the military departments have cost accounting management capabilities inherent in their design as required by DOD policy. Although agencies should first define their requirements, which are then used to evaluate the system’s capabilities to determine if it will meet users’ needs before it is developed or acquired, the department has not yet defined its cost accounting requirements at the major component level, including how SFIS will be used to support cost accounting in the existing and ERP system environments. They stated that the department has been unable to reach consensus on how to implement SFIS in support of cost accounting and management. SFIS is intended to be a comprehensive “common business language” that will standardize the financial reporting of information and data for budgeting, financial accounting, and cost/performance management. DOD has not yet determined how the SFIS data elements will be used to identify and aggregate cost information, nor has it established time frames for developing the cost accounting requirements and completing SFIS. Departmentwide cost accounting capabilities need to be developed. DOD had not developed departmentwide cost accounting capabilities to capture military equipment asset costs. Federal accounting standards require agencies to develop and implement cost accounting systems that provide the capability to collect cost information by responsibility segments, measure the full cost of outputs, provide information for performance measurement, integrate cost accounting and general financial accounting, provide appropriate and precise information, and accommodate special cost-management needs. DOD’s legacy financial management and related business systems were not designed to meet current financial reporting requirements and do not provide adequate evidence for supporting material amounts on the financial statements or acquisition management decision making. These systems were designed to record and report information on the status of appropriations and support funds management, and not designed to collect and record financial information in compliance with federal accounting standards. DOD acknowledged that it does not yet have the capability to identify, aggregate, and capture the full costs of its military equipment and has stated that the ERPs are intended to provide this capability. We have previously reported on problems that DOD has encountered in its efforts to implement ERPs. In 2007, we reported that the Army lacked an integrated approach for implementing its ERPs, which could result in interoperability problems. In September 2008, the Army reported a similar finding. Specifically, the Army reported that interoperability problems were likely to occur due to the lack of common data definitions and structures between the Army’s ERPs—General Fund Enterprise Business System (GFEBS), Global Combat Support System-Army (GCSS- Army), and Logistics Modernization Program (LMP)—thus resulting in the need for manual reconciliations and reduced efficiencies. The report concluded that the planned configuration of these systems may prevent the Army from receiving the intended benefits of an ERP, including financial transparency and cost accounting. Army officials stated that they are addressing these deficiencies, but did not provide a time line for completion. In July 2009, Navy reported that its ERP did not yet provide the capability to aggregate cost information to derive the full cost of its military equipment and to segregate military equipment from other general property, plant, and equipment. The Navy Financial Management Officer stated that these deficiencies have not yet been addressed because of other priorities. DOD stated that ERPs are critical to transforming business operations within the military departments. Systems integration is needed. DOD had not fully integrated its property and logistics systems with acquisition and financial systems. DOD policy requires that its financial management systems are planned for and managed together, operated in an integrated fashion, and linked together electronically in an efficient and effective manner to provide reliable, timely, and accurate financial management information. The department’s property and logistics systems were not designed to capture acquisition costs and the cost of modifications and upgrades, or to calculate depreciation. Many of the financial management systems in use are not fully integrated with other systems within the military components or departmentwide. The number of system interfaces and subsidiary and feeder systems, and the lack of standard data elements employed by each DOD component, make it difficult to cross-walk data between systems, share data, and ensure consistency and comparability of data. In March 2009, DOD reported that its legacy system environment does not facilitate the identification and aggregation of the full cost of its assets. DOD officials, including the Deputy Director of Property and Equipment Policy, AT&L, stated that the implementation of the ERPs and SFIS is intended to address this weakness. To facilitate information sharing for financial reporting purposes, in August 2005 DOD issued a policy requiring systems, including ERPs, that contain financial information to provide the ability to capture and transmit information following the SFIS data structure or, if not, to demonstrate that this capability will be achieved through a cross- walk to the SFIS data structure. DOD components and agencies are required to report to the Business Transformation Agency (BTA) the extent to which SFIS requirements, as defined in the department’s business enterprise architecture, are met. BTA officials, including the official responsible for the SFIS initiative, stated that the department is developing a process to validate the information included in the SFIS compliance reports submitted by the components and agencies but did not provide a time frame for completion. However, if certain SFIS requirements, such as cost accounting, are not clearly defined, including a determination of how cost information should be identified, aggregated, and managed within and across acquisition programs, the department’s intent to achieve standardization and comparability of cost information will be at risk. Further, as stated above, the Army’s ERPs—GFEBS, GCSS- Army, and LMP—may experience interoperability problems because of the lack of common data definitions and structures. In addition, DOD stated that it has not yet determined whether or how WAWF and the IUID will be integrated into the emerging ERP environment to facilitate the identification and aggregation of cost to address the agency’s requirements. While DOD is relying on a methodology to estimate the cost of its military equipment, the department has various actions underway to begin laying a foundation for addressing weaknesses that currently impair its ability to identify, aggregate, and account for the full cost of its military equipment assets. For example, DOD has taken important steps such as requiring greater detail in contract-related documentation, such as invoices, and the assignment of unique identifiers to individual items to aid its ability to identify, aggregate, and account for the cost of acquired assets. An additional challenge that DOD faces is establishing the universe of assets subject to valuation and cost accounting. Previous audits and evaluations have showed that some assets that no longer existed were included while other existing assets were improperly excluded from DOD’s property accountability records. This situation exists due to a combination of issues, including gaps in DOD’s guidance and policies related to asset accountability, as well as a lack of compliance with existing policies and guidance. These examples illustrate the interconnection or dependency between the various asset accounting issues the department is facing and its related actions to improve its cost accounting financial management for military equipment. DOD has acknowledged that additional actions are needed before the department achieves cost accounting and management capabilities, but stated that its improvement efforts are not yet focused on achieving these capabilities. Additional efforts are needed to issue additional guidance regarding how to identify the full cost of an asset to supplement its PFAT4ME guidance and to identify and define departmentwide cost accounting requirements at the major component level, including what information is needed to manage cost within and across acquisition programs and support asset valuation and life-cycle management and how implementation of SFIS and the ERPs will support these requirements. Moreover, DOD needs to determine the extent to which certain actions currently underway, such as WAWF and IUID, will be utilized in the emerging ERP environment. Without additional actions and guidance, the department’s current efforts are at risk of not meeting the intended objectives of providing cost accounting capabilities needed to reliably account for and report the full cost of its military equipment. In order to enhance corrective actions underway within DOD to address previously reported weaknesses and improve DOD’s ability to provide reliable information on the full cost of military equipment acquired through MDAPs, we recommend that the Secretary of Defense direct the DOD Chief Management Officer to work jointly with the Under Secretary of Defense (Comptroller); the Under Secretary of Defense for Acquisition, Technology, and Logistics; and the military department Chief Management Officers, as appropriate, to take the following nine actions: Enforce compliance with the department’s records management policy by periodically evaluating the extent to which the components are maintaining documentation in support of the full cost of military equipment. Establish and implement ongoing monitoring activities to enforce compliance with the department’s existing policies and procedures requiring the components to (1) perform periodic physical inventories and to reconcile the results to property accountability records after completion of existing efforts to verify the reliability of the property accountability records and (2) track and maintain records for government-furnished property in the possession of contractors. Update the department’s guidance regarding verification of information in component property accountability records to include verification that all assets recorded in the accountability records that are required by DOD to have a Unique Item Identifier are included in its IUID registry. Develop and implement guidance on how the IUID will be used to identify, aggregate, and report asset cost information. Classify the PFAT4ME training as a core course for the department’s affected acquisition personnel, including program managers, and track attendance to ensure that such personnel take the training. Develop and implement guidance to help ensure compliance with the oversight activities for the PFAT4ME initiative, including how often these reviews are to be performed, roles and responsibilities for oversight, the steps to be performed, and the basis for selecting contracts for review. Complete efforts to develop and implement a policy requiring the components to account for the full cost of military equipment, including guidance for what types of contract and other costs should be included and for determining the appropriate accounting treatment of these costs. Review the MEV methodology business rules to identify inconsistencies and revise the rules as needed. Assess the WAWF and IUID initiatives and determine the extent to which they will be utilized in the emerging ERP business systems environment. Additionally, we recommend that the Secretary of Defense direct the military department Chief Management Officers, in consultation with the Under Secretary of Defense (Comptroller) and the Under Secretary of Defense for Acquisition, Technology, and Logistics, as appropriate, take the following two actions: Define the cost accounting requirements at the major component level, including how SFIS data elements will be used to identify, aggregate, account for, and report cost information. After defining the cost accounting requirements, utilize the requirements as input to the ERPs to help ensure that the ERPs will provide the capability to identify and aggregate cost information for the department’s assets in accordance with DOD’s defined requirements. We received written comments on a draft of this report from the Under Secretary of Defense (Comptroller) which are reprinted in Appendix II. In commenting on the report, the Under Secretary stated the department agreed with the need to establish a framework that provides improved cost and management information that will support better management of Major Defense Acquisitions Programs (MDAP). The department concurred with the 11 recommendations and cited actions taken, under way, or planned to address them. In its response, the department emphasizes that it is sensitive to the cost of obtaining information solely for the purpose of proprietary financial reporting or audit compliance where this information is not otherwise used by management. It further states that DOD has concluded that it is not cost-effective to gather auditable data on the historical cost of military equipment systems for proprietary financial reporting and audit because the information is not used to manage. DOD has indicated that it will propose changes in department policies and instructions to accommodate this decision. These pending policy changes will likely impact DOD’s implementation of our recommendations and so at some point we may need to assess DOD’s corrective actions under the changed policies to determine whether the actions meet the intent of our recommendations. DOD acknowledges that there may be requirements for cost information related to acquisition-program lifecycle management, which the department will accommodate as appropriate. DOD also stated that it is working with federal standard setters to develop full-cost guidance that would guide its cost accounting efforts. The department will integrate this guidance into the ERPs and guide cost accounting efforts and will develop, coordinate, and issue policy and guidance on accounting for the full cost of military equipment consistent with our recommendations. We welcome DOD’s decision to accommodate such requirements and contribute to revised guidance for cost-effectively serving management’s information needs and reliable reporting on the cost of acquisition programs and assets acquired. It is also important to note that while federal accounting standards do not require agencies to collect historical, transaction-based cost data, they encourage agencies that estimate asset value, such as DOD, to establish the internal control practices and systems needed to capture and sustain such data for future acquisitions. We believe that this guidance reflects the importance of actual costs in providing reliable historical information for accountability to the American taxpayer and for management decision making as well. It is important to emphasize that our recommendations are focused not on gathering costs retrospectively but are intended to assist DOD in its efforts to develop the processes and systems needed to produce reliable information going forward. We believe that providing reliable information is likely to include capturing transaction-based costs as historical information for future management decisions and accountability reporting. The availability of timely, reliable, and useful financial information on the costs associated with acquiring assets is an essential tool that assists both management and Congress in effective decision making such as determining how to allocate resources to programs. It also provides an important monitoring mechanism for evaluating program performance that can help strengthen oversight and accountability. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; the Deputy Secretary of Defense/Chief Management Officer; the Under Secretary of Defense (Comptroller)/Chief Financial Officer; the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Under Secretary of the Army/Chief Management Officer; the Under Secretary of the Navy/Chief Management Officer; the Under Secretary of the Air Force/Chief Management Officer; and the Office of Management and Budget’s Office of Federal Financial Management. This report is available at no charge on GAO’s Web site at http://www.gao.gov. Should you or your staff have any questions concerning this report, please contact me at (202) 512-9095 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Our objective was to identify previously reported weaknesses that impair the Department of Defense’s (DOD) ability to provide reliable cost information for military equipment acquired through major defense acquisition programs (MDAPs) and determine what actions DOD has taken to address them. To address this objective, we ob including the military equipment (i.e., weapon systems) assets acquired through such programs, by reviewing DOD guidance and interviewing officials from the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics. We identified and reviewed applicable federal financial accounting standards, and interviewed officials of the Federal Accounting Standards Advisory Board to obtain clarification on the changes made to Statement of Federal Financial Accounting Standards (SFFAS) 35. We searched databases of audit reports issued during calendar years 2005 through 2009 using key terms (e.g., military equipment; general property, plant, and equipment; financial management; tained an understanding of MDAPs, weapons systems acquisition; and major defense acquisition programs). We reviewed the results of our search (e.g., reports, studies, and ana to identify weaknesses in business operations that, based on relevan federal financial accounting standards, impair DOD’s ability to account the cost of military equipment. We grouped these weaknesses into categories. To identify additional reports or relevant DOD studies and analyses and to obtain clarification, as needed, on reported weaknesses, we interviewed key department officials, including the following: Deputy Director, Financial Improvement and Audit Readiness Directorate, Office of the Under Secretary of Defense (Comptroller); Acting Deputy Director, Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics; representatives from the DOD’s Inspector General Office; representatives from the military services’ offices of the Assistan Secretary, Financial Management and Comptroller, Financial Management Operations; and Chief Management Office representatives within DOD and the military services as required by section 304(b). See appendix III for the reports, studies, and analyses reviewed to identify the relevant weaknesses. We discussed with DOD officials the categories of weaknesses we identified as a result of our search of prior reports, studies, and analyses, and obtained supporting documentation—such as memorandums, directives, an independent validation and verification report for the military equipment valuation initiative, and gap analyses related to the Navy Enterprise Resource Planning effort—from DOD on its actions to address them. Using applicable criteria, we assessed whether the actions taken adequately addressed the identified weaknesses. We interviewed th DOD officials referred to above to obtain clarification and explanation of e actions taken to address the weaknesses, including mechanisms and metrics used to monitor progress. We conducted this performance audit from October 2009 through July 2010 in accordance with generally accepted government auditing standards. 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In addition to the contact person named above, key contributors to this reports were Evelyn Logue, Assistant Director; Vanessa Estevez; Maxine Hattery; John Lopez; Chris Martin; Heather Rasmussen; Darby Smith; and Omar Torres. | Major defense acquisition programs (MDAP) are used to acquire, modernize, or extend the service life of the Department of Defense's (DOD) most expensive assets, primarily military equipment. The Weapon Systems Acquisition Reform Act of 2009 (P.L. 111-23), section 304(b), directed us to perform a review of weaknesses in DOD's operations that affect the reliability of financial information for assets acquired through MDAP. To do so, GAO identified and reviewed previously reported weaknesses that impair DOD's ability to provide reliable cost information for military equipment acquired through MDAPs, and determined what actions DOD has taken to address them. GAO searched databases of audit reports issued during calendar years 2005 through 2009 to identify previously reported weaknesses. Using applicable criteria, GAO assessed whether the actions taken by DOD adequately addressed these weaknesses. GAO found that weaknesses that impaired the department's ability to identify, aggregate, and account for the full cost of military equipment it acquires comprised seven major categories. Specifically, DOD had not (1) maintained support for the existence, completeness, and cost of recorded assets; (2) structured its contracts at the level of detail needed to allocate costs to contract deliverables; (3) provided guidance to help ensure consistency for asset accounting; (4) implemented monitoring controls to help ensure compliance with department policies; (5) defined departmentwide cost accounting requirements; (6) developed departmentwide cost accounting capabilities; and (7) integrated its systems. Although the department has acknowledged that it is primarily focused on verifying the reliability of information, other than cost, recorded in its property accountability systems, DOD has begun actions to address these weaknesses and improve its capability to identify, aggregate, and account for the full cost of its military equipment. For example, DOD is requiring that acquisition contracts be structured in a manner that facilitates application of the appropriate accounting treatment for contract costs, including the identification of costs that should be captured as part of the full cost of a deliverable. In addition, it has also begun to require that all contract deliverables that meet defined criteria be assigned a unique item identifier to facilitate asset tracking and aggregation of costs, and that electronic contract-related documentation, such as the invoice and receipt/acceptance documents, be maintained in a central data repository to ensure the availability of supporting documentation. Moreover, the department has begun to identify cost accounting data elements within its Standard Financial Information Structure (SFIS) and requires that its business-related Enterprise Resource Planning (ERP) systems support this structure. These efforts are intended to improve data sharing and integration between business areas. DOD acknowledged that the actions taken to date do not yet provide the department with the capabilities it needs to identify, aggregate, and account for the full cost of its military equipment. For example, DOD has begun to develop ERPs but has not yet defined the cost accounting requirements to be used to evaluate if these ERPs will provide the functionality needed to support cost accounting and management. DOD stated that additional actions, sustained management focus, and the involvement of many functional groups across DOD are needed before weaknesses that impair its ability to account for the full cost of the military equipment it acquires are addressed. Until DOD defines its cost accounting requirements and completes the other actions it has taken (e.g., defining data elements in SFIS) to support cost accounting and management, DOD is at risk of not meeting its financial management objective to report the full cost of its military equipment. DOD has stated that until these actions are completed it will continue to rely on its military equipment valuation (MEV) methodology to estimate the cost of its military equipment for financial reporting purposes. GAO is making 11 recommendations intended to strengthen actions DOD has taken to begin improving its ability to identify, aggregate, and account for the cost of military equipment acquired through MDAPs. Specifically, our recommendations focused on the need to define departmentwide cost accounting requirements and develop the process and system capabilities needed to support cost accounting and management. DOD concurred with our recommendations. |
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From fiscal year 2002 to fiscal year 2008, the U.S. government provided approximately $16.5 billion for the training and equipping of Afghan National Security Forces. State and Defense officials told us they will request over $5.7 billion to train and equip the Afghan army and police in fiscal year 2009. The goal of these efforts is to transfer responsibility for the security of Afghanistan from the international community to the Afghan government. As part of this effort, from June 2002 through June 2008, CSTC-A obtained about 380,000 small arms and light weapons from the United States and other countries for the Afghan army and police. The United States purchased over 240,000 of these weapons for about $120 million and shipped them to Afghanistan beginning in December 2004. Also, CSTC-A reported that it coordinated the donation of about 135,000 additional weapons from 21 countries, which valued their donations at about $103 million (see app. II). Figure 1 illustrates the number of weapons obtained for ANSF by USASAC, Navy IPO, and international donors since June 2002. The United States and international donors have provided rifles, pistols, machine guns, grenade launchers, shotguns, rocket-propelled grenade launchers, and other weapons. About 80 percent of the U.S.-procured weapons were “non-standard” weapons, which are not typically supplied by Defense. Many non-standard weapons, including about 79,000 AK-47 rifles, were received from former Warsaw Pact countries or were obtained from vendors in those countries. (See fig. 2 for details on U.S.- procured weapons shipped to Afghanistan for ANSF.) USASAC and Navy IPO procured most of the 242,000 weapons for ANSF through an adaptation of the Foreign Military Sales (FMS) program referred to by Defense as “pseudo-FMS.” As in traditional FMS, pseudo-FMS procurements are overseen by DSCA. However, in contrast to traditional FMS procurements, for Afghanistan, Defense primarily used funds appropriated by the Congress for the Afghanistan Security Forces Fund to purchase weapons to train and equip ANSF. USASAC procured about 205,000 (85 percent) of these weapons, including about 135,000 non-standard weapons purchased from four U.S.-based contractors. Navy IPO provided the remaining 37,000 (15 percent) M-16 rifles for the Afghan National Army. After procuring weapons for ANSF, Defense or its contractors transported them to Afghanistan by air, and CSTC-A received the weapons at Kabul International Airport. The Afghan National Army transported the weapons from the airport to one of two central storage depots in Kabul— one for the Afghan National Army and another for the Afghan National Police. Due to the limited operational capacity of the Afghan army and police and the extremely hostile environment in which they operate, CSTC-A retains control and custody of the weapons provided by the United States and international donors during storage at the central depots until the weapons are issued to ANSF units. In addition to maintaining the security and control of weapons stored at the central depots, CSTC-A trains ANSF in inventory management and weapons accountability. To this end, the central depots are staffed by U.S. and coalition military personnel, U.S. contractors, contract Afghan staff, and ANSF personnel. According to DSCA officials, equipment provided to ANSF is subject to end use monitoring, which is meant to provide reasonable assurances that the ANSF is using the equipment for its intended purposes. CSTC-A serves as the security assistance organization (SAO) for Afghanistan, with responsibility for monitoring the end use of U.S.-procured weapons and other equipment provided to ANSF, among other security assistance duties. DSCA’s Security Assistance Management Manual provides guidance for end use monitoring, which is classified as either “routine” or “enhanced,” depending on the sensitivity of the equipment and other factors, as follows: Routine end use monitoring. For non-sensitive equipment provided to a trusted partner, DSCA guidance calls for SAOs to conduct routine monitoring in conjunction with other required security assistance duties. As such, according to DSCA officials, DSCA expects SAOs to record relevant end use monitoring observations made during interactions with host country military and defense officials, such as visits to defense facilities, meetings or telephone conversations, military ceremonies, and dignitary visits. Enhanced end use monitoring. For sensitive defense articles and technology transfers made within sensitive political situations, DSCA guidance calls for more intensive and formal monitoring. This includes providing DSCA with equipment delivery records with serial numbers, conducting routine physical inventories of the equipment by serial number, and quarterly reporting on inventory results. Figure 3 illustrates the accountability process for weapons that CSTC-A provides to ANSF. Defense did not establish clear guidance on what accountability procedures apply when it is handling, transporting, and storing weapons obtained for ANSF through U.S. procurements and international donations. As a result, our tests and analysis of inventory records show significant lapses in accountability for these weapons. Such accountability lapses occurred throughout the weapons supply process. First, when USASAC and CSTC-A initially obtained weapons for ANSF, they did not record all the corresponding serial numbers. Second, USASAC and CSTC-A did not maintain control or visibility over U.S.-procured weapons during transport to the two ANSF central storage depots in Kabul. Third, CSTC-A did not maintain complete and accurate inventory records or perform physical inventories of weapons stored at the central depots. Finally, inadequate U.S. and ANSF staffing at the central depots along with poor security and persistent management challenges have contributed to the vulnerability of stored weapons to theft or misuse. These lapses have hampered CSTC-A’s ability to detect weapons theft or other losses. CSTC-A has recently taken steps to correct some of the deficiencies we identified, but CSTC-A has indicated that its continued implementation of the new accountability procedures is not certain, considering staffing constraints and other factors. Defense did not clearly establish what accountability procedures applied to the physical security of weapons intended for ANSF. As a result, the Defense organizations involved in providing weapons for ANSF, including DSCA, USASAC, Navy IPO, U.S. Central Command, and CSTC-A, did not have a common understanding of what accountability procedures to apply to these weapons while they were in U.S. control and custody. Defense guidance on weapons accountability lays out procedures for Defense organizations to follow when handling, storing, protecting, securing, and transporting Defense-owned weapons. These procedures include (1) serial number registration and reporting and (2) 100 percent physical inventories of weapons stored in depots by both quantity and serial number at least once annually. The objective of serial number registration and reporting procedures, according to Defense guidance, is to establish continuous visibility over weapons through the various stages of the supply process, including “from the contractor to depot; in storage.” However, Defense did not specifically direct U.S. personnel to apply these or any alternative weapons accountability procedures for the weapons in their control and custody intended for ANSF, and CSTC-A officials we spoke to were uncertain about the applicability of existing Defense guidance. In August 2008, the Under Secretary of Defense for Intelligence emphasized the importance of safeguarding weapons in accordance with existing accountability guidance until they are formally transferred to ANSF, stating that “the security of conventional [arms, ammunition, and explosives] is paramount, as the theft or misuse of this material would gravely jeopardize the safety and security of personnel and installations world-wide.” However, in October 2008, Defense’s Inspector General reported that U.S. Central Command had not clearly defined procedures for accountability, control, and physical security of U.S.-supplied weapons to ANSF, and as a result, misplacement, loss, and theft of weapons may not be prevented. The Inspector General recommended, among other things, that U.S. Central Command issue formal guidance directing the commands and forces in its area of responsibility, including CSTC-A, to apply existing Defense weapons accountability procedures. U.S. Central Command and the Office of the Under Secretary of Defense for Intelligence concurred with this recommendation. Nonetheless, U.S. Central Command officials we spoke to in December 2008 did not have a common understanding of when formal transfer of the weapons to ANSF is considered to have occurred, and hence up to what point to apply Defense accountability procedures, if at all. As of December 2008, U.S. Central Command had not decided what new guidance to issue. In July 2007, we made Defense and the Multinational Force-Iraq aware that they had not specified which accountability procedures applied for weapons provided to Iraq under the train-and-equip program in that country. To help ensure that U.S.-funded equipment reaches the Iraqi security forces as intended, we recommended that the Secretary of Defense determine which accountability procedures should apply to that program. In January 2008, the Congress passed legislation requiring that no defense articles may be provided to Iraq until the President certifies that a registration and monitoring system has been established and includes, among other things, the serial number registration of all small arms to be provided to Iraq, and a detailed record of the origin, shipping, and distribution of all defense articles transferred under the Iraq Security Forces Fund or any other security assistance program. On the basis of our data analysis and tests of weapons inventory records, we estimate that USASAC and CSTC-A did not maintain complete records for about 87,000 weapons—about 36 percent of over 242,000 weapons they procured for ANSF and shipped from December 2004 through June 2008. For about 46,000 weapons, USASAC did not maintain serial number records—information fundamental to weapons accountability—and for an estimated 41,000 weapons, CSTC-A did not maintain documentation on the location or disposition, based on our testing of a random sample of available serial number records. Weapons for which CSTC-A could not provide complete accountability records were not limited to any particular type of weapon or a specific shipment period. Records were missing for six of the seven types of weapons we tested and from shipments made during every year from 2004 to 2008. In addition, CSTC-A did not maintain complete or reliable records for the weapons it reported it had obtained from international donations from June 2002 through June 2008. According to CSTC-A, this totals about 135,000 weapons. USASAC and Navy IPO records indicate that they procured over 242,000 weapons and shipped them to Afghanistan from December 2004 through June 2008. However, USASAC did not record and maintain the serial numbers for over 46,000 of the weapons it purchased. USASAC’s records were incomplete because it did not require contractors to submit serial numbers for non-standard weapons they provided—a standard practice in traditional Foreign Military Sales. In July 2008, USASAC indicated that it would begin recording serial numbers for all weapons it procures for ANSF. (See app. III for a timeline of key events relating to accountability for ANSF weapons and other sensitive equipment.) However, as of December 2008 USASAC had not yet included provisions in its procurement contracts requiring the vendors of nonstandard weapons to provide these serial numbers. Furthermore, CSTC-A did not record the serial numbers for the weapons it received from international donors and stored in the central depots in Kabul for eventual distribution to ANSF. In a July 2007 memorandum, the Commanding General of CSTC-A noted that for international donations there was “no shipping paperwork to confirm receipt, and equipment was not inventoried at arrival for validation.” By not recording serial numbers for weapons upon receipt, USASAC and CSTC-A could not verify the delivery and subsequent control of weapons in Afghanistan. In July 2008, CSTC-A began to record serial numbers for all the weapons it received, including U.S.-procurements and international donations. However, CSTC-A had indicated that its continued recording of serial numbers was not certain. In the standard operating procedures it established in July 2008, CSTC-A indicated that it would record these numbers “if conditions are favorable with enough time and manpower allotted to inventory.” In December 2008, CSTC-A officials told us that to date they were fully implementing these new procedures. USASAC, Navy IPO, CSTC-A, Defense shippers, and contractors have been involved in arranging the transport of U.S.-procured weapons into Kabul by air. However, these organizations did not communicate adequately to ensure that accountability was maintained over weapons during transport. In particular, according to CSTC-A officials: USASAC and Navy IPO did not always provide CSTC-A with serial number records for weapons shipped to Afghanistan against which CSTC-A could verify receipt. Defense shippers sometimes split weapons shipments among multiple flights, making it difficult for CSTC-A to reconcile partial shipments received at different times with the information the suppliers provided for the entire order. Suppliers did not always label weapons shipments clearly, leading to confusion over their contents and intended destinations. CSTC-A did not always send confirmation of its receipt of weapons to the supplying organizations. Without detailed information about weapons shipments it was difficult for USASAC, Navy IPO, and CSTC-A to detect discrepancies, if any, between what weapons suppliers reported as shipped and those CSTC-A received. According to CSTC-A, when weapons arrived at the Kabul Afghanistan International Airport, CSTC-A personnel typically identified and counted incoming pallets of weapons but did not count individual weapons or record serial numbers. CSTC-A then temporarily gave physical custody of the weapons to the Afghan National Army for unescorted transport from the airport to the central depots in Kabul. Because CSTC-A did not conduct physical inventory checks on weapons arriving at the airport, due to security concerns at that facility, CSTC-A had limited ability to ensure that weapons were not lost or stolen in transit to the depots. After the Afghan National Army transported weapons to the central depots, CSTC-A did not document the transfer of title for weapons to ANSF. Since no Afghan officers were present at the depots to take possession of the weapons, CSTC-A personnel received the weapons and processed them into inventory for storage. Although Defense did not provide direction to CSTC-A on how and when to transfer title to ANSF, CSTC-A officials told us they considered title transfer to have occurred, without any formal documentation, when information about the weapons was typed into computer inventory systems at the central depots. In February 2008, a revision to DSCA’s Security Assistance Management Manual called for U.S. government officials delivering equipment to a foreign nation under pseudo-FMS to keep documentation showing when, where, and to whom delivery was made and report this information to the military organization responsible for procurement. CSTC-A officials told us that they were not certain whether this revised guidance applied to ANSF weapons and therefore have not provided any title transfer documentation to USASAC or Navy IPO, the procuring organizations. However, regardless of how and when title passed to ANSF and how title transfer was documented, because ANSF officials were not present at the depots to take possession, CSTC-A retained control and custody of the weapons at the depots. CSTC-A did not maintain complete and accurate inventory records for weapons at the central storage depots and allowed poor security to persist. Until July 2008, CSTC-A did not track all weapons at the depots by serial number or conduct routine physical inventories. Moreover, CSTC-A could not identify and respond to incidents of actual or potential compromise, including suspected pilferage, due to poor security and unreliable data systems. Specific gaps in accountability controls include the following: Incomplete serial number recording. For over 5 years, CSTC-A stored weapons in the central depots and distributed them to ANSF units without recording their serial numbers. In August 2007, nearly 10 months after CSTC-A’s Commanding General mandated serial number control, CSTC-A began registering weapons by serial number as they were issued to ANSF units. While this established some accountability at the point of distribution, thousands of weapons under CSTC-A control had no uniquely identifiable inventory record. CSTC-A initiated comprehensive serial number tracking in July 2008, recording the serial numbers of all weapons in inventory at that time and beginning to register additional weapons upon receipt at the central depots. Nonetheless, CSTC-A officials told us that staff shortages made serial number recording challenging. Lack of physical inventories. CSTC-A did not conduct its first full inventory of weapons in the central depots until June 2008. Without conducting regular physical inventories, it was difficult for CSTC-A to maintain accountability for weapons at the depots and detect weapons losses. Poor security. CSTC-A officials have reported concerns about the trustworthiness of Afghan contract staff and guards at the central depot that serves the Afghan National Army. We also observed deficiencies in facility security at this depot, including Afghan guards sleeping on duty and missing from their posts. Demonstrating the importance of conducting physical inventories, in June 2008, within 1 month of completing its first full weapons inventory, CSTC-A officials identified the theft of 47 pistols from this depot. CSTC-A officials also told us that a persistent lack of CSTC-A and responsible ANSF personnel at the central depots had increased the vulnerability of inventories to pilferage. Unreliable inventory information systems. The information systems CSTC-A uses for inventory management at the central depots are rudimentary and have introduced data reliability problems. CTSC-A officials told us that for items received before 2006, they had only “limited data” from manual records at the Afghan National Army central depot. In 2006, CSTC-A’s contractor installed a commercial-off-the-shelf inventory management database system. However, the system permits users to enter duplicate serial numbers, allowing data entry mistakes to compromise critical data. Furthermore, due to a limited number of user licenses, multiple users enter information using the same account, resulting in a loss of control and accountability for key inventory management records. CSTC-A also established an Excel spreadsheet record-keeping system in 2006 for the central depot where Afghan National Police weapons are stored. However, training of Afghan National Police personnel at that depot has not yet begun, and training Afghan National Army personnel in the use of depot information systems has been problematic due to illiteracy and a lack of basic math skills. In a report about operations at the central depot that serves the Afghan National Army, CSTC-A’s logistics training contractor noted that only “one in four [Afghan National Army personnel] have the basic education to operate either the manual or automated systems.” According to CSTC-A, inadequate staffing of U.S. and Afghan personnel at the central storage depots along with persistent management concerns have contributed to the vulnerability of stored weapons to theft or misuse. Although CSTC-A originally envisioned that ANSF would assume responsibility for the majority of central depot operations, ANSF has not asserted ownership of the central depots as planned, leaving U.S. personnel to continue exercising control and custody over the stored weapons. In addition, CSTC-A officials told us this resulted in ambiguities regarding roles and responsibilities and increased risk to stored weapons supplies. Specific challenges in this area include the following. Difficulty providing adequate U.S. staff to maintain full accountability. CSTC-A officials told us that the increasing volumes of equipment moving through the central depots had compounded the management challenges they faced, which included insufficient U.S. personnel on site to keep up with the implementation of equipment accountability procedures. They specifically cited staff shortages as having limited CSTC-A’s capacity to conduct full depot inventories, maintain security, and invest in the training of ANSF personnel. Lack of accountable Afghan officers and staff. CSTC-A accountability procedures call for ANSF officers to be on site at the central depots to take responsibility for ANSF property. However, according to CSTC-A, the Afghan ministries did not consider the central depots to be ANSF facilities, given the high level of CSTC-A control. Thus, ANSF was reluctant to participate in central depot operations and did not post any officers or sufficient Afghan staff to the depots. According to CSTC-A officials, these problems resulted in ambiguities regarding roles and responsibilities at the central depots and placed an increased burden on limited U.S. forces to fulfill mandatory accountability and security procedures. Difficulties raising the capacity of ANSF depot personnel. According to CSTC-A officials, efforts to develop the capabilities of ANSF personnel to manage the central depots have been hampered by the lack of basic education or skills among ANSF personnel and frequent turnover of Afghan staff. As of December 2008, no Afghan National Police personnel have been trained at the police depot. Contractors responsible for Afghan National Army equipment accountability training told us that their efforts have been hampered by the Afghans’ reluctance to attend training and by a lack of basic literacy and math skills needed to carry out depot operations. CSTC-A officials also told us that their embedded military trainers were frequently unable to focus on training and mentoring at the Afghan National Army depot, given their operational imperatives. CSTC-A and State have deployed hundreds of U.S. military trainers and contract mentors to help ANSF units, among other things, establish and implement equipment accountability procedures. Although CSTC-A has instituted a system for U.S. and coalition military trainers to assess the logistics capacity of ANSF units, they have not always assessed equipment accountability capabilities specifically. However, as part of their reporting to CSTC-A and State, contract mentors have documented significant weaknesses in the capacity of ANSF units to safeguard and account for weapons. As a result, the weapons CSTC-A has provided are at serious risk of theft or loss. Furthermore, CSTC-A did not begin monitoring the end use of sensitive night vision devices until about 15 months after issuing them to Afghan National Army Units. CSTC-A has recognized the critical need to develop ANSF units’ capacity to account for weapons and other equipment issued to them. In February 2008, CSTC-A acknowledged that it was issuing equipment to Afghan National Police units before providing training on accountability practices and ensuring that effective controls were in place. In June 2008, Defense reported to the Congress that it was CSTC-A’s policy not to issue equipment to ANSF units unless appropriate supply and accountability procedures were verified. As of June 2008, CSTC-A employed over 250 U.S. military or coalition personnel and contractors to advise ANSF on logistics matters, including establishing and maintaining a system of accountability for weapons. CSTC-A has also helped the Afghan Ministries of Defense and Interior establish decrees, modeled after U.S. regulations, requiring ANSF units to adopt accountability procedures. These procedures include tracking weapons by serial number using a “property book” to record receipt and inventory information, and conducting routine physical inventories of weapons. CSTC-A and State, with support from their respective contractors, MPRI and DynCorp, have conducted training for Afghan National Army and Afghan National Police personnel on the implementation of these decrees. CSTC-A has also assigned contract mentors and U.S. and coalition embedded trainers to work closely with property book officers and other logistics staff in ANSF units to improve accountability practices. In addition, State assigns contract mentors to monitor Afghan National Police units that have received accountability training. These mentors visit the units and evaluate, among other things, the implementation of basic accountability procedures and concepts, such as maintenance of property books and weapons storage rooms. We previously reported that Defense has cited significant shortfalls in the number of fielded embedded trainers and mentors as the primary impediment to advancing the capabilities of the Afghan Security Forces. According to information provided by CSTC-A officials, as of December 2008, CSTC-A had only 64 percent of the 6,675 personnel it required to perform its mission overall and only about half of the 4,159 mentors it required. While CSTC-A has established a system for assessing the logistics capacity of ANSF units, it has not consistently assessed or verified ANSF’s ability to properly account for weapons and other equipment. Afghan National Army. As Afghan National Army units achieve greater levels of capability, embedded U.S. and coalition military trainers are responsible for assessing and validating their progress. Trainers used various checklists in 2008 to assess and validate Afghan National Army units. One checklist we reviewed addressed seven dimensions of logistics capacity and performance, but did not specifically mention accountability for weapons or other equipment. The assessment category in the checklist most relevant to equipment accountability was a rating on whether a unit “understands the logistical process and utilizes it with reasonable effectiveness.” Another checklist we reviewed addressed 15 dimensions of “sustainment operations” and was used to assess units’ overall demonstration of logistics management capacity and “ability to effectively receive, store, and issue supplies.” However, the checklist did not address weapons or equipment accountability specifically. Furthermore, more detailed notes accompanying the completed checklists we reviewed provided virtually no information on equipment accountability as a factor in the logistics ratings the CSTC-A training team assigned to the unit. Afghan National Police. CSTC-A has also introduced a monthly assessment tool to be used by its mentors to evaluate Afghan National Police capability and identify strengths and weaknesses. Prior to June 2008, CSTC-A did not specifically evaluate the capacity of police units to account for weapons and other equipment. CSTC-A changed the format of its police assessment checklist to specifically address four dimensions of equipment accountability. According to the reformatted assessments we reviewed, as of September 30, 2008, some trained and equipped Afghan National Police units had not yet implemented accountability procedures required by the Afghan Ministry of Interior. These assessments indicated that of the first seven police districts to receive intensive training and weapons under CSTC-A’s Focused District Development Program, which began in November 2007, two districts were not maintaining property accountability, including property books, and one was not conducting audits and physical inventories periodically or when directed. Contract mentors employed by CSTC-A and State have reported extensively on weaknesses they observed in ANSF units’ capacity to safeguard and account for weapons and other equipment. Reports we reviewed, prepared by MPRI and DynCorp mentors between October 2007 and August 2008, indicated that ANSF units throughout Afghanistan had not implemented the basic property accountability procedures required by the Afghan Ministries of Defense and Interior. Although these reports did not address accountability capacities in a consistent manner that would allow a systematic or comprehensive assessment of all units, they did highlight common problems relating to weapons accountability, including a lack of functioning property book operations and poor physical security. Lack of functioning property book operations. Mentors reported that many Afghan army and police units did not properly maintain property books, which are fundamental tools used to establish equipment accountability and are required by Afghan ministerial decrees. In a report dated March 2008, a MPRI mentor to the property book officer for one Afghan National Army unit stated, “for 3 years, the unit property books have not been established properly” and that “a lack of functionality existed in every property book operation.” Another report, from March 2008, concluded, “equipment accountability and equipment maintainability is a big concern; equipment is often lost, damaged, or stolen, and the proper procedures are not followed to properly document and/or account for equipment.” In a 2008 MPRI quarterly progress report on Afghan National Police in Kandahar, a mentor noted that property book items were issued but not posted to any records, because personnel did not know their duties and responsibilities. The report further states that “at present the property managers are not tracking any classes of supplies at all levels” and that “ANSF is very basic in its day to day function,” exhibiting no consideration for property accountability. Poor security. MPRI reports also indicated that some Afghan National Police units did not have facilities adequate to ensure the physical security of weapons and protect them against theft in a high-risk environment. For example, a March 2008 MPRI report on Afghan National Police in one northern province stated that the arms room of the police district office was behind a wooden door and had only a miniature padlock, and that this represented “basically the same austere conditions as in the other districts.” Defense and State contractor reports identified various causes of ANSF accountability weaknesses, including illiteracy, corruption, desertion, and unclear guidance from Afghan ministries. Illiteracy. Mentors reported that widespread illiteracy among Afghan army and police personnel had substantially impaired equipment accountability. For instance, a March 2008 MPRI report on an Afghan National Army unit noted that illiteracy was directly interfering with the ability of supply section personnel to implement property accountability processes and procedures, despite repeated training efforts. In July 2008, a police mentor in the Zari district of Balkh province stated that, “a lack of personnel [at the district headquarters] who can read and write is hampering efficient operations,” and added that there is currently one literate person being mentored to take charge of logistics. In addition, an August 2008 DynCorp report on the Afghan National Police noted that in Kandahar, “concerns expressed over maintaining control over the storage facility keys. He cannot read or write, does not record anything that is being given out or have a request form for supplies filled out. is the same individual that was handing out automatic weapons to civilians the previous week.” Corruption. Reports of alleged theft and unauthorized resale of weapons are common. During 2008, DynCorp mentors reported multiple instances of Afghan National Police personnel, including an Afghan Border Police battalion commander in Khost province, allegedly selling weapons to anti-coalition forces. In a March 2008 report, mentors noted that despite repeated requests, the Afghan National Police Chief Logistical Officer for Paktika province would not produce a list of serial numbers for weapons on hand. The DynCorp mentors suggested this reluctance to share information could be part of an attempt to conceal inventory discrepancies. In addition, a May 2008 DynCorp report on police cited corruption in Helmand as that province’s most significant problem, noting that the logistics officer had been named in all allegations of theft, extortion, and deceit reported to mentors by their Afghan National Police contacts. Desertion. DynCorp mentors also reported cases of desertion in the Afghan National Police, which resulted in the loss of weapons. For instance, in July 2008, mentors reported that when Afghan Border Police officers at a Faryab province checkpoint deserted to ally themselves with anti-coalition forces, they took all their weapons and two vehicles with them. Another DynCorp mentor team training police in Ghazni province reported in July 2008 that 65 Afghan National Police personnel had deserted and would not be coming to the base to be processed. The police officers that did arrive came without their issued weapons. Unclear guidance. MPRI mentors reported that Afghan ministry logistics policies were not always clear to Afghan army and police property managers. A MPRI report dated April 2008 stated that approved Ministry of Interior policies outlining material accountability procedures were not widely disseminated and many logistics officers did not recognize any of the logistical policies as rule. Additionally, a MPRI mentor to the Afghan National Army told us that despite the new decrees, Afghan National Army logistics officers often carried out property accountability functions using Soviet-style accounting methods and that the Ministry of Defense was still auditing army accounts against those defunct standards. Senior Afghan Ministry of Defense officials we met with also described similar accountability weaknesses. In a written statement provided in response to our questions about Afghan National Army weapons accountability, the ministry officials indicated that soldiers deserting with their weapons had a negative effect on the Afghan National Army and reduced supplies on hand in units. They also indicated that Afghan National Army units in the provinces of Helmand, Kandahar, and Paktika have been particularly vulnerable to equipment theft. According to DSCA officials, U.S.-procured weapons and sensitive equipment provided to ANSF are subject to end use monitoring, which is meant to provide reasonable assurances that ANSF is using the equipment for intended purposes. Under DSCA guidance, weapons are subject to routine end use monitoring, which, according to DSCA officials, entails making and recording observations on weapons usage in conjunction with other duties and during interactions with local defense officials. For specified sensitive defense items, such as night vision devices, DSCA guidance calls for additional controls and enhanced end use monitoring. This includes providing equipment delivery records with serial numbers to DSCA, conducting routine physical inventories, and reporting on quarterly inventory results. For night vision devices this also includes the establishment of a physical security and accountability control plan. In July 2007, CSTC-A began issuing 2,410 night vision devices to Afghan National Army units without establishing the appropriate controls or conducting enhanced end use monitoring. According to U.S. Central Command, these devices pose a special danger to the public and U.S. forces if in the wrong hands. DSCA did not ensure that CSTC-A followed the end use monitoring guidance because CSTC-A purchased these devices directly and without the knowledge or involvement of DSCA officials. To address this, DSCA and CSTC-A established procedures in April 2008 to prohibit CSTC-A’s procurement of weapons and sensitive equipment in- country without DSCA involvement. In May 2008, CSTC-A first developed an end use monitoring plan that established both routine and enhanced monitoring procedures. The plan calls for the use of U.S. trainers and mentors embedded in ANSF units to provide reasonable assurances that the recipients are complying with U.S. requirements on the use, transfer, and security of the items. CSTC-A informed us that it began implementing the plan in July 2008, but noted it did not have sufficient staff or mentors to conduct the monitoring envisioned. CSTC-A officials told us they started to conduct and document routine end use monitoring for weapons provided to the Afghan police in 31 of Afghanistan’s 365 police districts. CSTC-A had not been able to undertake any monitoring in the remaining 334 police districts due to security constraints. During the course of our review, CSTC-A began following DSCA’s enhanced end use monitoring guidance for the night vision devices it had issued. CSTC-A started conducting inventories of these devices in October 2008, about 15 months after it began issuing them, and plans to conduct full physical inventories by serial number quarterly. As of December 2008, CSTC-A had accounted for all but 10 of the devices it had issued. DSCA and CSTC-A attributed this limited end use monitoring to a shortage of security assistance staff and expertise at CSTC-A, exacerbated by frequent CSTC-A staff rotations. Defense’s Inspector General similarly reported in October 2008 that CSTC-A did not have sufficient personnel with the necessary security assistance skills and experience and that short tours of duty and different rotation policies among the military services hindered the execution of security assistance activities. We also noted these problems in 2004, when we reported that the Office of Military Organization-Afghanistan, CSTC-A’s predecessor, did not have adequate personnel trained in security assistance procedures to support its efforts and that frequent personnel rotations were limiting Defense’s efforts to train key personnel in defense security assistance procedures and preserve institutional knowledge. CSTC-A officials told us that the addition of a USASAC liaison to the CSTC-A staff in Kabul had helped to offset some of these challenges, as the liaison was knowledgeable in security assistance procedures and had been able to provide some basic training for CSTC-A staff. Oversight and accountability for weapons is critical in high-threat environments, especially in Afghanistan, where potential theft and misuse of lethal equipment pose a significant danger to U.S. and coalition forces involved in security, stabilization, and reconstruction efforts. Because Defense organizations throughout the weapons supply chain have not had a common understanding of what procedures are necessary to safeguard and account for weapons, inventory records, including serial numbers, are not complete and accurate. As a result, Defense cannot be certain that weapons intended for ANSF have reached those forces. Further, weapons stored in poorly secured central depots are significantly vulnerable, and the United States has limited ability to detect the loss of these weapons without conducting routine inventories. Although CSTC-A established new weapons accountability procedures during the course of our review, it is not yet clear that, without a mandate from Defense and sufficient resources, CSTC-A will consistently implement these procedures. Because Afghan army and police units face significant challenges in controlling and accounting for weapons, it is essential that Defense enhance its efforts in working with ANSF units in this area. Systematically assessing ANSF’s ability to implement required weapons accountability procedures is particularly important for gaining reasonable assurances that ANSF units are prepared to receive and safeguard weapons as well as for evaluating overall progress in developing ANSF’s accountability capacity. Moreover, adequately monitoring night vision devices and other sensitive equipment after it is transferred to ANSF will help to ensure that such equipment is used for its intended purposes. As development of the Afghan security forces continues, it is vital that clear oversight and accountability mechanisms are in place to account for weapons and other sensitive equipment. To help ensure that the United States can account for weapons that it procures or receives from international donors for ANSF, we recommend that the Secretary of Defense establish clear accountability procedures for weapons in the control and custody of the United States, and direct USASAC, CSTC-A, and other military organizations involved in providing these weapons to (1) track all weapons by serial number and (2) conduct routine physical inventories. To help ensure that ANSF units can safeguard and account for weapons and other sensitive equipment they receive from the United States and international donors, we recommend that the Secretary of Defense direct CSTC-A to (1) specifically and systematically assess the ability of each ANSF unit to safeguard and account for weapons in accordance with Afghan ministerial decrees and (2) explicitly verify that adequate safeguards and accountability procedures are in place, prior to providing weapons to ANSF units, unless a specific waiver or exception is granted based on due consideration of practicality, cost, and mission performance. We also recommend that the Secretary of Defense devote the necessary resources to address the staffing shortages that hamper CSTC-A’s efforts to train, mentor, and assess ANSF in equipment accountability matters. Defense provided written comments on a draft of this report (see app. IV). Defense concurred with our recommendations and provided additional information on its efforts to help ensure accountability for weapons intended for the ANSF. Defense also provided technical corrections, which we incorporated into the report as appropriate. State did not provide comments. Defense concurred with our recommendation to establish clear accountability procedures for weapons intended for ANSF. It noted that Defense requirements and procedures exist for small arms tracking by serial number. However, Defense went on to state that DSCA, in conjunction with U.S. Central Command, has been directed to implement in Afghanistan congressionally-mandated controls that Defense is implementing in Iraq. These include (a) the registration of serial numbers of all small arms, (b) an end-use monitoring program for all lethal assistance, and (c) the maintenance of detailed records for all defense articles transferred to Afghanistan. As we indicated in our report, Defense organizations did not have a common understanding of whether existing accountability procedures applied to weapons obtained for ANSF, underscoring the importance of these controls. Defense did not state when these measures would be implemented; however, if Defense follows through on these actions and, in addition, clearly requires routine inventories of weapons in U.S. custody and control, our concerns will be largely addressed. Defense also concurred with our recommendation to systematically assess each ANSF unit’s capacity to account for and safeguard weapons and to ensure that adequate procedures are in place prior to providing weapons. Defense indicated that embedded mentors and trainers are assessing ANSF units’ accountability capacity. It also stated that for the Afghan National Army, weapons are only issued with coalition mentors present to provide oversight at all levels of command; and for the Afghan National Police, most weapons are currently being issued to selected units that have received focused training, including instruction on equipment accountability. We note that at the time of our review, ANSF unit assessments did not systematically address the units’ capacity to safeguard and account for weapons in its possession. We also note that Defense has cited significant shortfalls in the number of personnel required to train and mentor ANSF units. Unless these matters are addressed, we are not confident the shortcomings we reported will be adequately addressed. Finally, Defense also concurred with our recommendation that it address the staffing shortfalls that hamper CSTC-A’s efforts to train, mentor, and assess ANSF in weapons accountability matters. Defense commented that it is looking into ways to address the shortages, but did not state how or when additional staffing would be provided. 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 Secretaries of Defense and 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 concerning this report, please contact me at (202) 512-7331 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 V. To determine whether Defense and the Combined Security Transition Command-Afghanistan (CSTC-A) could account for weapons obtained, transported, stored, and distributed to Afghan National Security Forces (ANSF), we conducted the following work. We sought to determine which Defense accountability procedures are generally applicable to Defense equipment by reviewing documents and meeting with officials from U.S. Central Command in Tampa, Florida; Defense Security Cooperation Agency (DSCA) and Defense’s Office of Inspector General in Arlington, Virginia; and CSTC-A in Kabul, Afghanistan. We also reviewed relevant Defense regulations, instructions, and manuals. We compiled detailed information on 242,203 weapons the United States procured for ANSF and shipped to Afghanistan from December 2004 through June 2008. We identified the types, quantity, shipment dates, and cost of these weapons by reviewing and analyzing pseudo-FMS case documentation provided by DSCA and data provided by the U.S. Army Security Assistance Command (USASAC) in New Cumberland, Pennsylvania, and Navy IPO in Arlington, Virginia. To ensure we had a complete record of all weapons ordered and shipped during this time period, we checked USASAC and Navy shipment details against line-item details in Letters of Offer and Acceptance provided to us by DSCA. For each shipment of weapons we isolated in the USASAC and Navy International Programs Office (IPO) files, we compiled lists of serial numbers or determined the total number of weapons for which no serial number records were available. We identified 195,671 weapons for which USASAC and Navy IPO could provide serial numbers and 46,532 for which they could not. In some cases, quantities of weapons required by the Letter of Offer and Acceptance differed from those recorded as shipped; we followed up on these discrepancies with officials at USASAC, who explained that such differences were due to changes in market pricing between the time of the request and the time of purchase. We determined that the data were sufficiently reliable for the purposes of this report. To assess Defense’s ability to account for the location or disposition of weapons, we selected a stratified random probability sample of 245 weapons from the population of 196,671 U.S.-procured weapons for which Defense could provide serial numbers. The sample population of weapons included all years in which U.S.-procured weapons had been shipped to ANSF and seven specific categories of weapons obtained. Our random sample did not include certain miscellaneous weapon types, which we categorized as “other.” Each weapon in the population had a known probability of being included in our probability sample. We divided the weapons into two strata, based on the format of the weapons lists we obtained. About half of the serial numbers were available to us in electronic databases, allowing us to select a simple random sample of 96 weapons from those records. The remaining 98,462 serial numbers were provided to us in paper lists or electronic scans of paper files. From those records we selected a random systematic sample of 149 weapons by choosing a random start and selecting every subsequent 679th serial number. Each weapon selected in the sample was weighted in the analysis to account statistically for all the weapons in the population, including those that were not selected. In Afghanistan, we attempted either to physically locate each weapon in our sample or obtain documentation confirming that CSTC-A had recorded its issuance to ANSF or otherwise disposed of it. We used the results of our work to generalize to the universe of weapons from which we drew our sample and derive an estimated number of weapons for which CSTC-A cannot provide information on location or disposition. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our results as a 95 percent confidence interval (e.g. plus or minus 5 percentage points). 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 we have reported will include the true values in the study. We compiled detailed information on the approximately 135,000 weapons CSTC-A obtained for ANSF from international donors. We identified the estimated dollar values, types, quantities, and sources of these weapons by analyzing records from the office of CSTC-A’s Deputy Commanding General for International Security Cooperation. We assessed the reliability of these data by interviewing CSTC-A officials knowledgeable about the data and by analyzing the records they provided to identify problems with completeness or accuracy. CSTC-A officials told us the dollar amounts they track for the value of weapons donations had been provided by the donors and were of questionable accuracy, as they had not been independently verified by CSTC-A. We also reviewed CSTC-A’s records on the types, quantities, and sources of weapons donations. CSTC-A officials told us that due to a long-standing lack of accountability procedures for handling weapons donations received at the central storage depots, they had been unable to independently verify the quantities reported by donors. After our visit to Kabul, we continued to work closely with CSTC-A officials to identify additional data concerns. When we found discrepancies, such as data entry errors, we brought them to CSTC-A’s attention and worked with its officials to correct the discrepancies, to the extent that we could, before conducting our descriptive analyses. While CSTC-A’s procedures for ensuring the accuracy of these data have improved during the past year, documentation on procedures was lacking prior to March 2007, which made it impossible for us to independently assess the data’s accuracy. Because we still have concerns about the reliability of these data, we are only reporting them as background information and in an appendix to provide a sense of who donated the weapons and when. We documented weapons accountability practices and procedures by examining records and meeting with officials from DSCA, USASAC, Navy IPO, and CSTC-A—the organizations directly involved with obtaining, transporting, storing, and distributing weapons for ANSF. In Afghanistan, we observed weapons accountability practices at the Kabul Afghanistan International Airport and the two ANSF central storage depots in Kabul where weapons intended for the Afghan National Army and the Afghan National Police are stored before distribution to ANSF units. While at the central depots, we discussed weapons management with CSTC-A officials and mentors employed by MPRI, Defense’s ANSF development contractor. We also observed depot operations, including security procedures, storage conditions, and inventory information systems. In addition, we examined weapons inventory records at CSTC-A headquarters in Kabul. We met with officials from Defense’s Inspector General to discuss two audits it conducted during 2008 relating to weapons accountability in Afghanistan and reviewed a related report it issued in October 2008. To assess the extent to which CSTC-A has ensured that ANSF can properly safeguard and account for weapons and other sensitive equipment issued to it, we conducted the following work. We obtained information on ANSF weapons accountability practices by meeting with cognizant officials from the Afghan Ministries of Defense and Interior. The Ministry of Defense also provided written responses to our questions on this subject. In addition, we reviewed ministerial decrees documenting equipment accountability requirements applicable to the Afghan National Army and Afghan National Police and discussed the development and the implementation status of those decrees with CSTC-A and MPRI. We obtained information on CSTC-A’s efforts to train, mentor, and assess ANSF units on accountability for weapons and other equipment by reviewing documents and meeting with officials from CSTC-A and MPRI in Kabul. We reviewed all available weekly, monthly, quarterly, and ad hoc reports submitted by MPRI logistics mentors from October 2007 to August 2008 that included observations regarding ANSF equipment accountability practices. We also reviewed all available reports, including checklists and assessment tools, prepared by CSTC-A’s embedded military trainers to assess the logistics capabilities of Afghan army and police units. To gain a better understanding of ANSF weapons accountability practices and challenges, we visited an Afghan National Army commando unit near Kabul that had received weapons and night vision devices from CSTC-A and met with the unit’s property book officer and MPRI mentors assigned to that unit. Due to travel restrictions imposed by CSTC-A based on heightened security threats during our visit to Afghanistan, we were unable to travel outside of the Kabul area, as planned, to visit other ANSF units in the country that had also received weapons from CSTC-A. We obtained information on State’s efforts to ensure accountability for weapons provided to the Afghan National Police by reviewing documents and meeting with officials from the U.S. Embassy in Kabul and State’s Bureau of International Narcotics and Law Enforcement Affairs in Washington, D.C. We also reviewed all weekly reports submitted to State between January and August 2008 by State’s Afghan National Police development contractor, DynCorp, that included observations regarding police equipment accountability practices. We determined the end use monitoring procedures generally applicable to weapons transferred to foreign countries under Foreign Military Sales by reviewing DSCA’s Security Assistance Management Manual. We sought clarification on this guidance and views on its applicability to U.S. procured weapons and internationally donated weapons in Afghanistan from officials at DSCA and U.S. Central Command. We determined end use monitoring policies and practices in Afghanistan by reviewing documents and meeting with officials from U.S. Central Command, CSTC-A, DSCA, and State. In Afghanistan, we met with officials in CSTC-A’s Security Assistance Office, including the USASAC liaison to CSTC-A. We reviewed all available documentation of the end use monitoring CSTC-A had conducted as of December 2008 for weapons and other sensitive equipment, including night vision devices, provided to ANSF. Since June 2002, CSTC-A’s office of the Deputy Commanding General for International Security Cooperation has vetted, tracked, and coordinated the delivery of weapons donated to ANSF by the international community. CSTC-A officials reported to us that they had obtained about 135,000 weapons for ANSF in this manner, though we were unable to independently confirm that figure. CSTC-A officials also told us they had not evaluated the reliability of the dollar values assigned by donors for these weapons and noted that some quantities may be overstated, as many of the donated weapons were damaged or unusable. (See table 1 for a summary of the data CSTC-A reported to us on weapons provided by international donors.) While CSTC-A’s procedures for ensuring the accuracy of these data have improved during the past year, documentation was lacking prior to March 2007, which made it impossible for us to independently assess the data’s accuracy. Because we have concerns about the reliability of these data, we are only reporting them here to provide a sense of who donated the weapons. Included in CSTC-A’s records were details indicating that weapons donations have included rifles, pistols, light and heavy machine guns, grenade launchers, rocket-propelled grenade launchers, and mortars. According to this information, about 79 percent of the weapons donated were AK-47 assault rifles. Since international donors began providing weapons for ANSF in June 2002, CSTC-A and others have taken a variety of steps to improve accountability. Many of these steps occurred during the course of our review. Figure 4 provides a timeline of key events relating to accountability for ANSF weapons and other sensitive equipment. Charles Michael Johnson, Jr., (202) 512-7331 or [email protected]. Key contributors to this report include Albert H. Huntington III, Assistant Director; James B. Michels; Emily Rachman; Mattias Fenton; James Ashley; Mary Moutsos; Joseph Carney; Etana Finkler; Jena Sinkfield; and Richard Brown. | The Department of Defense (Defense), through its Combined Security Transition Command-Afghanistan (CSTC-A) and with the Department of State (State), directs international efforts to train and equip Afghan National Security Forces (ANSF). As part of these efforts, the U.S. Army Security Assistance Command (USASAC) and the Navy spent about $120 million to procure small arms and light weapons for ANSF. International donors also provided weapons. GAO analyzed whether Defense can account for these weapons and ensure ANSF can safeguard and account for them. GAO reviewed Defense and State documents on accountability procedures, reviewed contractor reports on ANSF training, met with U.S. and Afghan officials, observed accountability practices, analyzed inventory records, and attempted to locate a random sample of weapons. Defense did not establishclear guidance for U.S. personnel to follow when obtaining, transporting, and storing weapons for the Afghan National Security Forces, resulting in significant lapses in accountability. While Defense has accountability requirements for its own weapons, including serial number tracking and routine inventories, it did not clearly specify whether they applied to ANSF weapons under U.S. control. GAO estimates USASAC and CSTC-A did not maintain complete records for about 87,000, or 36 percent, of the 242,000 U.S.-procured weapons shipped to Afghanistan. For about 46,000 weapons, USASAC could not provide serial numbers, and GAO estimates CSTC-A did not maintain records on the location or disposition of about 41,000 weapons with recorded serial numbers. CSTC-A also did not maintain reliable records for about 135,000 weapons it obtained for ANSF from 21 other countries. Accountability lapses occurred throughout the supply chain and were primarily due to a lack of clear direction and staffing shortages. During our review, CSTC-A began correcting some shortcomings, but indicated that its continuation of these efforts depends on staffing and other factors. Despite CSTC-A's training efforts, ANSF units cannot fully safeguard and account for weapons and sensitive equipment. Defense and State have deployed hundreds of trainers and mentors to help ANSF establish accountability practices. CSTC-A's policy is not to issue equipment without verifying that appropriate supply and accountability procedures are in place. Although CSTC-A has not consistently assessed ANSF units' ability to account for weapons, mentors have reported major accountability weaknesses, which CSTC-A officials and mentors attribute to a variety of cultural and institutional problems, including illiteracy, corruption, and unclear guidance. Further, CSTC-A did not begin monitoring the end use of sensitive night vision devices until 15 months after issuing them to Afghan National Army units. |
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Executive Order 12958, Classified National Security Information, as amended, specifies three incremental levels of classification— Confidential, Secret, and Top Secret—to safeguard information pertaining to the following: military plans, weapons systems, or operations; foreign government information; intelligence activities (including special activities), intelligence sources/methods, cryptology; foreign relations/activities of the United States, including confidential sources; scientific, technological, or economic matters relating to national security, which includes defense against transnational terrorism; United States government programs for safeguarding nuclear materials vulnerabilities or capabilities of systems, installations, infrastructures, projects, plans, or protection services relating to the national security, which includes defense against transnational terrorism; or weapons of mass destruction. The requisite level of protection is determined by assessing the damage to national security that could be expected if the information were compromised (see table 1). Executive Order 12958, as amended, prohibits classifying information so as to conceal violations of law, inefficiency, or administrative error; prevent embarrassment to a person, organization, or agency; restrain competition; or prevent or delay the release of information, which does not require protection in the interest of national security. Classification decisions can be either original or derivative. Original classification is the initial determination that information requires protection against unauthorized disclosure in the interest of national security. An original classification decision typically results in the creation of a security classification guide, which is used by derivative classifiers and identifies what information should be protected, at what level, and for how long. Derivative classification is the incorporation, paraphrasing, or generation of information in new form that is already classified, and marking it accordingly. In 2004, 1,059 senior-level officials in DOD were designated original classification authorities, and as such, they were the only individuals permitted to classify information in the first instance. But any of the more than 1.8 million DOD personnel who possess security clearances potentially have the authority to classify derivatively. According to DOD, less than 1 percent of the estimated 63.8 million classification decisions the department made during fiscal years 2000 through 2004 were original; however, ultimately, original classification decisions are the basis for 100 percent of derivative classification decisions. Executive Order 12958, as amended, assigns ISOO the responsibility for overseeing agencies’ compliance with the provisions of the Executive Order. In this capacity, ISOO (1) performs on-site inspections of agency information security operations, (2) conducts document reviews, (3) monitors security education and training programs, and (4) reports at least annually to the President on the degree to which federal agencies are complying with the Executive Order. ISOO also issued Classified National Security Information Directive No. 1 to implement the Executive Order. The Executive Order and the ISOO directive stipulate a number of specific responsibilities expected of federal agencies, including DOD. Examples of responsibilities are promulgating internal regulations; establishing and maintaining security education and self-inspection programs; conducting periodic declassification reviews; and committing sufficient resources to facilitate effective information security operations. The Executive Order and the ISOO directive also require classifiers to apply standard markings to classified information. For example, originally classified records must include the overall classification as well as portion or paragraph marking, a “Classified by” line to identify the original classifier, a reason for classification, and a “Declassify on” date line. Executive Order 12958, as amended, states that information shall be declassified when it no longer meets the standards for classification. The point at which information generally becomes declassified is set when the decision is made to classify, and it is either linked to the occurrence of an event, such as the completion of a mission, or to the passage of time. Classified records that are more than 25 years old and have permanent historical value are automatically declassified unless an exemption is granted because their contents could cause adverse national security repercussions. The Defense Security Service Academy is responsible for providing security training, education, and awareness to DOD components, DOD contractors, and employees of other federal agencies and selected foreign governments. The academy’s 2005 course catalog includes more than 40 courses in general security and in specific disciplines of information, information systems, personnel, and industrial security, and special access program security. These courses are free for DOD employees and are delivered by subject matter experts at the academy’s facilities in Linthicum, Maryland, and at student sites worldwide via mobile training teams. Some courses are available through video teleconferencing and the Internet. In fiscal year 2004, more than 16,000 students completed academy courses, continuing an upward trend over the past 4 years. According to ISOO, DOD is one of the most prolific classifiers (original and derivative combined) among federal government agencies. From fiscal year 2000 to fiscal year 2004, DOD and the Central Intelligence Agency had individual classification activity that were each more than all other federal agencies combined. In 3 of these 5 years, DOD’s classification activity was higher than that of the Central Intelligence Agency’s (see figure 1). During these same 5 years, DOD declassified more information than any other federal agency, and it was responsible for more than three-quarters of all declassification activity in the federal government. A lack of oversight and inconsistent implementation of DOD’s information security program are increasing the risk of misclassification. DOD’s information security program is decentralized to the DOD component level, and OUSD(I) involvement in, and oversight of, components’ information security programs is limited. Also, while some DOD components and subordinate commands appear to manage their programs effectively, we identified weaknesses in others’ training, self-inspections, and security classification guide management. As a result, we found that many of the organizations we reviewed do not fully satisfy federal and DOD classification management requirements, which contributes to an increased risk of misclassification. Specifically, most of the components and subordinate commands we examined did not establish procedures to ensure that personnel authorized to and actually performing classification actions are adequately trained to do so, did not conduct rigorous self- inspections, and did not take required actions to ensure that derivative classification decisions are based on current, readily available documentation. According to the ISOO Director, adequate training, self- inspections, and documentation are essential elements of a robust information security program and their absence can impede effective information sharing and possibly endanger national security. As required by Executive Order 12958, OUSD(I) issued a regulation in January 1997, Information Security Program, outlining DOD’s information security program. This regulation does not specifically identify oversight responsibilities for OUSD(I), but instead decentralizes the management of the information security program to the heads of DOD components. Consequently, according to the DOD regulation, each DOD component is responsible for establishing and maintaining security training, conducting self-inspections, and issuing documentation to implement OUSD(I) guidance and security classification guides. OUSD(I) exercises little oversight over how the components manage their programs. As a result, OUSD(I) does not directly monitor components’ compliance with federal and DOD training, self-inspection, and documentation requirements stipulated in Executive Order 12958, as amended; the ISOO directive; and the DOD regulation. For example, OUSD(I) does not require components to report on any aspects of the security management program. Also, OUSD(I) does not conduct or oversee self-inspections, nor does it confirm whether self-inspections have been performed or review self-inspection findings. At the time of our review, OUSD(I)’s involvement consisted of accompanying ISOO on periodic inspections of select DOD components and subordinate commands that are not under the four military services. Additionally the DOD implementing regulation does not describe what self-inspections should cover, such as the recommended standards in the ISOO directive. Based on our analysis, we believe that OUSD(I)’s decentralized approach, coupled with the lack of specificity in the department’s implementing regulation on what components must do to satisfy the Executive Order and ISOO directive self-inspection requirement, has resulted in wide variance in the quality of components’ information security programs. Because all cleared personnel have the authority to derivatively classify information, they are required to have annual refresher training, whether or not they engaged in derivative classification actions. All of the 19 DOD components and subordinate commands we reviewed offer initial and annual refresher training for their personnel who are involved with derivative classification activities, and most track attendance to ensure that the training is received, as required by the ISOO directive and the DOD regulation (see table 2). However, from our analysis of the components’ and subordinate commands’ initial and annual refresher training, we determined that only 11 of the 19 components and subordinate commands cover the fundamental classification principles cited in the ISOO directive, the DOD regulation, and specifically defined as the minimum training that classifiers must have in a November 2004 memorandum signed by the Under Secretary of Defense for Intelligence. That is, the training offered by 8 of the components and subordinate commands does not describe the basic markings that must appear on classified information, the difference between original and derivative classification, the criteria that must be met to classify information, and the process for determining the duration of classification. Consequently, this training will not provide DOD with assurance that it will reduce improper classification practices, as called for in the ISOO directive. We also noted that 14 of the DOD components and subordinate commands do not assess whether participants understand the course material by administering a proficiency test. Components and subordinate commands that cover the classification principles cited in the ISOO directive and the DOD regulation include: the Army Intelligence and Security Command, which issues the Command’s A Users Guide to the Classification and Marking of Documents to personnel; the Army Materiel Command, which uses information obtained from the Defense Security Service Academy to develop its refresher training on marking classified records; the Naval Surface Warfare Center, Dahlgren Division, which requires personnel to complete an online refresher course and pass a proficiency test before they can print out a certificate indicating a passing score; the 88th Air Base Wing, which requires personnel to attend four quarterly briefings each year on relevant classification management topics; the Special Operations Command, which developed an online refresher course, complete with a proficiency test that must be passed to receive credit for attending; the National Geospatial-Intelligence Agency, which requires personnel to sign an attendance card indicating that they completed initial and annual refresher training, and issues them the agency’s Guide to Marking Documents; and the Defense Intelligence Agency, which provides personnel a 13-page reference guide that explains how to comply with Executive Order 12958, as amended. All of the components and subordinate commands that we examined provide their original classification authorities with initial training, frequently in one-on-one sessions with a security manager. However, only about half of the components and subordinate commands we examined provide the required annual refresher training to original classification authorities. Eleven of the 19 DOD components and subordinate commands we reviewed do not perform required self-inspections as part of the oversight of their information security programs. The ISOO directive requires agencies to perform self-inspections at all organizational levels that originate or handle classified information. Agencies have flexibility in determining what to cover in their self-inspections, although ISOO lays out several standards that it recommends DOD and other agencies consider including, such as: reviewing a sample of records for appropriate classification and proper markings; assessing familiarity with the use of security classification guides; reviewing the declassification program; evaluating the effectiveness of security training; and assessing senior management’s commitment to the success of the program. In its Information Security Program regulation, DOD components are directed to conduct self-inspections based on program needs and the degree of involvement with classified information; components and subordinate commands that generate significant amounts of classified information should be inspected at least annually. “Program needs,” “degree of involvement,” and “significant amounts” are not quantified, and components and subordinate commands have interpreted these phrases differently. For example, the Marine Corps performs self-inspections annually; the Naval Sea Systems Command performs self-inspections every 3 years; and Headquarters, Department of the Army, does not perform them. Navy and Army officials with whom we spoke cited resource constraints, and, in particular, staffing shortages, as the reason why inspections were not performed more often. Based on information provided by OUSD(I) for end of fiscal year 2003. The actual number of DOD personnel who completed an academy information security course in fiscal years 2003 and 2004 is less than 4,775 because some personnel completed multiple courses. The DOD regulation’s chapter on training requires DOD components to evaluate the quality and effectiveness of security training during self- inspections; however, none of the 19 components and subordinate commands we examined does so. Evaluating the quality of training during self-inspections can identify gaps in personnel’s skill and competencies, and focus efforts to improve existing training. Ten of the 19 DOD components and subordinate commands we reviewed perform staff assistance visits of their lower echelon units in lieu of more rigorous self-inspections. Staff assistance visits, which typically are not staffed by inspectors, train the visited organization on how to meet inspection requirements, and any noted deficiencies are informally briefed to the local command staff. However, no official report is created for tracking and resolving deficiencies. According to ISOO officials, staff assistance visits do not fulfill the inspection requirement specified in Executive Order 12958, as amended. However, in commenting on a draft of this report, DOD officials stated that they were unaware of ISOO’s position on staff assistance visits. Of the 19 DOD components and subordinate commands we reviewed, only 7 conduct periodic document reviews as part of their self-inspections, although they are required to do so. In addition to revealing the types and extent of classification and marking errors, a document review can offer insight into the effectiveness of annual refresher training. DOD has no assurance that personnel who derivatively classify information are using up-to-date security classification guides; however, our review showed that more than half of the estimated number of guides at the 17 organizations that could identify the number of guides they had were tracked for currency and updated at least every 5 years. DOD’s approach to providing personnel access to up-to-date classification guides through a central library at its Defense Technical Information Center has been ineffective. OUSD(I) is studying ways to improve the centralized availability of up-to-date classification guides. Executive Order 12958, as amended, directs agencies with original classification authority, such as DOD, to prepare security classification guides to facilitate accurate and consistent derivative classification decisions. Security classification guides identify what information needs protection and the level of classification; the reason for classification, to include citing the applicable categories in the Executive Order; and the duration of classification. The ISOO directive and DOD regulation also require agencies to review their classification guides for currency and accuracy at least once every 5 years, and to update them as necessary. As table 3 shows, some DOD components and subordinate commands did not manage their classification guides to facilitate accurate derivative classification decisions. Since 2 of the 19 organizations were unable to provide us with the number of classification guides that they are responsible for, we could not determine the total number of classification guides belonging to the components and subordinate commands we reviewed. However, the remaining 17 organizations estimated their combined total to be 2,243 classification guides. Of the 13 components and subordinate commands we reviewed that possess multiple classification guides: 10 maintain paper or electronic copies of classification guides in a central location, or are in the process of doing so; 8 track the currency of more than half of their combined classification guides to facilitate their review, to ensure that they are updated at least every 5 years, in accordance with the ISOO directive; and 8 either have made or are in the process of making their classification guides available to authorized users electronically. These 8 components and subordinate commands represent over 1,700—more than 75 percent— of the classification guides belonging to the DOD organizations that we reviewed. DOD’s strategy for providing personnel ready access to up-to-date security classification guides to use in making derivative classification decisions has been ineffective for two reasons. Officials at some of the DOD components and subordinate commands we examined told us that they routinely submit copies of their classification guides to the Defense Technical Information Center, as required, while others told us they do not. However, because of the way in which the Defense Technical Information Center catalogs its classification guide holdings, center officials could not tell us the names and the number of classification guides it possesses or is missing. In addition, center officials told us that they cannot compel original classification authorities to submit updated versions of their classification guides or report a change in status, such as a classification guide’s cancellation. When the center receives a new classification guide, it enters up to three independent search terms in an electronic database to create a security classification guide index. As of October 2005, the center had in excess of 4,000 index citations for an estimated 1,400 classification guides, which is considerably fewer than the estimated 2,234 classification guides that 17 of the 19 components and subordinate commands reported possessing. The absence of a comprehensive central library of up-to-date classification guides increases the potential for misclassification, because DOD personnel may be relying on insufficient, outdated reference material to make derivative classification decisions. Navy and Air Force officials showed us evidence of classification guides that had not been reviewed in more than five years, as the ISOO directive and DOD regulation require. As table 3 shows, several components and subordinate commands have taken or are taking action to improve derivative classifiers’ access to security classification guides; however, except for the Air Force, there is no coordination among these initiatives, and neither the Defense Technical Information Center nor the OUSD(I) is involved. During our review, OUSD(I) officials told us that the department is studying how to improve its current approach to making up-to-date classification guides readily available, departmentwide. In our review of a nonprobability sample of 111 classified OSD documents we questioned DOD officials’ classification decisions for 29 documents— that is, 26 percent of the sample. We also found that 93 of the 111 documents we examined (84 percent) had at least one marking error, and about half had multiple marking errors. Executive Order 12958, as amended, lists criteria for what information can be classified, and for markings that are required to be placed on classified records. While the results from this review cannot be generalized across DOD, they are indications of the lack of oversight and inconsistency that we found in DOD’s implementation of its information security program. To determine the extent to which personnel in five OSD offices followed established procedures for classifying information, we reviewed 111 documents recently classified by OSD, which revealed several questionable classification decisions and a large number of marking errors. In all, we questioned the classification decisions in 29, comprising 26 percent of the documents in the OSD sample. The majority of our questions pertained to whether all of the information marked as classified met established criteria for classification (16 occurrences), the seemingly inconsistent treatment of similar information within the same document (10 occurrences), and the apparent mismatch between the reason for classification and the document’s content (5 occurrences). We gave the OSD offices that classified the documents an opportunity to respond to our questions, and we received written responses from the Offices of the Under Secretaries of Defense for Policy; Comptroller/Chief Financial Officer; and for Acquisition, Technology, and Logistics; regarding 17 of the 29 documents. In general, they agreed that several of the documents in question contained errors of misclassification. For example, we questioned the need to classify all of the information marked Confidential or Secret in 13 of the 17 documents. In their written responses, the three OSD offices agreed that, in 5 of the 13 documents, the information was unclassified, and in a sixth document the information should be downgraded from Secret to Confidential. The OSD offices did not state an opinion on 3 documents. We did not receive responses to our questions from the other two OSD offices on the remaining 12 documents. The Executive Order, ISOO directive, and DOD’s regulation together establish criteria for the markings that are required on classified records (see table 4). The documents included in our document review were created after September 22, 2003, which is the effective date of ISOO’s Classified National Security Information Directive No. 1 and almost 6 months after Executive Order 12958 was last amended. The ISOO directive prescribes a standardized format for marking classified information that, according to the directive, is binding except in extraordinary circumstances or as approved by the ISOO Director. To implement classification marking changes that resulted from the Executive Order and directive, DOD issued its own interim guidance on April 16, 2004. Our review revealed that 93 of the 111 OSD documents (84 percent) had at least one marking error and about half of the documents had multiple marking errors, resulting in 1.9 errors per document we reviewed. As figure 2 shows, the marking errors that occurred most frequently pertained to declassification, the sources used in derivative classification decisions, and portion marking. The most common marking errors that we found in the OSD document sample, by type of marking error, are listed in table 5. Since ISOO issued its directive in September 2003, it has completed 19 classified document reviews of DOD components and subordinate commands. The types of marking errors that ISOO reported finding were similar to what we found among the OSD documents. Specifically, marking errors associated with declassification, source, and portion marking represented more than 60 percent of the errors in both document samples. DOD’s estimate of how many classification decisions it makes each year is of questionable accuracy. Although ISOO provides DOD components with guidance as to how they should calculate classification decisions, we found considerable variance within the department in how this guidance was implemented. For example, there was inconsistency regarding which records are included in the estimate, the number and types of lower echelon units that are included, when to estimate, and for how long to estimate. ISOO requires federal agencies to estimate the number of original and derivative classification decisions they made during the previous fiscal year, which ISOO includes in its annual report to the President. Agency estimates are based on counting the number of Confidential, Secret, and Top Secret original and derivative classification decisions during a designated time period and extrapolating an annual rate from them. According to ISOO guidance, agencies typically count their classification decisions during a consecutive 2-week period in each of the four quarters of the fiscal year, for a combined total of 8 weeks. OUSD(I) officials told us that two highly classified categories of information, sensitive compartmented information and special access programs, are included in the count; however, several components and subordinate commands we examined omit these categories from their totals. In addition, some components and subordinate commands—such as the Army’s Research, Development, and Engineering Command and the National Geospatial-Intelligence Agency—include e-mails in their count, while others—such as the Defense Intelligence Agency and the Central Command—do not. Whether or not to include e-mails can dramatically affect counts. For example, the National Security Agency’s classification estimate declined from 12.5 million in fiscal year 2002 to only 7 in fiscal year 2003. Agency officials attributed this dramatic drop to e-mails being included in the totals for fiscal year 2002 and not for fiscal year 2003. Some DOD components and subordinate commands do not query their entire organization, to encompass all personnel who may be classifying information. For example, the Defense Intelligence Agency randomly selects four of its eight directorates to participate, and the National Security Agency and the Naval Air Systems Command selects only lower echelon organizations that have an original classification authority. As a result, these locations omit an unknown number of derivative classification decisions. The Navy bases its annual estimate on data covering a 2-week period from each of its major commands once per year rather than from all of its commands, four times per year as suggested in ISOO guidance. For example, during the first quarter, the Marine Corps is queried, and during the second quarter, the fleet commands are queried. Also, some of the combatant commands’ service components are not queried at all, such as the Army’s component to the European Command, the Navy’s component to the Transportation Command, the Air Force’s component to the Southern Command, and the Marine Corps’ component to the Central Command. In commenting on a draft of this report, the department correctly points out that guidance issued by ISOO allows each component to decide who to include in its classification decisions estimate. The Special Operations Command and the Central Command both schedule their counts at the end of the fiscal year; 4 consecutive weeks at the former, and 8 consecutive weeks at the latter. Special Operations Command officials told us that the end of the fiscal year tends to be a slower operational period, thereby allowing more time to conduct the data collection. DOD components and subordinate commands convert their estimates in different ways to project an entire year. Those that conform to the suggested ISOO format of four 2-week counting periods a year (that is, 8 weeks) multiply their counts by 6.5 (that is, 8 weeks x 6.5 = 52 weeks). The Navy, however, multiplies each of its four separate counts by 429 to account for all of the lower echelon units not represented in the estimate. Our review of DOD’s submissions to ISOO of its estimated number of classification decisions for fiscal years 2000 through 2004, revealed several anomalies. For example, the National Reconnaissance Office reported making more than 6 million derivative and zero original classification decisions during this 5-year period, and the Marine Forces, Atlantic, reported zero derivative and zero original classification decisions during fiscal years 2003 and 2004. Subsequent conversations with Marine Forces, Atlantic, officials indicated that a misunderstanding as to what constitutes a derivative classification decision resulted in an underreporting for those 2 years. Other examples of DOD component data submissions during this 5-year time period that had either a disproportionate reporting of original versus derivative classification decisions or a significant change in counts from 1 year to the next include: DOD reported in fiscal year 2004 that, departmentwide, about 4 percent of its classification decisions were original, yet the Defense Advanced Research Projects Agency and the Joint Forces Command both reported that more than 70 percent of their classification decisions were original. DOD reported in fiscal year 2003, that departmentwide, less than 2 percent of its classification decisions were original, yet the Joint Staff and the European Command both reported more than 50 percent of their classification decisions were original. DOD reported in fiscal year 2002 that, departmentwide, less than 1 percent of its classification decisions were original, yet the Office of the Secretary of Defense and the Southern Command both reported more than 20 percent of their classification decisions were original. DOD reported an increase in the number of original classification decisions during the fiscal year 2002 through 2004 period, from 37,320 to 47,238 (about a 27 percent increase), to 198,354 (about a 300 percent increase). However, during this same 3-year period, the Navy’s trend for original classification decisions was from 1,628 to 16,938 (about a 900 percent increase) to 1,898 (about a 90 percent decrease); and the Army’s trend was from 10,417 to 2,056 (about an 80 percent decrease) to 133,791 (about a 6,400 percent increase). DOD reported a 75 percent decrease in the total number of classification decisions (that is, original and derivative) from fiscal year 2002 to fiscal year 2004, yet several DOD components reported a significant increase in overall classification decisions during this same time period, including the Defense Threat Reduction Agency (a 20,107 percent increase), the Southern Command (1,998 percent increase), Defense Intelligence Agency (a 1,202 percent increase), and the National Geospatial-Intelligence Agency (a 354 percent increase). OUSD(I) has decided to discontinue the practice of DOD components submitting their classification decisions estimates directly to ISOO. Beginning with the fiscal year 2005 estimates, OUSD(I) will scrutinize the classification decision estimates of its components before consolidating and submitting them to ISOO. Properly conducted, OUSD(I)’s review could improve the accuracy of these estimates, if methodological inconsistencies are reduced. Army, Navy, and Air Force classification officials told us that the military services are on pace to meet the target date of 2006 for reviewing their own classified documents that qualify for automatic declassification, and for referring records that contain classified information belonging to other agencies to those agencies—an assertion endorsed by ISOO in its 2004 report to the President. However, these officials told us that they are less likely to meet the target date of 2009 for reviewing records referred to them, and of 2011 for reviewing special media (such as audio and video recordings). DOD’s ability to satisfy the 2009 and 2011 target dates depends, to a great extent, on the actions of other federal agencies. We limited our review of DOD’s automatic declassification program to the four military services because, as figure 3 shows, they performed 85 percent of all the declassification within DOD in fiscal year 2004. Executive Order 12958, as amended, stipulates that on December 31, 2006, and on December 31 of every year thereafter, classified records that are (1) at least 25 years old and (2) of permanent historical value shall in general be automatically declassified, whether or not they have been reviewed. The Executive Order sets a record’s date of origination as the time of original classification, and it also exempts certain types of information from automatic declassification, such as information related to the application of intelligence sources and methods. The automatic declassification deadline for records containing information classified by more than one agency, such as the Army and the Air Force or the Army and the Central Intelligence Agency, is December 31, 2009, and for special media it is December 31, 2011. For the most part, only the originating agency can declassify its own information. Consequently, if the Army discovers classified information that was originated by the U.S. State Department, the Army must alert the State Department and refer the information to the State Department for resolution. The Executive Order describes special media as microforms, motion pictures, audiotapes, videotapes, or comparable media that make its review for possible declassification exemptions “more difficult or costly.” The ISOO directive mirrors these requirements and directs ISOO, in conjunction with its parent organization, the National Archives and Records Administration, and other concerned agencies to develop a standardized process for referring records containing information classified by more than one agency across the federal government. Army, Navy/Marine Corps, and Air Force classification officials told us that they face a variety of challenges impacting their ability to meet the target dates of 2009 for reviewing records referred to them, and of 2011 for reviewing special media. Based on information provided by officials from the military services and the National Archives and Records Administration who are responsible for the automatic declassification effort, it appears that three obstacles hinder their progress toward meeting these deadlines. DOD’s ability to remove these obstacles without the involvement of other federal agencies is limited. First, there is no federal government standard for annotating classified records that contain information classified by more than one agency. For example, two non- DOD agencies both annotate their records with a “D” and an “R,” but for opposite purposes. That is, one of the agencies uses a “D” to denote “deny automatic declassification” and an “R” to denote “release,” while the other agency uses a “D” to denote “declassify” and an “R” to denote “retain.” The National Archives and Records Administration and various interagency working groups and task forces have sought a federal government standard, but National Archives officials told us that they were not optimistic that agencies would reach agreement soon. According to these officials, the lack of a federal government standard has contributed to the inadvertent release of classified information. Second, there is no central location within DOD or the federal government for storing records eligible for automatic declassification that contain information classified by multiple DOD components or non-DOD agencies. To review records originated by the four military services, agencies must send personnel trained to evaluate information for declassification suitability to as many as 14 different sites where the records are stored. For example, the Air Force has records eligible for automatic declassification at storage sites located in Ohio, Alabama, and Texas (see figure 4). National Archives officials pointed out that consolidating the records at fewer sites may be more efficient, and likely more cost- effective. A third factor that may cause DOD to miss meeting the Executive Order deadlines is the lack of a common database that federal government agencies can use to track the status of records containing information classified by more than one agency. The ISOO directive allows federal government agencies to utilize electronic databases to notify other agencies of their referrals; however, agencies have created their own databases that operate independently of one another. In commenting on a draft of this report, DOD officials stated that, despite the lack of federal government standards, the department has been a leading proponent of working collaboratively with other federal agencies to meet automatic declassification deadlines. We cannot confirm the accuracy of DOD’s characterization because DOD’s relationship with other agencies involved in automatic declassification was not part of our review. The Under Secretary of Defense for Intelligence has delegated the execution and oversight of information security to the DOD component level. This decentralized approach, coupled with inconsistency in the implementation of components’ information security programs, has resulted in wide variance in the quality of these programs. For example, the OUSD(I) does not directly monitor components’ compliance with federal and DOD training, self-inspection, and documentation requirements stipulated in Executive Order 12958, as amended; the ISOO directive; and the DOD regulation. Inadequate classification management training, self-inspections, and security classification guide documentation among the various DOD components increase the risk of (1) poor classification decisions and marking errors, similar to what we observed in our OSD document review; (2) restricting access to information that does not pose a threat to national security; and (3) releasing information to the general public that should still be safeguarded. OUSD(I) oversight could reduce the likelihood of classification errors. For example, if OUSD(I) ensured that components evaluated the quality and effectiveness of training and periodically included document reviews in their self-inspections, prevalent classification errors could be addressed through annual refresher training that derivative classifiers complete. Evaluating the quality of training can assist components in targeting scarce resources on coursework that promotes learning and reduces misclassification. Although the results of our review of a sample of OSD documents cannot be generalized departmentwide, we believe these results coupled with the weaknesses in training, self-inspections, and documentation that we found at numerous components and subordinate commands increases the likelihood that documents are not being classified in accordance with established procedures. DOD’s estimate of how many original and derivative classification decisions it makes annually is unreliable because it is based on data from the DOD components that were derived using different assumptions about what should be included and about data collection and estimating techniques. Still, this estimate is reported to the President and to the public, and it is routinely cited in congressional testimony by DOD officials and freedom of information advocates as authoritative. During our review, OUSD(I) decided to resume its practice of reviewing components’ classification estimates before they are submitted to ISOO. If properly implemented, this review could improve data reliability to some extent, but only if it addresses the underlying lack of uniformity in how the individual DOD components are collecting and manipulating their data to arrive at their estimates. The automatic declassification provision in Executive Order 12958, as amended, requires agencies generally to declassify records that are 25 years old or more and that no longer require protection. The Army, Navy/Marine Corps, and Air Force reported they are on track to review all of the documents they classified before the deadline; however, they are less likely to complete their review of the untold number of records containing information classified by other DOD components and non-DOD agencies by the deadlines set in the Executive Order. As the deadlines pass and these records are automatically declassified, information that could still contain national security information becomes more vulnerable to disclosure. DOD’s ability to meet these deadlines is jeopardized both by conditions beyond and conditions within its direct control. For example, DOD cannot require non-DOD agencies to adopt a national standard for annotating classified records, but it can take action to streamline the process of reviewing records containing information classified by more than one DOD component. To reduce the risk of misclassification and create greater accountability across the department, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Intelligence to establish a centralized oversight process for monitoring components’ information security programs to ensure that they satisfy federal and DOD requirements. This oversight could include requiring components to report on the results of self-inspections or other actions, targeted document reviews, and/or reviews by the DOD Inspector General and component audit agencies. to issue a revised Information Security Program regulation to ensure that those personnel who are authorized to and who actually perform classification actions, receive training that covers the fundamental classification principles as defined in the Under Secretary’s memorandum of November 30, 2004 and that completion of such training is a prerequisite for these personnel to exercise this authority; the frequency, applicability, and coverage of self-inspections, and the reporting of inspection results are based on explicit criteria; and authorized individuals can access up-to-date security classification guides necessary to derivatively classify information accurately. To support informed decision making with regard to information security, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Intelligence to institute quality assurance measures to ensure that components implement consistently the DOD guidance on estimating the number of classification decisions, thereby increasing the accuracy and reliability of these estimates. To assist DOD in its efforts to meet automatic declassification deadlines, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Intelligence to evaluate the merits of consolidating records eligible for automatic declassification that contain information classified by multiple DOD components at fewer than the current 14 geographically dispersed sites. In commenting on a draft of this report, DOD concurred with all six recommendations; however, the department expressed concern that we did not accurately portray the Navy’s program for managing its security classification guides. Upon further review, we modified table 3 in the report and accompanying narrative to indicate that the Navy (1) does have a centralized library containing paper copies of its security classification guides, and (2) is developing an automated database to make its classification guides available to authorized users electronically. We disagree with the department’s assertion that the Navy is tracking its classification guides to ensure that they are reviewed at least once every 5 years for currency and are updated accordingly. Based on our discussions with Navy information security officials, including the Retrieval and Analysis of Navy (K)lassified Information (RANKIN) Program Manager, and observing a demonstration of the spreadsheet used to catalog security classification guide holdings, we saw no evidence to suggest that currency of guides is being systematically tracked. With respect to our fifth recommendation that focuses on how DOD estimates the number of classification decisions it makes each year, we endorsed the department’s decision to continue scrutinizing its components’ estimates before consolidating and submitting them to ISOO. However, we continue to believe that OUSD(I) should augment its after-the-fact review with measures to ensure that components follow a similar process to derive their classification decisions estimates, such as standardizing the types of records to be included. Adopting a consistent methodology across the department and from year to year should improve the reliability and accuracy of this estimate that is reported to the President. DOD also provided technical comments for our consideration in the final report, which we incorporated as appropriate. DOD’s formal comments are reprinted in appendix II. We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Directors of the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, and the National Security Agency. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning 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 III. To conduct our review of the Department of Defense’s (DOD’s) information security program, we met with officials and obtained relevant documentation from the following DOD components and subordinate commands: Department of the Army, Office of the Deputy Chief of Staff for Intelligence, Arlington, Virginia; U.S. Army Intelligence and Security Command, Fort Belvoir, U.S. Army Materiel Command, Fort Belvoir, Virginia; U.S. Army Research, Development and Engineering Command, Aberdeen Proving Ground, Maryland; Department of the Navy, Office of the Chief of Naval Operations, Arlington, Virginia; Naval Sea Systems Command, Washington, D.C.; Naval Surface Warfare Center Dahlgren Division, Dahlgren, Virginia; Naval Air Systems Command, Patuxent River, Maryland; Department of the Air Force Air and Space Operations, Directorate of Security Forces, Information Security Division, Rosslyn, Virginia; Air Force Air Combat Command, Langley Air Force Base, Virginia; Air Force Materiel Command, Wright-Patterson Air Force Base, 88th Security Forces Squadron, Wright-Patterson Air Force Base, Headquarters, U.S. Marine Corps, Arlington, Virginia; U.S. Marine Forces, Atlantic, Norfolk Naval Base, Virginia; Headquarters, U.S. Central Command, MacDill Air Force Base, Florida; Headquarters, U.S. Special Operations Command, MacDill Air Force National Geospatial-Intelligence Agency, multiple sites in the Washington, D.C. metropolitan area; Defense Intelligence Agency, Washington, D.C.; National Security Agency, Fort Meade, Maryland; and Headquarters, Defense Technical Information Center, Fort Belvoir, Virginia. The information security programs of these nine components, collectively, were responsible for about 83 percent of the department’s classification decisions each of the last 3 fiscal years that data are available (2002 through 2004). We selected the information security programs of three Army, three Navy, three Air Force, and one Marine Corps subordinate command because they had among the largest number of classification decisions for their component during the fiscal year 2002 through 2004 time period. To examine whether DOD’s implementation of its information security management program in the areas of training, self-inspections, and security classification guide management effectively minimizes the risk of misclassification, we compared the DOD components’ and subordinate commands’ policies and practices with federal and DOD requirements, including Executive Order 12958, Classified National Security Information, as amended; Information Security Oversight Office (ISOO) Directive 1, Classified National Security Information; and DOD Information Security Program regulation 5200.1-R. Additionally, we visited the Defense Security Service Academy in Linthicum, Maryland, to discuss DOD training issues, and the Defense Technical Information Center at Fort Belvoir, Virginia, to discuss the availability of current security classification guides. We also met with officials from the Congressional Research Service, the Federation of American Scientists, and the National Classification Management Society to obtain their perspectives on DOD’s information security program and on misclassification of information in general. To assess the extent to which DOD personnel in five offices of the Office of the Secretary of Defense (OSD) followed established procedures for classifying information, to include correctly marking classified information, we examined 111 documents classified from September 22, 2003 to June 30, 2005. Because the total number of classified documents held by DOD is unknown, we could not pursue a probability sampling methodology to produce results that could be generalized to either OSD or DOD. The September 22, 2003 start date was selected because it coincides with when the ISOO directive that implements the Executive Order went into effect. OSD was selected among the DOD components because it has been the recipient of fewer ISOO inspections than most of the other DOD components, and we expected comparatively greater compliance with the Executive Order since DOD’s implementing regulation, DOD 5200.1-R, was published by an OSD office. We selected the following five OSD offices located in Washington, D.C. to sample: Office of the Director of Program Analysis and Evaluation; Office of the Under Secretary of Defense for Policy; Office of the Under Secretary of Defense for Acquisition, Technology Office of the Assistant Secretary of Defense for Networks and Information Integration/Chief Information Officer; and Office of the Under Secretary of Defense Comptroller/Chief Financial Officer. These five offices were responsible for 84 percent of OSD’s reported classification decisions (original and derivative combined) during fiscal year 2004. According to the Pentagon Force Protection Agency, the office responsible for collecting data on classification activity for OSD, we obtained 100 percent of these five office’s classification decisions during the 21-month time period. Two GAO analysts independently reviewed each document using a 16-item checklist that we developed based on information in the Executive Order, and feedback from ISOO classification management experts. GAO analysts who participated in the document review completed the Defense Security Service Academy’s online Marking Classified Information course and passed the embedded proficiency test. Each document was examined for compliance with classification procedures and marking requirements in the Executive Order. The two analysts’ responses matched in more than 90 percent of the checklist items. On those infrequent occasions where the analysts’ responses were dissimilar, a third GAO analyst conducted a final review. We examined the rationale cited by the classifier for classifying the information, and whether similar information within the same document and across multiple documents was marked in the same manner. We also performed Internet searches on official U.S. Government Web sites to determine if the information had been treated as unclassified. For those documents that we identified as containing questionable classification decisions, we met with security officials from the applicable OSD offices to obtain additional information and documentation. To assess the reliability of DOD’s annual classification decisions estimate and the existence of material inconsistencies, we compared the guidance issued by ISOO and the Office of the Under Secretary of Defense for Intelligence on methods to derive this estimate with how DOD components and subordinate commands implemented this guidance. We also scrutinized the data to look for substantial changes in the data estimates reported by DOD components during fiscal years 2002 through 2004. To determine the likelihood of DOD’s meeting automatic declassification deadlines contained in Executive Order 12958, as amended, we met with officials from the Army, Navy/Marine Corps, and Air Force declassification offices. We decided to focus exclusively on the four military services, because, collectively they were responsible for more than 85 percent of the department’s declassification activity during fiscal year 2004. We also met with ISOO officials to discuss their evaluation of DOD’s progress towards meeting the Executive Order deadlines. To increase our understanding of the impediments that federal agencies in general, and DOD in particular, face with regard to satisfying automatic declassification deadlines, we met with declassification officials from the National Archives and Records Administration in College Park, Maryland. We met with ISOO officials to discuss the assignment’s objectives and methodology, and received documents on relevant information security topics, including inspection reports. We conducted our work from March 2005 through February 2006 in accordance with generally accepted government auditing standards. Davi M. D’Agostino (202) 512-5431 or [email protected]. Ann Borseth, Mattias Fenton, Adam Hatton, Barbara Hills, David Keefer, David Mayfield, Jim Reid, Terry Richardson, Marc Schwartz, Cheryl Weissman, and Jena Whitley made key contributions to this report. | Misclassification of national security information impedes effective information sharing, can provide adversaries with information to harm the United States and its allies, and incurs millions of dollars in avoidable administrative costs. As requested, GAO examined (1) whether the implementation of the Department of Defense's (DOD) information security management program, effectively minimizes the risk of misclassification; (2) the extent to which DOD personnel follow established procedures for classifying information, to include correctly marking classified information; (3) the reliability of DOD's annual estimate of its number of classification decisions; and (4) the likelihood of DOD's meeting automatic declassification deadlines. A lack of oversight and inconsistent implementation of DOD's information security program are increasing the risk of misclassification. DOD's information security program is decentralized to the DOD component level, and the Office of the Under Secretary of Defense for Intelligence (OUSD(I)), the DOD office responsible for DOD's information security program, has limited involvement with, or oversight of, components' information security programs. While some DOD components and their subordinate commands appear to manage effective programs, GAO identified weaknesses in others in the areas of classification management training, self-inspections, and classification guides. For example, training at 9 of the 19 components and subordinate commands reviewed did not cover fundamental classification management principles, such as how to properly mark classified information or the process for determining the duration of classification. Also, OUSD(I) does not have a process to confirm whether self-inspections have been performed or to evaluate their quality. Only 8 of the 19 components performed self-inspections. GAO also found that some of the DOD components and subordinate commands that were examined routinely do not submit copies of their security classification guides, documentation that identifies which information needs protection and the reason for classification, to a central library as required. Some did not track their classification guides to ensure they were reviewed at least every 5 years for currency as required. Because of the lack of oversight and weaknesses in training, self-inspection, and security classification guide management, the Secretary of Defense cannot be assured that the information security program is effectively limiting the risk of misclassification across the department. GAO's review of a nonprobability sample of 111 classified documents from five offices within the Office of the Secretary of Defense shows that, within these offices, DOD personnel are not uniformly following established procedures for classifying information, to include mismarking. In a document review, GAO questioned DOD officials' classification decisions for 29--that is, 26 percent of the sample. GAO also found that 92 of the 111 documents examined (83 percent) had at least one marking error, and more than half had multiple marking errors. While the results from this review cannot be generalized across DOD, they are consistent with the weaknesses GAO found in the way DOD implements its information security program. The accuracy of DOD's classification decision estimates is questionable because of the considerable variance in how these estimates are derived across the department, and from year to year. However, beginning with the fiscal year 2005 estimates, OUSD(I) will review estimates of DOD components. This additional review could improve the accuracy of DOD's classification decision estimates if methodological inconsistencies also are reduced. |
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NAGPRA requires federal agencies to (1) identify their Native American human remains, funerary objects, sacred objects, and objects of cultural patrimony, (2) try and determine if a cultural affiliation exists with a present day Indian tribe or Native Hawaiian organization, and (3) generally repatriate the culturally affiliated items to the applicable Indian tribe(s) or Native Hawaiian organization(s) under the terms and conditions prescribed in the act. NAGPRA covers five types of Native American cultural items (see table 1). NAGPRA’s requirements for federal agencies, museums, and the Secretary of the Interior, particularly the ones most relevant to their historical collections, which were the focus of our July 2010 report, include the following: Compile an inventory and establish cultural affiliation. Section 5 of NAGPRA requires that each federal agency and museum compile an inventory of any holdings or collections of Native American human remains and associated funerary objects that are in its possession or control. The act requires that the inventories be completed no later than 5 years after its enactment—by November 16, 1995—and in consultation with tribal government officials, Native Hawaiian organization officials, and traditional religious leaders. In the inventory, agencies and museums are required to establish geographic and cultural affiliation to the extent possible based on information in their possession. Cultural affiliation denotes a relationship of shared group identity which can be reasonably traced historically or prehistorically between a present day Indian tribe or Native Hawaiian organization and an identifiable earlier group. Affiliating NAGPRA items with a present day Indian tribe or Native Hawaiian organization is the key to deciding to whom the human remains and objects should be repatriated. If a cultural affiliation can be made, the act requires that the agency or museum notify the affected Indian tribes or Native Hawaiian organizations no later than 6 months after the completion of the inventory. The agency or museum was also required to provide a copy of each notice—known as a notice of inventory completion—to the Secretary of the Interior for publication in the Federal Register. The items for which no cultural affiliation can be made are referred to as culturally unidentifiable. Compile a summary of other NAGPRA items. Section 6 of NAGPRA requires that each federal agency and museum prepare a written summary of any holdings or collections of Native American unassociated funerary objects, sacred objects, or objects of cultural patrimony in its possession or control, based on the available information in their possession. The act requires that the summaries be completed no later than 3 years after its enactment—by November 16, 1993. Preparation of the summaries was to be followed by federal agency consultation with tribal government officials, Native Hawaiian organization officials, and traditional religious leaders. After a valid claim is received by an agency or museum, and if the other terms and conditions in the act are met, a notice of intent to repatriate must be published in the Federal Register before any item identified in a summary can be repatriated. Repatriate culturally affiliated human remains and objects. Section 7 of NAGPRA and its implementing regulations generally require that, upon the request of an Indian tribe or Native Hawaiian organization, all culturally affiliated NAGPRA items be returned to the applicable Indian tribe or Native Hawaiian organization expeditiously—but no sooner than 30 days after the applicable notice is published in the Federal Register—if the terms and conditions prescribed in the act are met. NAGPRA assigns certain duties to the Secretary of the Interior, which are carried out by the National NAGPRA Program Office (National NAGPRA) within NPS. In accordance with NAGPRA’s implementing regulations, National NAGPRA has developed a list of Indian tribes and Native Hawaiian organizations for the purposes of carrying out the act. The list is comprised of federally recognized tribes, Native Hawaiian organizations, and, at various points in the last 20 years, corporations established pursuant to the Alaska Native Claims Settlement Act (ANCSA). Since the enactment of two recognition laws in 1994, BIA has regularly published a comprehensive list of recognized tribes—commonly referred to as the list of federally recognized tribes—that federal agencies are supposed to use to identify federally recognized tribes. The recognition of Alaska Native entities eligible for the special programs and services provided by the United States to Indians because of their status as Indians has been controversial. Since a 1993 legal opinion by the Solicitor of the Department of the Interior, BIA’s list of federally recognized tribes has not included any ANCSA group, regional, urban, and village corporations. Finally, NAGPRA requires the establishment of a committee to monitor and review the implementation of inventory, identification and repatriation activities under the act. Among other things, the Review Committee is responsible for, upon request, reviewing and making findings related to the identity or cultural affiliation of cultural items or the return of such items and facilitating the resolution of any disputes among Indian tribes, Native Hawaiian organizations, and federal agencies or museum relating to the return of such items. We refer to these findings, recommendations and facilitation of disputes that do not involve culturally unidentifiable human remains simply as disputes; the Review Committee also makes recommendations regarding the disposition of culturally unidentifiable human remains. The NAGPRA Review Committee was established in 1991. The NMAI Act sections 11 and 13 generally require the Smithsonian to (1) inventory the Indian and Native Hawaiian human remains and funerary objects in its possession or control, (2) identify the origins of the Indian and Native Hawaiian human remains and funerary objects using the “best available scientific and historical documentation,” and (3) upon request repatriate them to lineal descendants or culturally affiliated Indian tribes and Native Hawaiian organizations. As originally written, the act did not set a deadline for the completion of these tasks, but amendments in 1996 added a June 1, 1998, deadline for the completion of inventories. The 1996 amendments also require the Smithsonian to prepare summaries for unassociated funerary objects, sacred objects, and objects of cultural patrimony by December 31, 1996. The NMAI Act uses the same definitions as NAGPRA for unassociated funerary objects, sacred objects, and objects of cultural patrimony, but the NMAI Act does not define human remains and it does not use the term associated funerary objects. Instead, the NMAI Act requires Indian funerary objects—which it defines as objects that, as part of the death rite or ceremony of a culture, are intentionally placed with individual human remains, either at the time of death or later—to be included in inventories and unassociated funerary objects to be included in summaries. The Smithsonian has identified two museums that hold collections subject to the NMAI Act: the National Museum of the American Indian and the National Museum of Natural History. Final repatriation decisions for the American Indian Museum are made by its Board of Trustees and the Secretary of the Smithsonian has delegated responsibility for making final repatriation decisions for the Natural History Museum to the Smithsonian’s Under Secretary for Science. According to Smithsonian officials, when new collections are acquired, the Smithsonian assigns an identification number—referred to as a catalog number—to each item or set of items at the time of the acquisition or, in some cases, many years later. A single catalog number may include one or more human bones, bone fragments, or objects, and it may include the remains of one or more individuals. All of this information is stored in the museums’ electronic catalog system, which is partly based on historical paper card catalogs. Generally, each catalog number in the electronic catalog system includes basic information on the item or set of items, such as a brief description of the item, where the item was collected, and when it was taken into the museum’s collection. Since the NMAI Act was enacted, the Smithsonian has identified approximately 19,780 catalog numbers that potentially include Indian human remains (about 19,150 within the Natural History Museum collections and about 630 within the American Indian Museum collections). Finally, like NAGPRA, the NMAI Act requires the establishment of a committee to monitor and review the inventory, identification, and return of Indian human remains and cultural objects. The Smithsonian Review Committee was established in 1990 for this purpose. As we reported in July 2010, federal agencies have not yet fully complied with all of the requirements of NAGPRA. Specifically, we found that while the eight key federal agencies generally prepared their summaries and inventories on time, they had not fully complied with other NAGPRA requirements. In addition, we found that while the NAGPRA Review Committee had conducted a number of activities to fulfill its responsibilities under NAGPRA, its recommendations have had mixed success. Furthermore, while National NAGPRA has taken several actions to implement the act’s requirements, in some cases it has not effectively carried out its responsibilities. Finally, although the key agencies have repatriated many NAGPRA items, repatriation activity has generally not been tracked or reported governmentwide. The eight key federal agencies we reviewed in our July 2010 report generally prepared their summaries and inventories by the statutory deadlines, but the amount of work put into identifying their NAGPRA items and the quality of the documents prepared varied widely. Of these eight agencies, the Corps, the Forest Service, and NPS did the most extensive work to identify their NAGPRA items, and therefore they had the highest confidence level that they had identified all of them and included them in the summaries and inventories that they prepared. In contrast, relative to these agencies, we determined that BLM, BOR, and FWS were moderately successful in identifying their NAGPRA items and including them in their summaries and inventories, and BIA and TVA had done the least amount of work. As a result, these five agencies had less confidence that they had identified all of their NAGPRA items and included them in summaries and inventories. In addition, not all of the culturally affiliated human remains and associated funerary objects had been published in a Federal Register notice as required. For example, at the time of our report, BOR had culturally affiliated 76 human remains but had not published them in a Federal Register notice. All of the agencies acknowledged that they still have additional work to do and some had not fully complied with NAGPRA’s requirement to publish notices of inventory completion for all of their culturally affiliated human remains and associated funerary objects in the Federal Register. As a result of these findings, we recommended the agencies develop and provide to Congress a needs assessment listing specific actions, resources, and time needed to complete the inventories and summaries required by NAGPRA. We further recommended that the agencies develop a timetable for the expeditious publication in the Federal Register of notices of inventory completion for all remaining Native American human remains and associated funerary objects that have been culturally affiliated in inventories. The Departments of Agriculture and the Interior and TVA agreed with our recommendations. For example, Interior stated that this effort is under way in most of its bureaus and that it is committed to completing the process. It added that one of the greatest challenges to completing summaries and inventories of all NAGPRA items is locating collections and acquiring information from the facilities where the collections are stored. We found that the NAGPRA Review Committee, to fulfill its responsibilities under NAGPRA, had monitored federal agency and museum compliance, made recommendations to improve implementation, and assisted the Secretary in the development of regulations. As we reported, the committee’s recommendations to facilitate the resolution of disposition requests involving culturally unidentifiable human remains have generally been implemented (52 of 61 requests has been fully implemented). In disposition requests, parties generally agreed in advance to their preferred manner of disposition and, in accordance with the regulations, came to the committee to complete the process and obtain a final recommendation from the Secretary. In contrast to the amicable nature of disposition requests, disputes are generally contentious, and we found that the NAGPRA Review Committee’s recommendations have had a low implementation rate. Specifically, of the 12 disputes that we reviewed, the committee’s recommendations were fully implemented for 1 dispute, partially implemented in 3 others, not implemented for 5, and the status of 3 cases is unknown. Moreover, we found that some actions recommended by the committee exceeded NAGPRA’s scope, such as recommending repatriation of culturally unidentifiable human remains to non-federally recognized Indian groups. However, we found that the committee, National NAGPRA, and Interior officials had since taken steps to address this issue. We reported that National NAGPRA had taken several actions to help the Secretary carry out responsibilities under NAGPRA. For example, National NAGPRA had published federal agency and museum notices in the Federal Register; increasing this number in recent years, while reducing the backlog of notices awaiting publication. Furthermore, it had administered a NAGPRA grants program that from fiscal years 1994 through 2009 resulted in 628 grants awarded to Indian tribes, Native Hawaiian organizations, and museums totaling $33 million. It had also administered the nomination process for NAGPRA Review Committee members. Overall, we found that most of the actions performed by National NAGPRA were consistent with the act, but we identified concerns with a few actions. Specifically, National NAGPRA had developed a list of Indian tribes for the purposes of carrying out NAGPRA, but at various points in the last 20 years the list had not been consistent with BIA’s policy or an Interior Solicitor legal opinion analyzing the status of Alaska Native villages as Indian tribes. As a result, we recommended that National NAGPRA, in conjunction with Interior’s Office of the Solicitor, reassess whether ANCSA corporations should be considered as eligible entities for the purposes of carrying out NAGPRA. Interior agreed with this recommendation and, after our report was issued, Interior’s Office of the Solicitor issued a memorandum in March 2011 stating that NAGPRA clearly does not include Alaska regional and village corporations within its definition of Indian tribes and that the legislative history confirms that this was an intentional omission on the part of Congress. The memorandum also states that while the National NAGPRA Program’s list of Indian tribes for purposes of NAGPRA must not include ANCSA regional and village corporations, National NAGPRA is currently bound by its regulatory definition of Indian tribe that contradicts the statutory definition by including ANCSA corporations. Because of this, the Solicitor suggests that the regulatory definition be changed as soon as feasible, followed by a corresponding change in the list. We also found that National NAGPRA did not always properly screen nominations for the NAGPRA Review Committee and, in 2004, 2005, and 2006, inappropriately recruited nominees for the committee, in one case recommending the nominee to the Secretary for appointment. As a result, we recommended that the Secretary of the Interior direct National NAGPRA to strictly adhere to the nomination process prescribed in the act and, working with Interior’s Office of the Solicitor as appropriate, ensure that all NAGPRA Review Committee nominations are properly screened to confirm that the nominees and nominating entities meet statutory requirements. Interior agreed with this recommendation, stating that the committee nomination procedures were revised in 2008 to ensure full transparency and that it will ask the Solicitor’s Office to review these procedures. In July 2010 we reported that while agencies are required to permanently document their repatriation activities, they are not required to compile and report that information to anyone. Of the federal agencies that have published notices of inventory completion, we determined that only three have tracked and compiled agencywide data on their repatriations—the Forest Service, NPS, and the Corps. These three agencies, however, along with other federal agencies that have published notices of inventory completion, do not regularly report comprehensive data on their repatriations to National NAGPRA, the NAGPRA Review Committee, or Congress. Through data provided by these three agencies, along with our survey of other federal agencies, we found that federal agencies had repatriated a total of 55 percent of human remains and 68 percent of associated funerary objects that had been published in notices of inventory completion as of September 30, 2009. Agency officials identified several reasons why some human remains and associated funerary objects had not been repatriated, including the lack of repatriation requests from culturally affiliated entities, repatriation requests from disputing parties, a lack of reburial sites, and a lack of financial resources to complete the repatriation. Federal agencies had also published 78 notices of intent to repatriate that covered 34,234 unassociated funerary objects, sacred objects, or objects of cultural patrimony. Due to a lack of governmentwide reporting, we recommended the Secretaries of Agriculture, Defense, and the Interior and the Chief Executive Officer of the Tennessee Valley Authority direct their cultural resource management programs to report their repatriation data to National NAGPRA on a regular basis, but no less than annually, for each notice of inventory completion they have or will publish. Furthermore, we recommended that National NAGPRA make this information readily available to Indian tribes and Native Hawaiian organizations and that the NAGPRA Review Committee publish the information in its annual report to Congress. The Departments of Agriculture and the Interior and TVA agreed with this recommendation, and Interior stated that its agencies will work toward completing an annual report beginning in 2011. In our May 2011 report we found that the Smithsonian Institution still had much work remaining with regard to the repatriation activities required by the NMAI Act. Specifically, we found that while the American Indian and Natural History Museums generally prepared summaries and inventories within the statutory deadlines the process that the Smithsonian relies on is lengthy and resource intensive. Consequently, after more than 2 decades, the museums have offered to repatriate the Indian human remains in only about one-third of the catalog numbers identified as possibly including such remains since the act was passed. In addition, we found that the Smithsonian established a Review Committee to meet the statutory requirements, but limited its oversight of repatriation activities. Finally, we found that while the Smithsonian has repatriated most of the human remains and many of the objects that it has offered for repatriation, it has no policy on how to address items that are culturally unidentifiable. We found that while the American Indian and Natural History Museums had generally prepared summaries and inventories within the deadlines established in the NMAI Act, their inventories and the process they used to prepare them have raised questions about their compliance with some of the act’s statutory requirements. The first question was the extent to which the museums prepared their inventories in consultation and cooperation with traditional Indian religious leaders and government officials of Indian tribes, as required by the NMAI Act. Section 11 of the act directs the Secretary of the Smithsonian, in consultation and cooperation with traditional Indian religious leaders and government officials of Indian tribes, to inventory the Indian human remains and funerary objects in the possession or control of the Smithsonian and, using the best available scientific and historical documentation, identify the origins of such remains and objects. However, the Smithsonian generally began the consultation process with Indian tribes after the inventories from both museums were distributed. The Smithsonian maintains that it is in full compliance with the statutory requirements for preparing inventories and that section 11 does not require that consultation occur prior to the inventory being completed. The second question is the extent to which the Natural History Museum’s inventories—which were finalized after the 1996 amendments—identified geographic and cultural affiliations to the extent practicable based on available information held by the Smithsonian, as required by the amendments. The museum’s inventories generally identified geographic and cultural affiliations only where such information was readily available in the museum’s electronic catalog. However, the Smithsonian states that it does not interpret section 11 as necessarily requiring that the inventory and identification process to occur simultaneously, and therefore it has adopted a two-step process to fulfill section 11’s requirements. The legislative history of the 1996 amendments provides little clear guidance concerning the meaning of section 11. However, we also found that the two-step process that the Smithsonian has adopted is a lengthy and resource-intensive one and that, at the pace that the Smithsonian is applying this process, it will take several more decades to complete this effort. As a result of the identification and inventory process the Smithsonian is using, since the passage of the NMAI Act in 1989 through December 2010, the Smithsonian estimates that it has offered to repatriate approximately one-third of the estimated 19,780 catalog numbers identified as possibly including Indian human remains. The American Indian Museum had offered to repatriate human remains in about 40 percent (about 250) of its estimated 630 catalog numbers. The Natural History Museum had offered to repatriate human remains in about 25 percent (about 5,040) of its estimated 19,150 catalog numbers containing Indian human remains. In some cases, through this process, the Smithsonian did not offer to repatriate human remains and objects because it determined that they could not be culturally affiliated with a tribe. The congressional committee reports accompanying the 1989 act indicate that the Smithsonian estimated that the identification and inventory of Indian human remains as well as notification of affected tribes and return of the remains and funerary objects would take 5 years. However, more than 21 years later, these efforts are still under way. In light of this slow progress, we suggested that Congress may wish to consider ways to expedite the Smithsonian’s repatriation process including, but not limited to, directing the Smithsonian to make cultural affiliation determinations as efficiently and effectively as possible. In May 2011, we reported that the Smithsonian Review Committee had conducted numerous activities to implement the special committee provisions in the NMAI Act, but its oversight and reporting activities have been limited. For example, we found that contrary to the NMAI Act, the committee does not monitor and review the American Indian Museum’s inventory, identification, and repatriation activities, although it does monitor and review the Natural History Museum’s inventory, identification, and repatriation activities. Although the law does not limit the applicability of the Smithsonian Review Committee to the Natural History Museum, the Secretary established a committee to meet this requirement in 1990 that oversees only the Natural History Museum’s repatriation activities and is housed within that museum. Although the Smithsonian believes Congress intended to limit the committee’s jurisdiction to the Natural History Museum, the statutory language and its legislative history do not support that view. The Smithsonian provided several reasons to support this contention but, as we reported in May 2011, these reasons are unpersuasive. Therefore, we recommended that the Smithsonian’s Board of Regents direct the Secretary of the Smithsonian to expand the Smithsonian Review Committee’s jurisdiction to include the American Indian Museum, as required by the NMAI Act, to improve oversight of Smithsonian repatriation activities. With this expanded role for the committee, we further recommended that the Board of Regents and the Secretary should consider where the most appropriate location for the Smithsonian Review Committee should be within the Smithsonian’s organizational structure. The Smithsonian agreed with this recommendation, stating that the advisory nature of the committee could be expanded to include consultation with the American Indian Museum. In our May 2011 report, we also found that neither the Smithsonian nor the Smithsonian Review Committee submits reports to Congress on the progress of repatriation activities at the Smithsonian. Although section 12 of the NMAI Act requires the Secretary, at the conclusion of the work of the committee, to so certify by report to Congress, there is no annual reporting requirement similar to the one required for the NAGPRA Review Committee. As we stated earlier, in 1989, it was estimated that the Smithsonian Review Committee would conclude its work in about 5 years and cease to exist at the end of fiscal year 1995. Yet the committee’s monitoring and review of repatriation activities at the Natural History Museum has been ongoing since the committee was established in 1990. As a result, we recommended that the Board of Regents, through the Secretary, direct the Smithsonian Review Committee to report annually to Congress on the Smithsonian’s implementation of its repatriation requirements in the NMAI Act. The Smithsonian agreed with this recommendation, stating that it will submit, on a voluntary basis, annual reports to Congress. The Smithsonian further stated that although the format and presentation are matters to be discussed internally, it intends to use the National NAGPRA report as a guide and framework for its discussion and report. Finally, during our review of the Smithsonian Review Committee activities we determined that no independent administrative appeals process exists to challenge the Smithsonian’s cultural affiliation and repatriation decisions, in the event of a dispute. As a result, we recommended that the Board of Regents establish an independent administrative appeals process for Indian tribes and Native Hawaiian organizations to appeal decisions to either the Board of Regents or another entity that can make binding decisions for the Smithsonian Institution to provide tribes with an opportunity to appeal cultural affiliation and repatriation decisions made by the Secretary and the American Indian Museum’s Board of Trustees. The Smithsonian agreed with this recommendation, stating that it will review its dispute resolution procedures, with the understanding that the goal is to ensure that claimants have proper avenues to seek redress from Smithsonian repatriation decisions, including a process for the review of final management determinations. In May 2011 we reported that the Smithsonian estimates that, of the items it has offered for repatriation, as of December 31, 2010, it has repatriated about three-quarters (4,330 out of 5,980) of the Indian human remains, about half (99,550 out of 212,220) of the funerary objects, and nearly all (1,140 out of 1,240) sacred objects and objects of cultural patrimony. Some items have not been repatriated for a variety of reasons, including tribes’ lack of resources, cultural beliefs, and tribal government issues. In addition, we found that, in the inventory and identification process, the Smithsonian determined that some human remains and funerary objects were culturally unidentifiable. In some of those cases it did not offer to repatriate the items and it does not have a policy on how to undertake the ultimate disposition of such items. Specifically, our report found that according to Natural History Museum officials about 340 human remains and about 310 funerary objects are culturally unidentifiable. The NMAI Act does not discuss how the Smithsonian should handle human remains and objects that cannot be culturally affiliated, and neither museum’s repatriation policies describe how they will handle such items. In contrast, a recent NAGPRA regulation that took effect in May 2010 requires, among other things, federal agencies and museums to consult with federally recognized Indian tribes and Native Hawaiian organizations from whose tribal or aboriginal lands the remains were removed before offering to transfer control of the culturally unidentifiable human remains. Although Smithsonian officials told us that the Smithsonian generally looks to NAGPRA and the NAGPRA regulations as a guide to its repatriation process, where appropriate, in a May 2010 letter commenting on the NAGPRA regulation on disposition of culturally unidentifiable remains, the Directors of the American Indian and Natural History Museums cited overall disagreement with the regulation, suggesting that it “favors speed and efficiency in making these dispositions at the expense of accuracy.” Nevertheless, in our May 2011 report, we recommended that the Smithsonian’s Board of Regents direct the Secretary and the American Indian Museum’s Board of Trustees to develop policies for the Natural History and American Indian Museums for the handling of items in their collections that cannot be culturally affiliated to provide for a clear and transparent repatriation process. The Smithsonian agreed with this recommendation, stating that both the American Indian and Natural History Museums, in the interests of transparency, are committed to developing policies in this regard and that such policies will give guidance to Native communities and the public as to how the Smithsonian will handle and treat such remains. In conclusion, Chairman Akaka, Vice Chairman Barrasso, and Members of the Committee, our two studies clearly show that while federal agencies and the Smithsonian have made progress in identifying and repatriating thousands of Indian human remains and objects, after 2 decades of effort, much work still remains to be done to address the goals of both NAGPRA and the NMAI Act. In this context, we believe that it is imperative for the agencies to implement our recommendations to ensure that the requirements of both acts are met and that the processes they employ to fulfill the requirements are both efficient and effective. This concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact Anu K. Mittal at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Jeffery D. Malcolm, Assistant Director; Mark Keenan; and Jeanette Soares also made key contributions to this statement. In addition, Allison Bawden, Pamela Davidson, Emily Hanawalt, Cheryl Harris, Catherine Hurley, Rich Johnson, Sandra Kerr, Jill Lacey, Anita Lee, Ruben Montes de Oca, David Schneider, John Scott, Ben Shouse, and Maria Soriano also made key contributions to the reports on which this statement is based. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The National Museum of the American Indian Act of 1989 (NMAI Act), as amended in 1996, generally requires the Smithsonian Institution to inventory and identify the origins of its Indian and Native Hawaiian human remains and objects placed with them (funerary objects) and repatriate them to culturally affiliated Indian tribes upon request. According to the Smithsonian, two of its museums--the American Indian and the Natural History Museums--have items that are subject to the NMAI Act. The Native American Graves Protection and Repatriation Act (NAGPRA), enacted in 1990, includes similar requirements for federal agencies and museums. The National NAGPRA office, within the Department of the Interior's National Park Service, facilitates the governmentwide implementation of NAGPRA. Each act requires the establishment of a committee to monitor and review repatriation activities. GAO's testimony is based on its July 2010 report on NAGPRA implementation (GAO-10-768) and its May 2011 report on Smithsonian repatriation (GAO-11-515). The testimony focuses on the extent to which key federal agencies have complied with NAGPRA's requirements and the extent to which the Smithsonian has fulfilled its repatriation requirements. GAO found that almost 20 years after NAGPRA was enacted, eight key federal agencies with significant historical collections--Interior's Bureau of Indian Affairs (BIA), Bureau of Land Management, Bureau of Reclamation, U.S. Fish and Wildlife Service and National Park Service; Agriculture's U.S. Forest Service; the U.S. Army Corps of Engineers; and the Tennessee Valley Authority--have not fully complied with the requirements of the act. All of the agencies acknowledged that they still have additional work to do and some have not fully complied with NAGPRA's requirement to publish notices of inventory completion for all of their culturally affiliated human remains and associated funerary objects in the Federal Register. In addition, GAO found two areas of concern with the National NAGPRA office's activities. First, National NAGPRA had developed a list of Indian tribes for the purposes of carrying out NAGPRA that was inconsistent with BIA's official list of federally recognized tribes and an Interior legal opinion. Second, National NAGPRA did not always screen nominations for NAGPRA Review Committee positions properly. GAO found that repatriations were generally not tracked or reported governmentwide. However, based on GAO's compilation of federal agencies' repatriation data, through September 30, 2009, federal agencies had repatriated 55 percent of the human remains and 68 percent of the associated funerary objects that had been published in notices of inventory completion. The relevant agencies agreed with the recommendations in both reports and GAO is making no new recommendations at this time. |
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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 processing uranium ore 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 the 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, the Nuclear Regulatory Commission (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 the 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 the contamination, developing an action plan, and carrying out the cleanup using the selected method. According to DOE, depending on the type and extent of the 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 April 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 NRC as meeting the standards of the Environmental Protection Agency (EPA). At 10 of the other 12 sites, DOE is working on obtaining such a license, and the remaining 2 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 NRC 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 expects to complete it 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 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 another $202 million. More recently, DOE 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. Since the time we issued our report, DOE has reported some progress in developing its groundwater cleanup plans. However, it is still 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, and thereby increase the final cost of the groundwater cleanup. In its fiscal year 1997 congressional budget request, DOE 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 ability and willingness of the affected states to pay their share of the cleanup costs. According to DOE, several states 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 has worked 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 roughly $200,000. 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 the long-term custody, that is, the surveillance and maintenance, of both Title I and Title II sites, but the Department bears the financial responsibility for these activities only 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 the long-term custody so that they, not the federal government, bear these costs in full, at the time we issued our December 1995 report, NRC had not reviewed its estimate of basic surveillance costs since 1980, and DOE was estimating that basic monitoring would cost about three times more than NRC had estimated. Since then, NRC and DOE have worked together to determine what level of basic monitoring should occur and how comprehensive the inspection reports should be. However, DOE still maintains that ongoing routine maintenance will be needed at all sites, while 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 whether 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 $621 million over budget; (3) DOE cleanup costs increased because there were more contaminated sites than originally 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, 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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Over the past 20 years, DOD has been engaged in an effort to modernize its aging tactical aircraft force. The F-22A and JSF, along with the F/A-18E/F, are the central elements of DOD’s overall recapitalization strategy for its tactical air forces. The F-22A was developed to replace the F-15 air superiority aircraft. The continued need for the F-22A, the quantities required, and modification costs to perform its mission have been the subject of a continuing debate within DOD and the Congress. Supporters cite its advanced features—stealth, supercruise speed, maneuverability, and integrated avionics—as integral to the Air Force’s Global Strike initiative and for maintaining air superiority over potential future adversaries. Critics argue that the Soviet threat it was originally designed to counter no longer exists and that its remaining budget dollars could be better invested in enhancing current air assets and acquiring new and more transformational capabilities that will allow DOD to meet evolving threats. Its fiscal year 2007 request includes $800 million for continuing development and modifications for aircraft enhancements such as equipping the F-22A with an improved ground attack capability and improving aircraft reliability. The request also includes about $2.0 billion for advance procurement of parts and funding of subassembly activities for the initial 20 aircraft of a 60-aircraft multiyear procurement. JSF is a replacement for a substantial number of aging fighter and attack aircraft currently in the DOD inventory. For the Air Force, it is intended to replace the F-16 and A-10 while complementing the F-22A. For the Marine Corps, the JSF is intended to replace the AV-8B and F/A-18 A/C/D; for the Navy, the JSF is intended to complement the F/A-18E/F. DOD estimates that as currently planned, it will cost $257 billion to develop and procure about 2,443 aircraft and related support equipment, with total costs to maintain and operate JSF aircraft adding $347 billion over the program’s life cycle. After 9 years in development, the program plans to deliver its first flight test aircraft later this year. The fiscal year 2007 budget request includes $4 billion for continuing development and $1.4 billion for the purchase of the first 5 procurement aircraft, initial spares, and advance procurement for 16 more aircraft to be purchased in 2008. We have frequently reported on the importance of using a sound, executable business case before committing resources to a new product development. In its simplest form, such a business case is evidence that (1) the warfighter’s needs are valid and can best be met with the chosen concept and quantities, and (2) the chosen concept can be developed and produced within existing resources—that is, proven technologies, design knowledge, adequate funding, and adequate time to deliver the needed product. At the heart of a good business case is a knowledge-based strategy to product development that demonstrates high levels of knowledge before significant commitments of time and money are made. The future of DOD’s tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs—which represent about $245 billion in investments to be made in the future. Yet achieving expected outcomes for both these programs continues to be fraught with risk. We have reported that the F-22A’s original business case is unexecutable and does not reflect changing conditions over time. Currently, there is a significant mismatch between the Air Force’s stated need for F-22A aircraft and the resources the Office of the Secretary of Defense (OSD) is willing to commit. The business case for the JSF program, which has 90 percent of its investments still in the future, significantly overlaps production with development and system testing—a strategy that often results in cost and schedule increases. Both programs are at critical junctures that require DOD to make important business decisions. According to the Air Force, a minimum of 381 modernized F-22A aircraft are needed to satisfy today’s national strategic requirements—a buy that is roughly half the 750 aircraft originally planned, but more than double the 183 aircraft OSD states available funding can support. Since the Air Force began developing the F-22A in 1986, the business case for the program has changed radically— threats have changed, requirements have been added, costs have increased, funds have been added, planned quantities have been reduced, and deliveries of the aircraft to the warfighter have been delayed. There is a 198-aircraft capability gap today. Decisions in the last 2 years have worsened the mismatch between Air Force requirements and available resources, further weakening the F-22A program’s business case. Without a new business case, an agreement on an appropriate number of F-22As for our national defense, it is uncertain as to whether additional investments in the program are advisable. The original business case for the F-22A program was to develop air superiority fighters to counter a projected threat of significant quantities of advanced Soviet fighters. During the 19-year F-22A development program, that threat did not materialize to the degree expected. Today, the requirements for the F-22A have evolved to include what the Air Force has defined as a more robust ground attack capability to destroy expected air defense systems and other ground targets and an intelligence-gathering capability. However, the currently configured F-22A is not equipped to carry out these roles without further investments in its development. The F-22As modernization program is currently being planned for three basic blocks, or spirals, of increasing capability to be developed and delivered over time. Current Air Force estimates of modernization costs, from 2007 through 2016, are about $4.3 billion. Additional modernization is expected, but the content and costs have not been determined or included in the budget. OSD has restructured the acquisition program twice in the last 2 years to free up funds for other priorities. In December 2004, DOD reduced the program to 179 F-22As to save about $10.5 billion. This decision also terminated procurement in 2008. In December 2005, DOD changed the F- 22A program again, adding $1 billion to extend production for 2 years to ensure a next-generation fighter aircraft production line would remain in operation in case JSF experienced delays or problems. It also added 4 aircraft for a total planned procurement of 183 F-22As. As part of the 2005 change, aircraft previously scheduled in 2007 will not be fully funded until 2008 or later. OSD and the Air Force plan to buy the remaining 60 F-22As in a multiyear procurement that would buy 20 aircraft a year for 3 years—2008 through 2010. The Air Force plans to fund these aircraft in four increments—an economic order quantity to buy things cheaper; advanced procurement for titanium and other materials and parts to protect the schedule; subassembly; and final assembly. The Air Force plans to provide Congress a justification for multiyear procurement in May 2006 and the fiscal year 2007 President’s Budget includes funds for multiyear procurement. The following table shows the Air Force’s plan for funding the multiyear procurement. Air Force officials have told us that an additional $400 million in funds are needed to complete the multiyear procurement and that the accelerated schedule to obtain approval and start the effort adds risk to the program, creating more weaknesses in the current F-22A business case. A 198-aircraft gap between what the Air Force needs and what is affordable raises questions about what additional capabilities need to be included in the F-22A program. In March 2005, we recommended that the Air Force develop a new business case that justified additional investments in modernizing the aircraft to include greater ground attack and intelligence-gathering capabilities before moving forward. DOD responded to our report that business case decisions were handled annually in the budget decisions and that the QDR would analyze requirements for the F-22A and make program decisions. However, it is not clear from the QDR report, issued last month, what analyses were conducted to determine the gaps in capability, the alternatives considered, the quantities needed, or the costs and benefits of the F-22A program. Therefore, questions about the F-22A program remain: What capability gaps exist today and will exist in the future (air superiority, ground attack, electronic attack, intelligence gathering)? What alternatives besides the F-22A can meet these needs? What are the costs and benefits of each alternative? How many F-22As are needed? What capabilities should be included? Until these questions are answered and differences are reconciled, further investments in the program—for either the procurement of new aircraft or modernization—cannot be justified. The JSF program appears to be on the same path as the F-22A program. After being in development for 9 years, the JSF program has not produced the first test aircraft, has experienced substantial cost growth, has reduced the number of planned aircraft, and has delayed delivery of the aircraft to the warfighter. Moreover, the JSF program remains committed to a business case that invests heavily in production before testing has demonstrated acceptable performance of the aircraft. At the same time, the JSF program has contracted to develop and deliver the aircraft’s full capability in a single-step, 12-year development program—a daunting task given the need to incorporate the technological advances that, according to DOD, represent a quantum leap in capability. The business case is a clear departure from the DOD policy preference that calls for adopting an evolutionary approach to acquisitions. Furthermore, the length and cost of the remaining development are exceedingly difficult to accurately estimate, thereby increasing DOD’s risks in contracting for production. With this risky approach, it is likely that the program will continue to experience significant cost and schedule overruns. The JSF program expects to begin low-rate initial procurement in 2007 with less than 1 percent of the flight test program completed and no production representative prototypes built for the three JSF variants. Technologies and features critical to JSF’s operational success, such as a low observable and highly common airframe, advanced mission systems, and maintenance prognostics systems, will not have been demonstrated in a flight test environment when production begins. Other key demonstrations that will have not been either started or only in the initial stages before production begins include testing with a fully integrated aircraft—mission systems and full software, structural and fatigue testing of the airframe, and shipboard testing of Navy and Marine Corps aircraft. When the first fully integrated and capable development JSF is expected to fly in 2011, DOD will already have committed to buy 190 aircraft at an estimated cost of $26 billion. According to JSF program plans, DOD’s low- rate initial production quantities will increase from 5 aircraft a year in 2007 to 133 a year in 2013, when development and initial operational testing are completed. By then, DOD will have procured more than double that amount—424 aircraft at an estimated cost of about $49 billion, and spending for monthly production activities is expected to be about $1 billion, an increase from $100 million a month when production is scheduled to begin in 2007. Figure 1 shows the significant overlap in development and testing and the major investments in production. The overlap in testing and production is the result of a business case and acquisition strategy that has proven to be risky in past programs like F-22A, Comanche, and B-2A, which far exceeded the cost and delivery goals set at the start of their development programs. JSF has already increased its cost estimate and delayed deliveries despite a lengthy replanning effort that added over $7 billion and 18 months to the development program. JSF officials have stated that the restructured program has little or no flexibility for future changes or unanticipated risks. The program has planned about 8 years to complete significant remaining activities of the system development and demonstration phase, including fully maturing 7 of the 8 critical technologies; completing the designs and releasing the engineering drawings for all manufacturing and delivering 15 flight test aircraft and 7 ground test developing 19 million lines of software code; and completing a 7-year, 12,000-hour flight test program. The JSF program’s latest planned funding profile for development and procurement, produced in December 2004 by the JSF program office, assumes annual funding rates to hover close to $13 billion between 2012 and 2022, peaking at $13.8 billion in 2013. If the program fails to achieve its current estimated costs, funding challenges could be even greater than that. The Office of Secretary of Defense Cost Analysis Improvement Group was to update its formal independent cost estimate in the spring of 2005. The group now does not expect to formally complete its estimate until spring 2006, but its preliminary estimate was substantially higher than the program office’s. A modest cost increase would have dramatic impacts on funding. For example, a 10 percent increase in production costs would amount to over $21 billion (see fig. 2). DOD has recently made decisions to reduce near-term funding requirements that could cause future JSF costs to increase. It had begun to invest in the program to develop an alternative engine for the aircraft, but now plans to cancel further investments in order to make the remaining funds available for other priorities. According to DOD, it believes that there is no cost benefit or savings with an engine competition for the JSF and there is low operational risk with going solely with a single engine supplier. DOD has already invested $1.2 billion in funding for this development effort through fiscal year 2006. By canceling the program, it expects to save $1.8 billion through fiscal year 2011. Developing alternative engines is a practice that has been used in past fighter aircraft development programs like the F-16 and F-15 programs. An alternative engine program may help maintain the industrial base for fighter engine technology, result in price competition in the future for engine acquisition and spare parts, instill incentives to develop a more reliable engine, and ensure an operational alternative should the current engine develop a problem that would ground the entire fleet of JSF aircraft. As result, the JSF decision should be supported by a sound business case analysis. To date, we have not seen such an analysis. Finally, the uncertainties inherent in concurrently developing, testing, and producing the JSF aircraft prevent the pricing of initial production orders on a fixed price basis. Consequently, the program office plans to place initial procurement orders on cost reimbursement contracts. These contracts will provide for payment of allowable incurred costs, to the extent prescribed in the contract. With cost reimbursement contracts a greater cost risk is placed on the buyer—in this case, DOD. For the JSF, procurement should start when risk is low enough to enter into a fixed price agreement with the contractor based on demonstrations of the fully configured aircraft and manufacturing processes. DOD has not been able to achieve its recapitalization goals for its tactical aircraft forces. Originally, DOD had planned to buy a total of 4,500 tactical aircraft to replace the aging legacy force. Today, because of delays in the acquisition programs, increased development and procurement costs, and affordability pressures, it plans to buy almost one-third fewer tactical aircraft (see fig. 3). The delivery of these new aircraft has also been delayed past original plans. DOD has spent nearly $75 billion on the F-22A and JSF programs since they began, but this accounts for only 122 new operational aircraft. Because DOD’s recapitalization efforts have not materialized as planned, many aircraft acquired in the 1980s will have to remain in the inventory longer than originally expected, incurring higher investment costs to keep them operational. According to DOD officials, these aging aircraft are approaching the end of their service lives and are costly to maintain at a high readiness level. While Air Force officials assert that aircraft readiness rates are steady, they agree that the costs to operate and maintain its aircraft over the last decade have risen substantially. Regardless, the military utility of the aging aircraft is decreasing. The funds used to operate, support, and upgrade the current inventory of legacy aircraft represent opportunity costs that could be used to develop and buy new aircraft. From fiscal years 2006 to 2011, DOD plans to spend about $57 billion for operations and maintenance and military personnel for legacy tactical fighter aircraft. Some of these funds could be invested in newer aircraft that would be more capable and less costly to operate. For example, the Air Force Independent Cost Estimate Summary shows that the F-22A will be less expensive to operate than the F-15. The F-22A will require fewer maintenance personnel for each squadron, and one squadron of F-22As can replace two squadrons of F-15. This saves about 780 maintenance personnel as well as about $148 million in annual operating and support cost according to the independent cost estimate. Over the same time frame, DOD also plans to spend an average of $1.5 billion each year—-or $8.8 billion total—to modernize or improve legacy tactical fighter aircraft (see fig. 4). Further delays or changes in the F-22A or JSF programs could require additional funding to keep legacy aircraft in the inventory and relevant to the warfighter’s needs. In testimony last year, we suggested that the QDR would provide an opportunity for DOD to assess its tactical aircraft recapitalization plans and weigh options for accomplishing its specific and overarching goals. In February 2006, the Secretary of Defense testified that recapitalization of DOD’s tactical aircraft is important to maintain America’s air dominance. Despite this continued declaration about recapitalizing tactical aircraft, DOD’s 2006 QDR report did not present a detailed investment strategy that addressed needs and gaps, identified alternatives, and assessed costs and benefits. With limited information contained in the QDR report, many questions are still unanswered about the future of DOD’s tactical aircraft modernization efforts. As DOD moves forward with its efforts to recapitalize its tactical aircraft force, it has the opportunity to reduce operating costs and deliver needed capabilities to the warfighter more quickly. To take advantage of this opportunity, however, DOD must fundamentally change the way it buys weapon systems. Specifically, the department must change how it selects weapon systems to buy, and how it establishes and executes the business case. Although the F-22A program has progressed further in the acquisition process than the JSF program, both programs are at critical decision-making junctures, and the time for DOD to implement change is now. Before additional investments in the F-22A program are made, DOD and the Air Force must agree on the aircraft’s capabilities and quantities and the resources that can be made available to meet these requirements. A cost and benefit analysis of F-22A capabilities and alternative solutions weighed against current and expected threats is needed to determine whether a sound business case for the F-22A is possible and whether investing an additional $13.8 billion over the next 5 years to procure or modernize these aircraft is justified. With more than 90 percent of investment decisions to develop, test, and buy JSF aircraft remaining, DOD could implement significant changes in its business case before investing further in the JSF program. The JSF program should delay production and investments in production capability until the aircraft design qualities and integrated mission capabilities of the fully configured and integrated JSF aircraft variants have been proven to work in flight testing. Also, an evolutionary acquisition strategy to limit requirements for the aircraft’s first increment of capabilities that can be achieved with proven technologies and available resources could significantly reduce the JSF program’s cost and schedule risks. Such a strategy would allow the program to begin testing and low-rate production sooner and, ultimately, to deliver a useful product in sufficient quantities to the warfighter sooner. Once the JSF is delivered, DOD could begin retiring its aging and costly tactical aircraft. Capabilities that demand as yet undemonstrated technologies would be included as requirements in future JSF aircraft increments that would be separately managed. An evolutionary, knowledge-based acquisition approach would not only help significantly minimize risk and deliver capabilities to the warfighter sooner, it would be in line with current DOD policy preferences. DOD’s use of an evolutionary, knowledge-based approach is not unprecedented. The F-16 program successfully evolved capabilities over the span of 30 years, with an initial F-16 capability delivered to the warfighter about 4 years after development started. Figure 5 illustrates the F-16 incremental development approach. The F-16 program provides a good acquisition model for the JSF program. For JSF, an evolutionary approach could entail delivering a first increment aircraft with at least as much capability as legacy aircraft with sufficient quantities to allow DOD to retire its aging tactical aircraft sooner and reduce operating inefficiencies. Limiting development to 5-year increments or less, as suggested in DOD’s acquisition policy, would force smaller, more manageable commitments in capabilities and make costs and schedules more predictable. Some of the more challenging JSF capabilities, such as advanced mission systems or prognostics technologies, would be deferred and added to follow-on efforts once they are demonstrated in the technology development environment—a more conducive environment to maturing and proving new technologies. A shorter system development phase would have other important benefits. It would allow DOD to align a program manager’s tenure to the completion of the phase, which would enable program managers to be held accountable for decisions. It also would allow DOD to use fixed-price-type contracts for production, and thereby reduce the government’s cost risk. Additionally, DOD should do a more comprehensive business case analysis of the costs, benefits and risks before terminating the alternative engine effort. A competitive engine program may (1) incentivize contractors’ to minimize life cycle costs; (2) improve engine reliability and quality in the future; (3) provide operational options; and (4) maintain the industrial base. At a broader level, DOD needs to make more substantive changes to its requirements, funding, and acquisition processes to improve weapon system program outcomes. We have recommended these changes in past reports and DOD has agreed with them. The January 2006 Defense Acquisition Performance Assessment report, based on a study directed by the Deputy Secretary of Defense, made some important observations regarding DOD acquisitions. The report concluded that the current acquisition process is slow, overly complex, and incompatible with meeting the needs of DOD in a diverse marketplace. Notably, the report confirmed that a successful acquisition process must be based on requirements that are relevant, timely, informed by the combatant commanders, and supported by mature technologies and resources necessary to realize development. The report also pointed out that DOD’s acquisition process currently operates under a “conspiracy of hope,” striving to achieve full capability in a single step and consistently underestimating what it would cost to attain this capability. The report makes a number of key recommendations for changing DOD’s acquisition process including the following: develop a new requirements process that has greater combatant commander involvement and is time-phased, fiscally informed, and jointly prioritized; change the current acquisition policy to ensure a time-constrained development program is strictly followed; keep program managers from the start of development through delivery of the “Beyond Low-Rate Initial Production Report”; and move the start of a development program to the point in time that a successful preliminary design review is completed. Our work in weapons acquisition and best practices over the past several years has drawn similar conclusions. We have made numerous recommendations on DOD’s acquisition processes and policy—as well as recommendations on specific major weapon system programs—to improve cost, schedule, and performance outcomes and to increase accountability for investment decisions. In 2000, DOD revised its acquisition policy to address some of our recommendations. Specifically, DOD has written into its policy an approach that emphasizes the importance of knowledge at critical junctures before managers agree to invest more money in the next phase of weapon system development. Theoretically, a knowledge-based approach results in evolutionary—that is, incremental, manageable, predictable—development and uses controls to help managers gauge progress in meeting cost, schedule, and performance goals. However, DOD policy lacks the controls needed to ensure effective implementation of this approach. Furthermore, decision makers have not consistently applied the necessary discipline to implement its acquisition policy and assign much-needed accountability for decisions and outcomes. Some of key elements of acquisition that we believe DOD needs to focus on include the following: constraining individual program requirements by working within available resources and by leveraging systems engineering; establishing clear business cases for each individual investment; enabling science and technology organizations to shoulder the ensuring that the workforce is capable of managing requirements trades, source selection, and knowledge-based acquisition strategies; establishing and enforcing controls to ensure appropriate knowledge is captured and used at critical junctures before moving programs forward and investing more money; and aligning tenure for program managers that matches the program’s acquisition time to ensure greater accountability for outcomes. In conclusion, despite DOD’s repeated declaration that recapitalizing its aging tactical aircraft fleet is a top priority, the department continues to follow an acquisition strategy that consistently results in escalating costs that undercut DOD’s buying power, forces DOD to reduce aircraft purchases, and delays delivering needed capabilities to the warfighter. Continuing to follow a strategy that results in disappointing outcomes cannot be encouraged—particularly given our current fiscal and national security realities. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other members of the subcommittee may have. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance, GAO-06-356 (Washington D.C.: March 15, 2006). Defense Acquisitions: Business Case and Business Arrangements Key for Future Combat System’s Success, GAO-06-478T (Washington D.C.: March 1, 2006). Defense Acquisitions: DOD Management Approach and Processes Not Well-Suited to Support Development of Global Information Grid, GAO-06- 211, (Washington D.C.: January 30, 2006). Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66, (Washington D.C.: December 19, 2005). Unmanned Aircraft Systems: Global Hawk Cost Increase Understated in Nunn-McCurdy Report, GAO-06-222R, (Washington D.C.: December 15, 2005) DOD Acquisition Outcomes: A Case for Change, GAO-06-257T, (Washington D.C.: November 15, 2005). Defense Acquisitions: Progress and Challenges Facing the DD(X) Surface Combatant Program GAO-05-924T. (Washington D.C.: 07/19/2005). Defense Acquisitions: Incentives and Pressures That Drive Problems Affecting Satellite and Related Acquisitions. GAO-05-570R. (Washington D.C.: 06/23/2005). Defense Acquisitions: Resolving Development Risks in the Army’s Networked Communications Capabilities is Key Fielding Future Force. GAO-05-669 (Washington D.C.: 06/15/2005). Progress of the DD(X) Destroyer Program. GAO-05-752R. (Washington D.C.: 06/14/2005) Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for Tactical Aircraft Modernization. GAO-05-519T. (Washington D.C.: 04/06/2005). Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-05-301 (Washington D.C.: 03/31/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-428T. (Washington D.C.: 03/16/2005). Defense Acquisitions: Changes in E-10A Acquisition Strategy Needed Before Development Starts. GAO-05-273 (Washington D.C.: 03/15/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-442T (Washington D.C.: 03/15/2005). Tactical Aircraft: Air Force Still Needs Business Case to Support F/A-22 Quantities and Increased Capabilities. GAO-05-304. (Washington D.C.: 03/15/2005). Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter Program with Different Acquisition Strategy. GAO-05-271. (Washington D.C.: 03/15/2005). Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs and Implications for Tactical Aircraft Modernization. GAO-05-390T (Washington D.C.: 03/03/2005). Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255 (Washington D.C.: 03/01/2005). Defense Acquisitions: Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183 (Washington D.C.: 02/28/2005). Unmanned Aerial Vehicles: Changes in Global Hawk’s Acquisition Strategy Are Needed to Reduce Program Risks. GAO-05-06 (Washington D.C.: 11/05/2004). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Department of Defense's (DOD) F-22A and Joint Strike Fighter (JSF) programs aim to replace many of the Department's aging tactical fighter aircraft--many of which have been in DOD's inventory for more than 20 years. Together, the F-22A and JSF programs represent a significant investment for DOD--currently estimated at almost $320 billion. GAO has reported on the poor outcomes in DOD's acquisitions of tactical aircraft and other major weapon systems. Cost and schedule overruns have diminished DOD's buying power and delayed the delivery of needed capabilities to the warfighter. Last year, GAO testified that weaknesses in the F-22A and JSF programs raised questions as to whether DOD's overarching tactical aircraft recapitalization goals were achievable. At the request of this Subcommittee, GAO is providing updated testimony on (1) the extent to which the current F-22A and JSF business cases are executable, (2) the current status of DOD's tactical aircraft recapitalization efforts, and (3) potential options for recapitalizing the air forces as DOD moves forward with its tactical aircraft recapitalization efforts. The future of DOD's tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs--which represent about $245 billion in investments to be made in the future. Both programs continue to be burdened with risk. The F-22A business case is unexecutable in part because of a 198 aircraft gap between the Air Force requirement and what DOD estimates it can afford. The JSF program, which has 90 percent of its investments still in the future, plans to concurrently test and produce aircraft thus weakening DOD's business case and jeopardizing its recapitalization efforts. It plans to begin producing aircraft in 2007 with less than 1 percent of the flight test program completed. DOD's current plan to buy about 3,100 new major tactical systems to replace its legacy aircraft represents a 33-percent reduction in quantities from original plans. With reduced buys and delays in delivery of the new systems, costs to keep legacy aircraft operational and relevant have increased. While the Secretary of Defense maintains that continued U.S. air dominance depends on a recapitalized force, DOD has not presented an investment strategy for tactical aircraft systems that measures needs, capability gaps, alternatives, and affordability. Without such a strategy, DOD cannot reasonably ensure it will recapitalize the force and deliver needed capabilities to the warfighter within cost and schedule targets. As DOD moves forward with its efforts to recapitalize its tactical aircraft, it needs to rethink the current business cases for the F-22A and JSF programs. This means matching needs and resources before more F-22A aircraft are procured and ensuring the JSF program demonstrates acceptable aircraft performance before it enters initial production. |
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After the collapse of the World Trade Center and the accompanying spread of dust resulting from the collapse, EPA, other federal agencies, and New York City and New York State public health and environmental authorities focused on numerous outdoor activities, including cleanup, dust collection, and air monitoring. In May 2002, New York City formally requested federal assistance to clean and test building interiors in the vicinity of the WTC site for airborne asbestos. Such assistance may be made available to state and local governments under the Stafford Act and the National Response Plan, which establishes the process and structure for the federal government to provide assistance to state and local agencies when responding to threats or acts of terrorism, major disasters, and other emergencies. FEMA, which coordinates the federal response to requests for assistance from state and local governments, entered into interagency agreements with EPA to develop and implement the first and second indoor cleanup programs for residents in Lower Manhattan. In response to recommendations from the Inspector General and expert panel members, EPA’s second program incorporates some additional testing elements. For example, EPA is testing for a wider range of contaminants. In addition to asbestos, EPA will test for man-made vitreous fibers, which are in such materials as building and appliance insulation; lead; and polycyclic aromatic hydrocarbons, a group of over 100 different chemicals that are formed during the incomplete burning of coal, oil, gas, and garbage. EPA will also test dust as well as the air. In order to test the dust for these contaminants, EPA had to develop cleanup standards. However, EPA’s second program does not incorporate the following other recommendations: (1) broadening the geographic scope of the testing effort, (2) testing HVACs and “inaccessible” locations, and (3) expanding the program to include workplaces. Broadening the geographic scope of testing. EPA did not expand the scope of testing north of Canal Street, as well as to Brooklyn, as advisory groups had recommended. EPA reported that it did not expand the scope of testing because it was not able to differentiate between normal urban dust and WTC dust, which would have enabled it to determine the geographic extent of WTC contamination. Some expert panel members had suggested that EPA investigate whether it was feasible to develop a method for distinguishing between normal urban dust and WTC dust. EPA ultimately agreed to do so. Beginning in 2004—almost 3 years after the disaster—EPA conducted this investigation. EPA officials told us that because so much time had passed since the terrorist attack, it was difficult to distinguish between WTC dust and urban dust. EPA ultimately abandoned this effort because peer reviewers questioned its methodology; EPA decided not to explore alternative methods that the peer reviewers had proposed. Instead, EPA will test only in an area where visible contamination has been confirmed by aerial photography conducted soon after the WTC attack. However, aerial photography does not reveal indoor contamination, and EPA officials told us that they knew that some WTC dust was found immediately after the terrorist attacks outside the area eligible for its first and second program, such as in Brooklyn. Testing HVACs and in inaccessible areas. In its November 2005 draft plan for the second program, EPA had proposed collecting samples from a number of locations in HVACs. In some buildings HVACs are shared, and in others each residence has its own system. In either case, contaminants in the HVAC could re-contaminate the residence unless the system is also professionally cleaned. However, EPA’s second program will not provide for testing in HVACs unless tests in common areas reveal that standards for any of four contaminants have been exceeded. EPA explains in the second plan that it will not sample within HVACs because it chose to offer more limited testing in a greater number of apartments and common areas rather than provide more comprehensive testing in a smaller number of these areas. Similarly, EPA had proposed sampling for contaminants in “inaccessible” locations, such as behind dishwashers and rarely moved furniture within apartments and common areas. Again, because it was unable to differentiate between normal urban dust and WTC dust, EPA stated that it would not test in inaccessible locations in order to devote its resources to as many requests as possible. In fact, EPA only received 295 requests from residents and building owners to participate in the second program, compared with 4,166 eligible participants in the first program. Expanding the program to include workers/workplaces. According to EPA’s second program plan, the plan is “the result of ongoing efforts to respond to concerns of residents and workers.” Workers were concerned that workplaces in Lower Manhattan experienced the same contamination as residences. In its second program, EPA will test and clean common areas in commercial buildings, but will do so only if an individual property owner or manager requests the service. EPA stated that employees who believe their working conditions are unsafe as a result of WTC dust may file a complaint with OSHA or request an evaluation by HHS’s National Institute of Occupational Safety and Health. Concerns remain, however, because these other agencies do not have the authority to conduct cleanup in response to contaminant levels that exceed standards. In addition, OSHA’s standards are designed primarily to address airborne contamination, while EPA’s test and clean program is designed to address contamination in building spaces, whether the contamination is airborne or in settled dust. Thus, OSHA can require individual employers to adopt work practices to reduce employee exposure to airborne contaminants, whereas EPA’s test and clean program is designed to remove contaminants from affected spaces. EPA did not provide sufficient information in its second plan so that the public could make informed choices about their participation. Specifically, EPA did not fully disclose the limitations in the testing results from its first program. While EPA stated that the number of samples in its first program exceeding risk levels for airborne asbestos was “very small,” it did not fully explain that this conclusion was limited by the following factors. Participation. Participation in the program came from about 20 percent of the residences eligible for participation. In addition, participation was voluntary, which may suggest that the sample of apartments was not representative of all the residences eligible for the program. Those who chose to participate may not have been at greatest risk. Contaminants tested. EPA’s cleanup decisions were based only on tests for asbestos, rather than other contaminants, and the decisions focused on airborne contamination rather than contamination in dust inside residences. Sampling protocol. EPA took over 80 percent of the samples after professional cleaning was complete. Therefore it is not surprising that EPA found few samples exceeding its asbestos standard. EPA also did not explain in its second program plan that its first program’s test results excluded samples that were discarded because they were “not cleared”—that is, could not be analyzed because the filter had too many fibers to be analyzed under a microscope. However, EPA’s final report on its first program stated that residences with more than one inconclusive result, such as filter overload, were encouraged to have their residences re-cleaned and re-tested. EPA did not explain the impact of excluding these samples or other data limitations from its conclusion that the number of samples exceeding asbestos standards was very small. Without providing complete explanations of the data, residents who could have elected to participate might have been discouraged from doing so. EPA did not take steps to ensure that resources would be adequate to achieve the second program’s objectives. Instead, EPA is implementing this program with the funding remaining after its first program— approximately $7 million. EPA could not provide us with any basis for determining whether this funding level is appropriate. EPA officials told us that they were unable to determine the cost of the program without knowing the number of participants. However, we note that funds available for the second program are less than 20 percent of the first program’s funding, despite an increase in the number and type of contaminants being sampled. Almost two-thirds of the panel members told us they did not believe the $7 million for the sampling and cleanup was sufficient. According to one of the expert panel’s chairmen—a former EPA Assistant Administrator—the $7 million was sufficient for initial sampling in the second program, but not for sampling and cleanup. If demand had exceeded available resources, EPA would have simply limited participation by ranking program applicants on the basis of their proximity to the WTC site. Shortcomings in EPA’s second program to test and clean residences for WTC contamination raise questions about the agency’s preparedness for addressing indoor contamination resulting from future disasters. The effectiveness of this program may be limited because some important recommendations were not incorporated, and because program implementation will not begin until later this year—more than 5 years after the World Trade Center collapsed. Furthermore, owing to these factors, the majority of panel members do not support EPA’s second program, noting that it was not responsive to the concerns of residents and workers harmed by the collapse of the WTC towers, it was scientifically and technically flawed, or it was unacceptable because it would not identify the extent of contamination. Some panel members questioned the value of participating in EPA’s program, and even stated that they would discourage participation. Madam Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact John B. Stephenson, Director, Natural Resources and Environment (202) 512-3841, or [email protected]. Key contributors to this testimony were Janice Ceperich, Katheryn Summers Hubbell, Karen Keegan, Omari Norman, Diane B. Raynes, Carol Herrnstadt Shulman, and Sandra Tasic. Additional assistance was provided by Katherine M. Raheb. 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 September 11, 2001, terrorist attack on the World Trade Center (WTC) turned Lower Manhattan into a disaster site. As the towers collapsed, Lower Manhattan was blanketed with building debris and combustible materials. This complex mixture created a major concern: that thousands of residents and workers in the area would now be exposed to known hazards in the air and in the dust, such as asbestos, lead, glass fibers, and pulverized concrete. In May 2002, New York City formally requested federal assistance to address indoor contamination. The Environmental Protection Agency (EPA) conducted an indoor clean and test program from 2002 to 2003. Several years later, after obtaining the views of advisory groups, including its Inspector General and an expert panel, EPA announced a second test and clean program in December 2006. Program implementation is to begin later in 2007, more than 5 years after the disaster. GAO's testimony, based on preliminary work evaluating EPA's development of its second program, addresses (1) EPA's actions to implement recommendations from the expert panel and its Inspector General, (2) the completeness of information EPA provided to the public in its second plan, and (3) EPA's assessment of available resources to conduct the program. We discussed the issues we address in this statement with EPA. EPA has taken some actions to incorporate recommendations from the Inspector General and expert panel members into its second program, but its decision not to incorporate other recommendations may limit the overall effectiveness of this program. For example, EPA's second program incorporates recommendations to expand the list of contaminants it tests for, and to test for contaminants in dust as well as the air. However, it does not incorporate a recommendation to expand the boundaries of cleanup to better ensure that WTC contamination is addressed in all locations. EPA reported that it does not have a basis for expanding the boundaries because it cannot distinguish between normal urban dust and WTC dust. EPA did not begin examining methods for differentiating between normal urban dust and WTC dust until nearly 3 years after the disaster, and therefore the process for finding distinctions was more difficult. In addition, EPA's second program does not incorporate recommendations to sample heating, ventilation, and air conditioning (HVAC) systems. According to EPA's plan, the agency chose to offer limited testing in a greater number of apartments and common areas rather than provide more comprehensive testing (such as in HVACs) in a smaller number of these areas. EPA's second plan does not fully inform the public about the results of its first program. EPA concluded that a "very small" number of samples from its first program exceeded risk levels for airborne asbestos. However, EPA did not explain that this conclusion was to be expected because it took over 80 percent of the samples after residences were professionally cleaned. Without this additional information, residents who could have participated might have opted not to do so because of EPA's conclusion. EPA did not assess the adequacy of available resources for the second program. EPA stated that it plans to spend $7 million on this program, which is not based on any assessment of costs, but is the funding remaining from the first program. Without careful planning for future disasters, timely decisions about data collection, and thorough communication of sampling results, an evaluation of the adequacy of cleanup efforts may be impossible. |
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The federal government’s vast real property portfolio is used for all aspects of operations and includes buildings such as warehouses, office space, dormitories, and hospitals. Agencies’ physical security programs address how agencies approach aspects of physical security for these buildings, such as conducting risk assessments to identify threats and vulnerabilities, determining which countermeasures to implement, and coordinating security efforts within the agency and with other agencies. We have previously reported that because of the considerable differences in types of federal facilities and the variety of risks associated with each of them, there is no single, ideal approach to physical security. For example, in some instances, an agency’s component offices—which are subordinate entities such as bureaus, administrations, or other operating divisions—have their own physical security programs for the facilities they use. In other instances, an agency’s regions or districts play a role in physical security. ISC was created by Executive Order 12977 in 1995, after the bombing of the Alfred P. Murrah federal building in Oklahoma City, to address physical security across federal facilities occupied by federal employees for nonmilitary activities. ISC’s mandate is to enhance the quality and effectiveness of security in and protection of federal facilities. To accomplish this, Executive Order 12977 directs the ISC to, among other things, develop and evaluate security standards for federal facilities, develop a strategy for ensuring compliance with such standards, and oversee the implementation of appropriate security measures in federal facilities. Executive Order 12977 also directs each executive agency and department to cooperate and comply with ISC policies and recommendations issued pursuant to the order. The order, as amended, gives the Secretary of Homeland Security the responsibility to monitor federal agency compliance with ISC policies and recommendations. Prior to the creation of ISC, there was no federal body responsible for developing government-wide physical security standards. Consequently, ISC became the government’s central forum for exchanging information and disseminating standards and guidance on physical security at federal facilities. ISC’s standards are intended to help agencies integrate security into the operations, planning, design, and construction of federal facilities and are intended to be customized to address facility-specific conditions. ISC has developed the following security standards and guidance, among others:9, 10 Physical Security Criteria for Federal Facilities establishes a process for determining the baseline set of physical security measures to be applied at a federal facility and provides a framework for the customization of security measures to address unique risks at a facility. Design-Basis Threat establishes a profile of the type, composition, and capabilities of adversaries. It is designed to correlate with the countermeasures contained in the Physical Security Criteria for Federal Facilities. Facility Security Level Determinations defines the criteria and process to be used in determining the facility security level of a federal facility, a categorization that then serves as the basis for implementing ISC standards. Use of Physical Security Performance Measures directs all federal agencies to assess and document the effectiveness of their physical security programs through performance measurement and testing. For a complete listing of ISC standards and guidance, see www.dhs.gov/interagency- security-committee-standards-and-best-practices. Accessed January 22, 2013. ISC officials said that they are in the process of consolidating and streamlining several of their physical security standards into a single document, which they believe will help facilitate agencies’ use of the standards. This standard provides guidance on how to establish and implement a comprehensive measurement and testing program. Security Specialist Competencies provides the range of core competencies federal security specialists should possess to perform their basic duties and responsibilities. ISC’s 51 member agencies meet quarterly to promote information sharing on physical security. Members serve on working groups and subcommittees to develop and update physical security standards and guidance, including those listed above. ISC also engages with industry and other government stakeholders to advance best practices and provides training on its standards to federal facility security professionals and other stakeholders. Leadership for the ISC is provided by DHS’s Assistant Secretary for Infrastructure Protection, who is the chair of the ISC; an Executive Director; and eight standing subcommittees that identify long- and short-term priorities and oversee strategic initiatives. Agencies draw upon a variety of information sources in developing and continually refining aspects of their physical security programs, such as how and when to conduct risk assessments, what skills security staff should have, and how to determine which countermeasures to implement at their facilities. Sources can include an agency’s institutional knowledge or subject matter expertise in physical security, federal statutes and regulations, physical security standards issued by ISC, and state or local regulations, among others, as shown in figure 1. Characteristics such as agencies’ missions and the type, use, and location of their facilities can affect which of these sources agencies use. For example, a facility may adhere to local building codes that affect aspects of physical security such as perimeter fencing, or a facility that is used to house radioactive waste may be subject to federal requirements on the storage of nuclear materials. Institutional knowledge in physical security and ISC’s physical security standards were the two sources that our survey results and case- study interviews showed to be the most influential in guiding agencies’ physical security programs. All 32 of the agencies we surveyed reported that institutional knowledge or subject matter expertise informs their physical security programs. This was the most widely used source cited in our survey, as shown in figure 1. For example, officials from three of the agencies we surveyed said that the knowledge, experience, and expertise that their security specialists have in physical security—which they consider institutional knowledge— is reflected in their physical security programs and policies. One of these officials said his agency contracts with a security company that has extensive knowledge and experience in providing security and law enforcement to high profile institutions across the federal government, and that this knowledge is used in managing the agency’s security program. Another agency official said that the knowledge gained from employees’ previous education, training, or work experiences, or historical knowledge of the agency has assisted in the development of several security policies and procedures within the agency. Agencies also rely heavily on institutional knowledge or subject matter expertise to inform specific aspects of their security programs, more so than any other source we asked about in our survey. As shown in figure 2, 26 agencies reported that institutional knowledge informs how they conduct risk assessments and determine appropriate countermeasures. For example, officials from two of our case-study agencies—DOE and USPS—said that they use institutional knowledge to inform how they conduct these activities. DOE headquarters officials told us that when developing and updating agency-wide physical security policies, which address topics such as risk assessments, they obtain input from DOE staff in their component offices, who have knowledge of the particular needs and constraints of their facilities based on their experience implementing security programs. In addition, USPS officials said that their security staff’s knowledge of the agency’s long-standing security program and their professional education in physical security helps them make decisions about security measures needed at their facilities, such as on the location of perimeter fencing and the appropriate brightness for security lights. Twenty-nine of 32 agencies surveyed reported that ISC standards inform their physical security programs, making it the second most-used source behind institutional knowledge, as shown in figure 1. Officials we interviewed from our case-study agencies said that they use ISC standards as one of many sources that inform what they include in their physical security programs. ISC has developed a number of government- wide physical security standards that address topics intended to help guide agencies’ physical security programs, including determining a facility’s risk level and identifying threats posed by potential adversaries, among other things. Agencies’ use of ISC standards can help ensure that physical security programs are effective government-wide. The standards are developed based on the collective knowledge and physical security expertise of ISC member agencies and, therefore, reflect leading practices in physical security. Every ISC member agency that we surveyed, as well as four agencies that are not ISC members, reported that they use ISC standards at least to some degree. The three agencies we surveyed that reported that they do not use ISC standards at all are not ISC members. According to our survey, ISC standards are most often used for conducting design-basis threat analysis of agency facilities, identifying aspects of facilities that need security measures, and determining appropriate countermeasures, as shown in figure 2. Although the majority of agencies we surveyed use ISC standards, the extent of their reliance varies—with some agencies using the standards extensively to inform their physical security programs and some using them in a more limited way. For example, 11 agencies reported that all of the physical security aspects shown in figure 2 are largely informed by ISC standards, whereas six agencies reported that none of these aspects are largely informed by ISC standards. Instead, these six agencies generally reported that these aspects are somewhat, minimally, or not informed by ISC standards. Among the six agencies that said none of these aspects are largely informed by ISC standards, three are primary ISC members, two are associate members, and one is not an ISC member. We found that agencies’ reasons for making limited use of ISC standards reflect a lack of understanding by some agencies regarding how the standards are intended to be used. For example, officials from the case- study agencies that we interviewed said that certain conditions at their agencies contribute to their limited use of the standards. Specifically, these agencies cited the suitability of the ISC standards to the agencies’ facilities and their own physical security requirements as contributing to their limited use of the standards. Suitability of standards. Officials we interviewed at our case-study agencies told us that they are selective in their use of ISC standards because the standards are not suitable for the types of facilities in their portfolio. For example, USPS officials said that, consistent with ISC standards, they establish a baseline level of protection at their facilities that address facility-specific functions and threats, but they do not follow some practices included in the ISC standards— particularly those related to access control—because the practices are not suitable for the high degree of public access needed at post offices. Likewise, VA officials told us that they do not use ISC standards for all of their facilities because some practices included in the standards do not cover security topics that are specific to their facilities, such as hospitals and health clinics. In response to these comments, ISC officials told us that ISC’s standards are designed to be suitable for all facilities and to accommodate a broad range of security needs, conditions, and types of facilities. For example, ISC’s Physical Security Criteria for Federal Facilities—one of ISC’s key standards—establishes a decision-making process to help agencies consistently determine the baseline level of protection needed for each facility. The Criteria provide agencies the flexibility to build upon or customize the baseline level of protection to address facility- specific conditions. According to the Criteria, consistency in the process used to determine a baseline level of protection for each facility is important because it helps ensure that the risks that all facilities face—regardless of the type facility—are mitigated to an acceptable level. Furthermore, according to ISC officials, the Criteria do not prescribe specific countermeasures and, as a result, can be used by all agencies regardless of the type of facilities in their portfolio. Use of other physical security standards. Officials we interviewed at our case-study agencies also told us that they do not make greater use of ISC standards because they have their own standards for physical security. For example, officials at DOE told us that the Atomic Energy Act was the foundation for their security program long before the ISC was created and ISC standards developed. Additionally, DOE officials told us that the act and DOE’s security policy derived from it establishes physical security requirements for their facilities with classified or nuclear material and that these requirements are usually more stringent than ISC requirements. Similarly, VA officials told us that they have developed their own physical security standards that are specific to the needs of their hospital and clinic facilities, and that these standards go above and beyond ISC standards. ISC officials told us that, because ISC standards are intended to ensure a minimum or baseline level of protection, it is appropriate for agencies to have their own requirements and standards that exceed those of ISC. According to ISC officials, an agency should apply the decision- making process established by the ISC standards to determine if their facilities’ physical security requirements meet the baseline, and then add additional requirements based on their agency’s needs. As previously discussed, ISC was established to enhance the quality and effectiveness of security in and protection of non-military, federal facilities. Although most agencies we surveyed use ISC standards to some degree, some agencies’ use of the standards is limited because they believe that the ISC standards are not suitable for their circumstances. Clarifying how agencies can use the standards regardless of the types of facilities in their portfolio and in concert with their existing physical security programs may result in the greater use of the standards. Use of ISC standards may be beneficial because they provide agencies with tools and approaches for consistently and cost-effectively establishing a baseline level of protection at all facilities commensurate with identified risks at those facilities. By using the standards to determine the level of protection needed to address the unique risks faced at each facility, agencies may be able to avoid expending resources on countermeasures that are not needed. ISC currently does not formally monitor agencies’ compliance with ISC standards. ISC officials said that with only five full time employees and a budget that is not a dedicated line item within DHS’s budget, it lacks the staff and resources to conduct monitoring. Currently, in place of a formal monitoring program, ISC officials hold quarterly meetings and participate in ISC working groups along with their member agencies. ISC officials said that the information sharing that occurs through these channels helps them achieve a basic understanding of whether and how member agencies use the standards. This approach, however, does not provide a thorough or systematic assessment of ISC member agencies’ use of the standards, and provides no information on non-member agencies’ physical security practices. Further, because ISC conducts limited outreach to non-member agencies, property-holding agencies that are not ISC members may not be fully aware of the benefits that the use of the ISC standards might have for them. ISC stated in its 2012 to 2017 action plan that it plans to establish protocols and processes for monitoring and testing compliance with its standards by fiscal year 2014. According to ISC’s executive director, monitoring agencies’ compliance with the standards could include agency self-assessments or ISC officials’ assessing agencies’ compliance. Monitoring and testing as well as other methods of measuring the performance of the standards can help gauge the adequacy of facility protection, improve security, and ensure accountability for achieving the goals of the standards. In commenting on a draft of this report, DOE and USPS stated that they use ISC standards as a baseline for at least some of their facilities. DOE officials said that ISC standards must be considered the baseline for security for facilities that do not have classified or nuclear material but have federal personnel. USPS officials said that ISC’s Criteria standard provides flexibility to customize baseline levels of protection to address facility-specific conditions and that it is within this framework that USPS employs appropriate countermeasures at its facilities when it is not able to adopt ISC’s recommended standards. As discussed, ISC is planning to monitor and test agencies’ compliance with ISC standards. This monitoring and testing will help shed more light on whether these and other agencies’ approaches align with ISC’s standards. Based on responses to our survey and our interviews with agency officials, we found that agencies use a range of management practices that can contribute to effective oversight of physical security programs, including: having a manager responsible for physical security, having agency-wide physical-security policies, using risk management practices that compare physical security measuring the performance of physical security programs. We and others have reported that these practices can help agencies address risks, achieve effective results in their programs, determine program effectiveness, and identify whether changes are needed to better meet the program objectives. A physical security manager can be beneficial for an agency because the manager can establish a cohesive strategy for the agency to mitigate or reduce risk across the agency’s facilities, coordinate and oversee physical security efforts across departments, and minimize potential redundancies that could be occurring across departments if accountability for physical security is dispersed among several managers, according to guidance issued by ASIS International. Many of the agencies we surveyed reported that they have a manager at the agency-wide level responsible for their risk assessment approaches and monitoring and oversight (25 and 22 agencies, respectively), as shown in figure 3. However, we determined that physical security managers at our case-study agencies have varying levels of responsibility. For example, DOE’s director of security has agency-wide responsibility and works with component offices throughout the agency to ensure that the component offices’ security programs align with DOE policies, which helps achieve a consistent approach to security across the agency. Alternatively, FCC’s chief security officer is responsible for physical security at only a select group of the 14 facilities held by FCC. Two of FCC’s component offices are responsible for physical security at the remaining facilities. Each of these component offices approach physical security in a way that meets its particular needs. The FCC official we interviewed acknowledged, however, that if physical security were centrally managed—through a physical security manager with agency- wide responsibilities, for example—the agency could benefit from a consistent approach to physical security for facility types that are similar. Although it is important to tailor physical security to facilities so that the unique risks at those facilities are addressed, a consistent approach to certain aspects of physical security is beneficial because it helps ensure that all facilities are covered by a baseline level of physical security commensurate with identified risks at those facilities. For example, we previously reported that the Department of the Interior (Interior) established a central law enforcement and security office in 2002 that enabled it to develop a uniform risk assessment and ranking methodology to quantify risk, identify needed security enhancements, and measure risk-reduction benefits at some of its properties. In addition to fostering consistency, a central approach to physical security can also help coordinate physical security across component offices and provide a single point of contact for the agency for physical security. For example, Interior’s central office responsible for security provided the agency with a single point of contact that the Secretary and senior managers could depend upon for security information and advice. We have previously reported that agencies’ physical security programs can benefit from documented agency-wide guidelines. According to GAO’s Standards for Internal Control in the Federal Government, policies and procedures that enforce management’s directives at an agency-wide level are an important part of an agency’s ability to achieve effective results in its programs, in physical security as well as other types of programs. Furthermore, according to the Standards for Internal Control, assessing compliance to policies and procedures can also assist agencies in monitoring and measuring the performance of programs, including physical security programs. A majority of the agencies (24) we surveyed reported that they have documented agency-wide guidelines for monitoring and overseeing security programs at individual facilities, as shown in figure 4. Our more in-depth analysis of the case-study agencies found that they have documented agency-wide policies for a range of physical security activities. For example, DOE has documented policies for facility-level security plans, performance assurance, facility clearance activities, and other security-related activities that apply to individual facilities, and according to OPM officials their agency has a documented general security policy and access control policy. Having documented policies can help agencies ensure that their security programs achieve results. For example, USPS’s security policy states that its security policies and adherence to these policies can help the agency ensure that the most appropriate level of security and protection available are provided to its facilities. DOE’s security policy states that adherence to the policies can help prevent adverse impacts on the safety of DOE and contractor employees and the public. Most agencies (26 of 32) we surveyed reported that offices at the agency- wide or component level, or both, monitor facilities’ compliance with policies and procedures. In addition, six agencies reported that their region or district offices or facilities are responsible for performing this activity, rather than agency-wide or component offices. Agency-wide offices at our case-study agencies monitor facilities’ compliance with agency-wide policies. For example, USPS staff working in field offices annually assess whether postal facilities are complying with agency-wide policies, and the headquarters security office reviews the results of the assessments. At DOE, component offices assess facilities’ compliance with security policies and the agency-wide security office reviews high risk facilities to determine if DOE policies have been adequately implemented. We have previously identified risk management as a key practice in facility protection. A risk management approach that compares physical security across facilities can provide agencies assurance that the most critical risks at facilities across their agencies are being prioritized and mitigated, and that systemic risks are identified and addressed. Agencies we surveyed reported that they conduct risk management practices—such as comparing risk assessments across facilities and monitoring the implementation of countermeasures across facilities—and that such practices are most often the responsibility of agency-wide offices, component level offices, or both. Specifically, of the 32 agencies we surveyed, 24 agencies reported that agency-wide or component offices, or both, had primary responsibility for comparing risk assessments across facilities and 26 agencies reported that either or both of these offices had primary responsibility for monitoring countermeasure implementation across facilities. A few agencies reported that regional or district offices or facilities had primary responsibility for these activities instead of agency-wide or component offices. However, not all agencies we surveyed perform these activities: six agencies reported that they do not compare risk assessments across facilities, and two agencies reported that they do not monitor the implementation of countermeasures across facilities. Officials from OPM and DOE, two of our case-study agencies, said that they do not compare risk assessments across facilities. Specifically, OPM officials told us that they do not compare the results of the risk assessments across facilities because they have a small facility portfolio and have not seen the need to do such a comparison. Rather, the agency uses risk assessments to determine what countermeasures need to be implemented to address risks at individual facilities. Similarly, DOE officials told us that each of their component offices conducts risk assessments in different ways and that the Office of Health, Safety, and Security, which has agency-wide responsibility for physical security policy and oversight, does not compare risks across components or facilities. In contrast, officials from another case-study agency, USPS, said that they do perform such comparisons. USPS officials who have agency-wide responsibilities for physical security said that they review the results of risk assessment performed across facilities to identify trends or anomalies that may indicate a systemic problem, and use this information to determine which countermeasures need to be implemented on a national basis. Monitoring the implementation of countermeasures across facilities can provide agencies with an agency-wide understanding of their vulnerabilities and whether identified risks have been mitigated. Another key practice in facility protection we have identified is the use of performance measures. In the area of physical security, performance measures could include the number of security incidents or the effectiveness of countermeasures, among other things. We have previously reported that benefits of performance measures for physical security include helping agencies reach their strategic objectives for physical security, evaluating the effectiveness of their physical security programs, and identifying changes needed to better meet the program’s objectives. Twenty-two of 32 agencies we surveyed reported that at least some of their performance measures are documented in agency-wide or component-level planning, budget, or performance reports. The remaining 10 agencies reported that they did not have or did not know if they have performance measures documented in such reports. One of our case-study agencies, OPM, uses agency-wide performance measures to measure the performance of its security program. In contrast, officials from another case-study agency, DOE, said that such measures are difficult to implement at their agency. OPM, for example, has specific goals for its physical security program that are reflected in the evaluation used for its director of security. These performance goals, which are linked to the agency’s strategic plan and operational goals, include measures such as completing a certain number of facility risk assessments, revising physical security policies, and fully implementing physical security technologies by specific dates. In contrast, DOE officials told us that although measuring performance on an agency-wide basis is a beneficial practice, they do not have agency-wide performance measures because each DOE facility varies, making it difficult to compare performance trends across facilities. Among the physical security activities we asked about, agencies we surveyed identified allocating physical security resources across an agency’s portfolio as the greatest challenge. A majority of agencies (17 or more) we surveyed identified the following resource allocation activities as extremely or very challenging: balancing the need for improved security with other operational needs and competing interests, obtaining funding for security technologies and personnel, and balancing the funding process with changing security needs. Additional activities related to resource allocation were also among those that surveyed agencies found most challenging, as shown in figure 5. Surveyed agencies generally reported other aspects of physical security that we asked about to be less challenging than those related to resource allocation. Officials we interviewed at various levels in our case-study agencies— including at agency-wide offices and facilities—also cited challenges related to the timeliness of funding decisions or prioritizing resource allocation decisions. For example, DOE officials in the agency-wide office responsible for physical security said that once they decide which countermeasures they need to implement to address threats or vulnerabilities, it takes time to obtain funding because the budget cycle spans multiple years. Similarly, officials at a USPS facility we visited said that USPS’s funding process—which involves headquarters prioritizing security funds and reassessing the priorities during the year to take into consideration newly identified security deficiencies—makes it a challenge for the facility to obtain funding as quickly as it would like. A USPS headquarters official said that this might occur because there are other facilities that have higher priority security needs, and that facilities would be able to implement an interim solution while awaiting funding for a long- term solution. Officials must also prioritize funding for physical security along with other agency needs, as described by an official from a VA hospital we visited, who said that the medical center director has to balance funding for physical security needs, such as training for security personnel, with other hospital needs, such as medical equipment and overtime pay. Agency officials we interviewed at our case-study agencies said that the following circumstances contribute to the challenges they experience in allocating physical security resources: Evolving threats. DOE officials at the agency-wide level and a component office discussed the budgetary implications of the need to address constantly changing threats and increased risks, which results in the need for new or increased countermeasures at their facilities. For example, the agency-wide officials said that after the terrorist attacks of September 11, 2001, there was a large focus on security and that as a result, DOE incorporated many new countermeasures at its facilities. The officials stated that the threats have changed over time, and different countermeasures are required to address the new threats. Limited familiarity with aspects of physical security. A USPS headquarters official said that his agency recently took steps to help individuals who make funding decisions in physical security make more informed funding decisions. This official said that USPS improved the existing level of coordination between the individuals responsible for making funding decisions and those with expertise in physical security. According to USPS, this enabled the agency to more effectively prioritize and decide which physical security projects should get funded. Likewise, a police officer at a VA facility we visited described the challenge of identifying appropriate and cost-effective technologies to purchase because his training and expertise are in law enforcement, not in technological aspects of physical security. Limited budgets available for physical security. Agencies throughout the federal government have experienced or are experiencing budget constraints that have limited the funding available for their programs, including physical security programs. Agency officials we interviewed told us that they have limited funds to implement some physical security measures that address identified risks. A USPS official we interviewed said that while baseline physical security measures are in place at each USPS facility, financial constraints, caused by declining revenues at the agency, have affected the agency’s ability to deploy security enhancements at its facilities. For instance, because of limited funding, implementing security enhancements, such as an upgraded closed-circuit television (CCTV) system, may be delayed at a facility until the needed funding becomes available. In addition, an official at FCC stated that funding was not available to implement several recommendations identified in its fiscal year 2012 physical security risk assessments. This official said that while there has not been an immediate impact of not funding these recommendations, the lack of funding results in continued risks not being addressed. However, in instances when a risk assessment identified an immediate or imminent threat, this official said that funding was made available to mitigate or reduce the threat. As discussed, agencies are already using management practices to support oversight of their physical security programs, but according to our survey, agencies make limited use of some of these management practices for the purposes of allocating resources. For example, as shown in figure 3, of the 30 agencies responding to the survey question on whether they have a manager responsible for physical security aspects we asked about, only 13 reported that they have a manager for allocating resources based on risk assessments. In contrast, a majority of agencies reported having managers for other aspects of physical security, including those related to oversight. In addition, as discussed, 6 agencies do not compare risk assessments across facilities and 10 agencies do not have or do not know if they have documented agency- or component- wide performance measures. In addition to supporting oversight, we identified a number of examples of how agencies’ use of management practices can contribute to more efficient allocation of physical security resources across an agency’s portfolio of facilities. Below are examples of how management practices—such as having a physical security manager, comparing risk assessments across facilities, and using performance measures—can aid in more efficient resource allocation. The use of management practices for the purposes of resource allocation is particularly relevant given the challenges cited in this area. DOE’s Office of Inspector General recently reported that the agency could realize efficiencies by consolidating security guard contracts from multiple offices throughout the agency to a single unified office. A physical security manager who is responsible for allocating resources across an agency or across components within an agency can help bring about greater efficiencies in procurement of equipment or personnel at the agency. We have previously reported that comparing physical security across facilities, such as comparing the results of risk assessments across facilities and monitoring the implementation of countermeasures across facilities, is another risk management practice that can help agency officials prioritize resource allocation decisions. In this context, USPS headquarters officials said that they are in the process of improving their capability to compare the results of risk assessments across facilities. They plan to use these comparisons to help them prioritize which facilities in their portfolio have the greatest physical security needs and then direct funding to meet the priority needs. We have also previously reported that using physical security-related performance measures can help agencies justify investment decisions to maximize available resources. Such performance measures have helped security officials in one government agency in Australia allocate resources more effectively across facilities. One performance measure this agency used allowed security officials to monitor the impact of additional security expenditures on a facility’s risk rating while controlling for existing security enhancements that mitigate the risk, such as the number of guard patrols and the adequacy of access control systems. Security officials then used the results to justify spending decisions and prioritize security investments. Although this example is from an agency outside of the United States, the use of such performance measures could be a useful practice to more effectively allocate resources at agencies within the United States as well. As the government’s central forum for exchanging information and disseminating guidance on physical security at federal facilities, ISC is well positioned to develop and disseminate guidance on management practices that can help agencies make funding decisions across a portfolio of facilities. ISC’s key physical security standards can help agencies make resource allocation decisions at individual facilities, but the standards do not currently address management practices for allocating resources across an agency’s entire portfolio of facilities. ISC’s key standards—Facility Security Level Determinations, Physical Security Criteria, and Design-Basis Threat—are intended to be used to determine the types of countermeasures needed at a given facility to provide a baseline level of protection. In this regard, the standards can help agencies make spending decisions at individual facilities, but do not provide direction to guide funding decisions across a portfolio of facilities. ISC officials we interviewed said that compiling information on management practices that support the allocation of resources across a portfolio of facilities would be useful for agencies. Agencies’ physical security programs are mainly informed by their own institutional knowledge and subject matter expertise and, to a lesser degree, ISC standards. A few agencies rely extensively on ISC standards to inform key aspects of their security programs, but others use the standards in a more limited way. Agencies whose officials we interviewed and those we surveyed told us that they do not use ISC standards to a greater degree because the standards are not suitable to their facilities or because their agencies base their security programs on their own physical security standards that they believe obviate the need to use ISC standards. These reasons indicate some agencies lack an understanding of how the standards are intended to be used. As ISC officials stated, the standards are meant to accommodate almost any type of facility and are to be used in concert with other physical security requirements to which agencies may be subject. ISC has an opportunity to clarify to agencies how the standards are intended to be used when it disseminates new or updated standards, provides training to agencies on the standards, or engages in other outreach regarding the standards. Furthermore, ISC can use its quarterly meetings with its member agencies as a forum to share best practices on how the standards are to be used. Such outreach to clarify how the standards can be used may result in the greater use of the standards by ISC member agencies. Likewise, outreach by ISC to executive branch agencies that are not ISC members to clarify how the ISC standards are to be used may also lead to wider adoption of ISC standards. Potential benefits of more widespread use of ISC standards include helping to achieve the purpose of Executive Order 12977 to enhance the quality and effectiveness of security of federal facilities. Moreover, consistent use may help ensure that federal agencies are following a decision-making process that helps ensure that all facilities are covered by a cost-effective baseline level of protection commensurate with identified risks at those facilities. In addition to these benefits, clarifying to executive branch agencies how ISC standards are to be used will also help the agencies understand what the standards require, which is an important first step for ISC as it prepares to monitor and test agencies’ compliance with its standards. Government agencies are faced with increasing security requirements and limited budgets. Effective program management, including the use of management practices such as risk management strategies and a centralized management structure, can help make the most effective use of limited resources. While agencies are already using management practices to support oversight of their physical security programs, agencies make limited use of some of these management practices for the purposes of allocating resources. For example, most agencies do not have a central manager or agency-wide guidelines for allocating resources across facilities based on risk assessments, and some agencies do not compare risk assessments across facilities. Agencies also reported that the greatest challenge they face—among the physical security activities we asked about—is allocating physical security resources. ISC’s key standards do not currently provide guidance on management practices that agencies can use to allocate resources across their entire portfolio of facilities. Agencies’ use of management practices could help agencies make resource allocation decisions strategically for their entire portfolios of facilities and maximize effective resource allocation agency-wide. As the government’s central forum for exchanging information and disseminating guidance on physical security at federal facilities, ISC is well positioned to develop and disseminate guidance that could increase agencies’ use of these practices. We recommend that the Secretary of Homeland Security direct ISC to take the following two actions: To help achieve the purpose of Executive Order 12977 to enhance the quality and effectiveness of security of federal facilities, conduct outreach to all executive branch agencies to clarify how the standards can be used in concert with agencies’ existing physical security programs. To help agencies make the most effective use of resources available for physical security across their portfolios of facilities, develop and disseminate guidance on management practices for resource allocation as a supplement to ISC’s existing physical security standards. This effort could include identifying practices most beneficial for physical security programs and determining the extent to which federal agencies currently use these practices. We provided a draft of this report and the e-supplement that provides summary results of our survey to DHS, DOE, VA, USPS, FCC, and OPM for comment. In written comments, reproduced in appendix III, DHS concurred with the report’s recommendations. DHS said that ISC would conduct outreach with agencies to clarify how its standards can be used and that it would develop guidance to help agencies make the most effective use of resources available for physical security across their portfolios of facilities. DHS also provided technical clarifications, which we incorporated as appropriate. Further, DHS said that it concurred with the e-supplement. DOE and USPS did not provide formal written comments on the draft report or e-supplement, but provided technical clarifications, which we incorporated as appropriate. VA, FCC, and OPM did not have any comments on the draft report or e-supplement. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees; the Secretaries of Homeland Security, Energy, and Veterans Affairs; the Postmaster General; the Chairman of the Federal Communications Commission; and the Director of the Office of Personnel Management. 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 key contributions to this report are listed in appendix IV. The objectives of our review were to examine (1) the sources that inform how federal agencies conduct their physical security programs and (2) the management practices that agencies use to oversee physical security activities and allocate physical security resources. Our review focused on executive branch agencies that have facilities that are not protected by the Federal Protective Service (FPS) and that have facilities located in the United States and its territories. Facilities in the judicial or legislative branches, military facilities, and facilities located abroad were not included in the scope of our review. To help inform our research, we reviewed and synthesized reports and documentation on physical security, and interviewed officials familiar with this issue area. For example, we reviewed prior reports from GAO, the Congressional Research Service, and the Congressional Budget Office on the security of federal government facilities and effective program management, as well as documentation from the Department of Homeland Security’s Interagency Security Committee (ISC), including physical security standards developed by the ISC. We also interviewed physical security officials at the General Services Administration (GSA); ISC; the Department of Defense (DOD); the Department of State; and ASIS International, an organization for security professionals in the public and private sector that has developed physical security standards for the federal government and non-government entities. We conducted a web-based survey of 36 cabinet level and independent agencies in the federal government. The surveyed agencies included all non-military agencies that are required under Executive Order 13327 to report to GSA’s Federal Real Property Profile (FRPP) as well as those that are not required to report to the FRPP but optionally did so in fiscal year 2010. In addition, although not included in the FRPP, we surveyed the U.S. Postal Service (USPS) because of its large number of federal real property holdings. See appendix II for a list of agencies we surveyed. We obtained responses from all 36 surveyed agencies. To determine whether the surveyed agencies were within the scope of our review, we asked questions in the survey to determine if all of their facilities were protected by FPS. Four agencies reported that all of their facilities were protected by FPS, and we therefore did not include them in our review. The remaining 32 agencies are included in our review, and in this report we identify these agencies as the agencies we surveyed. Of the 32 agencies that were within the scope of our review, 16 are primary ISC members, 9 are associate ISC members, and 7 are not members of ISC. We asked chief security officers or equivalents at the surveyed agencies a series of questions with both closed- and open-ended responses regarding physical security within their agency. The survey included questions on (1) the organization and administration of their agencies, (2) sources used to inform physical security programs, (3) security program policy elements and implementation, (4) challenges and best practices in physical security, and (5) the agencies’ building portfolios. We developed the survey questions based on previous GAO work and interviews with agency officials. This report presents survey results in aggregate and does not discuss individual agency responses in a way that would identify them. Summary results for each survey question, except those requiring narrative responses, are available in a supplement to this report, GAO-13-223SP. Because this was not a sample survey, it had no sampling errors. However, the practical difficulties of conducting any survey can introduce non-sampling errors, such as difficulties interpreting a particular question, which can introduce unwanted variability into the survey results. We took steps to minimize non-sampling errors by pre-testing the questionnaire in person with six different agencies. The agencies were GAO, USPS, the Department of Energy (DOE), ISC, GSA, and the Federal Communications Commission (FCC). We conducted pretests to help ensure that the questions were clear and unbiased, that the data and information were readily obtainable, and that the questionnaire did not place an undue burden on respondents. An independent reviewer within GAO also reviewed a draft of the questionnaire prior to its administration. We made appropriate revisions to the content and format of the questionnaire based on the pretests and independent review. The web-based survey was administered from May 15, 2012, to June 27, 2012. Respondents were sent an email invitation to complete the survey on a GAO web server using a unique username and password. To increase the response rate, we followed up with emails and personal phone calls to respondents to encourage participation in our survey. We then analyzed results of the survey, and as part of this survey analysis, we recoded certain responses that were inconsistent. We followed up with individual agencies as needed to ensure we properly understood what needed to be recoded. All data analysis programs were independently verified for accuracy. In addition to the survey, we also conducted case studies with five agencies for more in-depth analysis. These case-study agencies were selected to achieve diversity in total building square footage and levels of public access allowed at facilities. The five agencies we selected for our case studies were DOE, the Department of Veterans Affairs (VA), USPS, FCC, and the U.S. Office of Personnel Management (OPM). Based on our review of agency square footage as presented in the Federal Real Property Council’s FY2010 Federal Real Property Report, we classified DOE, VA, and USPS as large property holders, and FCC and OPM as small property holders. To ensure that we had diversity in levels of public access at agencies’ facilities, we reviewed previous GAO reports and agency websites. For example, from initial interviews, we found that USPS provides a high level of public access to customers where as DOE provides limited public access except for employees and contractors. For each of these five agencies, we interviewed officials in their headquarters offices who are familiar with physical security policy and reviewed documentation on physical security. This report discusses the results of interviews on an individual agency basis, in which case the agency referred to is identified by name, as well as in the aggregate. Since these agencies were selected as part of a non-probability sample, the findings from our case studies cannot be generalized to all federal agencies. To supplement these interviews, we conducted site visits to individual DOE, VA, and USPS facilities. For each of these agencies we visited facilities in New Jersey, West Virginia, and Illinois. We selected these locations and facilities to achieve diversity in geographic area, urban and rural environments, and facility risk level as determined by the agencies. We determined which facilities to visit at each location based on FRPP data for DOE and VA, USPS’s internal real property database, recommendations from agency officials, and research on the agencies’ facilities from their agency websites. The facilities we visited in each state are listed below. Argonne National Laboratory, DOE, Argonne Jesse Brown VA Medical Center, Chicago Cardiss Collins Processing and Distribution Center, USPS, Chicago Princeton Plasma Physics Laboratory, DOE, Princeton Lyons VA Medical Center, Lyons Trenton Main Post Office, USPS, Trenton National Energy Technology Laboratory, DOE, Morgantown Louis A. Johnson VA Medical Center, Clarksburg Clarksburg Processing and Distribution Facility, USPS, Clarksburg At each of these facilities we interviewed facility officials in charge of physical security and reviewed documentation related to physical security. If needed, we also interviewed officials from component offices—which are subordinate entities within an agency, such as bureaus, administrations, and other operating divisions within an agency—who oversee facilities with regard to physical security. This report discusses the results of site visit interviews on an individual basis, in which case the agency referred to is identified by name, as well as in the aggregate. Since these facilities and component offices were selected as part of a non-probability sample, the findings from our facility visits cannot be generalized to all federal agencies. We conducted this performance audit from November 2011 to January 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. We conducted a web-based survey of 36 cabinet level and independent agencies. These 36 agencies are those non-military agencies that are required under Executive Order 13327 to report to the Federal Real Property Profile (FRPP); those that voluntarily reported to the FRPP in 2010; and the U.S. Postal Service which, although not included in the FRPP, is one of the federal government’s largest real property holders. The agencies we surveyed are listed below. Four agencies reported that all of their facilities were protected by FPS, and we therefore did not include them in our review. In addition to the contact named above, Heather Halliwell (Assistant Director), Eli Albagli, Steve Caldwell, Roshni Davé, Colin Fallon, Kathleen Gilhooly, Jill Lacey, Hannah Laufe, Ying Long, Sara Ann Moessbauer, John Mortin, and Nitin Rao made key contributions to this report. | GAO has designated federal real property management as a high-risk area due, in part, to the continued challenge of facility protection. Executive branch agencies are responsible for protecting about 370,000 non-military buildings and structures; the Federal Protective Service (FPS) protects over 9,000 of these. ISC--an interagency organization led by the Department of Homeland Security (DHS)--issues physical security standards for agencies' use in designing and updating physical security programs. GAO was asked to review physical security programs at executive branch agencies with facilities that FPS does not protect. This report examines (1) the sources that inform agencies' physical security programs and (2) the management practices agencies use to oversee physical security and allocate resources. GAO reviewed and analyzed survey responses from 32 agencies. GAO also interviewed officials and reviewed documents from 5 of these agencies, which were selected as case studies for more indepth analysis. The survey and results can be found at GAO-13-223SP . Agencies draw upon a variety of information sources in developing and updating their physical security programs. The most widely used source, according to survey responses from 32 agencies, is the institutional knowledge or subject matter expertise in physical security that agencies' security staff have developed through their professional experience. The second most used source are standards issued by the Interagency Security Committee (ISC). The standards, which are developed based on leading security practices across the government, set forth a decision-making process to help ensure that agencies have effective physical security programs in place. However, according to survey responses, the extent of agencies' use of ISC standards varied--with some agencies using them in a limited way. Agency officials from the case-study agencies said that certain conditions at their agencies--such as the types of facilities in the agencies' portfolios and their existing physical security requirements--contribute to limited use of the standards. ISC officials said that the standards are designed to be used by all agencies regardless of the types of facilities or their existing security programs; the standards can be customized to the needs of individual facilities and do not require the use of specific countermeasures. ISC has an opportunity to clarify how the standards are intended to be used when it trains agencies on them; during quarterly meetings with member agencies, where ISC can share best practices on the use of the standards; or when ISC engages in other outreach on the standards. Clarifying how agencies can use the standards may result in their greater use. Greater use of the standards may maximize the effectiveness and efficiency of agencies' physical security programs. Agencies use a range of management practices to oversee physical security activities. For example, 22 surveyed agencies reported that they have a manager at the agency-wide level responsible for monitoring and overseeing physical security at individual facilities. In addition, 22 surveyed agencies reported that they have some documented performance measures for physical security. Such performance measures can help agencies evaluate the effectiveness of their physical security programs and identify changes needed to better meet program objectives. Agencies' use of management practices such as having a physical security manager responsible for allocating resources and using performance measures to justify investment decisions could also contribute to more efficient allocation of physical security resources across an agency's portfolio of facilities. However, some agencies make limited use of such practices to allocate resources. For example, only 13 reported that they have a manager for allocating resources based on risk assessments. In contrast, a majority of agencies reported having managers for other aspects of physical security, including those related to oversight. Greater use of management practices for allocating resources is particularly relevant given that the surveyed agencies identified allocating resources as the greatest challenge. As the government's central forum for exchanging information and disseminating guidance on physical security, ISC is well positioned to develop and disseminate guidance about management practices that can help agencies allocate resources across a portfolio of facilities. However, ISC's key physical security standards do not currently address management practices for allocating resources across an agency's entire portfolio of facilities. DHS should direct ISC to conduct outreach to executive branch agencies to clarify how its standards are to be used, and develop and disseminate guidance on management practices for resource allocation as a supplement to ISC's existing physical security standards. DHS concurred with these recommendations. |
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Energy audits typically identify information on projects that could address the consumption of fossil fuel and electricity as well as projects that could reduce emissions from other sources, such as leaks in refrigeration equipment. Energy audits also include information on the cost- effectiveness of projects and on the extent to which the projects could reduce emissions. This information can then be used to evaluate and select projects. The audits generally fall into three categories— preliminary, targeted, and comprehensive—and are distinguished by the level of detail and analysis required. Preliminary audits are the least detailed and provide quick evaluations to determine a project’s potential. These audits typically do not provide sufficiently detailed information to justify investments but may prove useful in identifying opportunities for more detailed evaluations. Targeted audits are detailed analyses of specific systems, such as lighting. Comprehensive audits are detailed analyses of all major energy-using systems. Both targeted and comprehensive audits provide sufficiently detailed information to justify investing in projects. Energy-saving projects that fall outside the scope of energy audits include efforts to enhance outreach and education efforts to curtail energy use by building occupants and purchasing high-efficiency appliances. Outreach and education efforts include providing information on how employees can conserve energy, such as AOC’s “how-to guides” that detail cost- effective methods to save energy in the workplace. Efforts to curtail energy use include purchasing energy-efficient computer equipment and appliances, using information available from the Environmental Protection Agency’s Energy Star program or the Federal Energy Management Program (FEMP). Energy Star-qualified and FEMP-designated products meet energy-efficiency guidelines set by the Environmental Protection Agency and the Department of Energy and, in general, represent the top 30 percent most energy-efficient products in their class of products. These products cover a wide range of categories, including appliances and office equipment. According to the Energy Star program, office products that have earned the Energy Star rating use about half as much electricity as standard equipment and generally cost the same as equipment that is not Energy Star qualified. AOC has made some progress toward implementing the two recommendations in our April 2007 report. First, AOC has taken steps to address our recommendation that it develop a schedule for routinely conducting energy audits by developing a prioritized list of buildings for which it plans to conduct comprehensive energy audits (see App. 1). Specifically, AOC is currently undertaking a comprehensive energy audit of the U.S. Capitol Police Buildings and Grounds and obtained a draft submission in May 2008 from the private contractor performing the audit. AOC also plans to use $400,000 of fiscal year 2008 funds to perform comprehensive energy audits of the Capitol Building and the Ford House Office Building, and says it will direct any remaining fiscal year 2008 funds to an audit of the Hart Senate Office Building. Additionally, AOC has contracted with a private firm to conduct a preliminary energy audit of the Senate Office Buildings that could prove useful in identifying opportunities for more comprehensive and targeted evaluations. AOC officials said that they developed the prioritized list of buildings to audit by comparing the amount of energy used per square foot of space in each building (referred to as energy intensity) and then placing the buildings that use relatively higher levels of energy at the top of the list. However, AOC’s prioritized list does not provide information on the energy intensity of each building, an explanation of its prioritization scheme, or cost estimates. Furthermore, AOC has not developed a schedule for routinely conducting audits as we recommended in our April 2007 report. AOC officials said that they cannot complete a more comprehensive schedule because of uncertainty about the extent to which AOC will receive future appropriations to conduct the audits. We believe that developing a more detailed schedule for future audits along with an explanation of its prioritization scheme and cost estimates would assist the Congress in its appropriations decisions and facilitate the completion of additional audits. Second, AOC can do more to fully address the second recommendation in our April 2007 report that it implement selected projects as part of an overall plan to reduce emissions that considers cost-effectiveness, the extent to which the projects reduce emissions, and funding options. In recent years, AOC has undertaken numerous projects throughout the Capitol Hill Complex to reduce energy use and related emissions, but these projects were not identified through the process we recommended. Projects completed or underway include upgrading lighting systems, conducting education and outreach, purchasing energy-efficient equipment and appliances, and installing new windows in the Ford building. Examples of projects in Senate office buildings include upgrading the lighting in 11 offices with daylight and occupancy sensors, installing energy efficiency ceiling tiles in the Hart building, and replacing steam system components. According to AOC, these efforts have already decreased the energy intensity throughout the Capitol Hill Complex. Specifically, AOC said that it decreased its energy intensity—the amount of energy used per square foot of space within a facility—by 6.5 percent in fiscal year 2006 and 6.7 percent in fiscal year 2007. As AOC moves forward with identifying and selecting projects that could decrease energy use and related emissions, it could further respond to our recommendation by developing a plan that identifies the potential benefits and costs of each option based on the results of energy audits. Such a plan could build on AOC’s existing Sustainability Framework Plan and its Comprehensive Emissions Reduction Plan for the Capitol Complex, which identify measures that could lead to improvements in energy efficiency and reductions in greenhouse gas emissions. Complementing these plans with information on projects identified through energy audits would further assist AOC in using the resources devoted to energy efficiency enhancements as effectively as possible. The Senate has three primary options for decreasing greenhouse gas emissions and related environmental impacts associated with its operations. These include (1) implementing additional projects to decrease the demand for electricity and steam derived from fossil fuel; (2) adjusting the Capitol Power Plant’s fuel mix to rely more heavily on natural gas, which produces smaller quantities of greenhouse gas emissions for each unit of energy input than the coal and oil also burned in the plant; and (3) purchasing renewable electricity or carbon offsets from external providers. Each option involves economic and environmental tradeoffs and the first option is likely to be the most cost-effective because the projects could lead to recurring cost savings through reductions in energy expenditures. Regarding the first option, as we reported in April 2007, conducting energy audits would assist AOC in addressing the largest sources of emissions because the audits would help identify cost-effective energy-efficiency projects. In general, energy projects are deemed cost-effective if it is determined through an energy audit that they will generate sufficient savings to pay for their capital costs. These projects may require up-front capital investments that the Senate could finance through direct appropriations or contracts with utility or energy service companies, under which the company initially pays for the work and the Senate later repays the company with the resulting savings. Until AOC exhausts its opportunities for identifying energy-efficiency projects that will pay for themselves over a reasonable time horizon, this option is likely to be more cost-effective than the second two options, both of which would involve recurring expenditures. In pursuing energy audits, AOC faces a significant challenge collecting reliable data on the baseline level of energy use within each Senate office building. Such data would help identify inefficient systems and provide a baseline against which AOC could measure potential or actual energy- efficiency improvements. First, while AOC has meters that track electricity use in each building, the meters that track the steam and chilled water used by each building no longer work or provide unreliable data. AOC officials said that they have purchased but not installed new meters to track the use of chilled water and are evaluating options for acquiring new steam meters. Installing these meters and collecting reliable data would enhance any efforts to identify potential energy saving measures. Second, AOC does not have submeters within each building to track the electricity use within different sections of each building. Such submetering would further assist in targeting aspects of the Senate buildings’ operations that consume relatively high quantities of energy. AOC said that it plans to install submeters for electricity, chilled water, and steam by February 2009. A second option for decreasing greenhouse gas emissions would involve directing AOC to further adjust the fuel mix at the Capitol Power Plant to rely more heavily on the combustion of natural gas in generating steam for space heating. The plant currently produces steam using a combination of seven boilers—two that primarily burn coal, but could also burn natural gas, and five boilers that burn fuel oil or natural gas. The total capacity of these boilers is over 40 percent higher than the maximum capacity required at any given time, and the plant has the flexibility to switch among the three fuels or burn a combination of fuels. The percentage of energy input from each fuel has varied from year to year, with an average fuel mix of 43 percent natural gas, 47 percent coal, and 10 percent fuel oil between 2001 and 2007. In June 2007, the Chief Administrative Officer of the House of Representatives released the Green the Capitol Initiative, which directed AOC to operate the plant with natural gas instead of coal to meet the needs of the House. The House Appropriations Committee subsequently directed GAO to determine the expected increase in natural gas use for House operations and the associated costs at the power plant that would result from the initiative. In May 2008, we reported that the fuel-switching directive should lead to a 38 percent increase in natural gas use over the average annual quantity consumed between 2001 and 2007. We also estimated that the fuel switching should cost about $1.4 million in fiscal year 2008 and could range from between $1.0 and $1.8 million depending on actual fuel costs, among other factors. We also estimated that the costs would range from between $4.7 million and $8.3 million over the 2008 through 2012 period, depending on fuel prices, the plant’s output, and other factors. While we have not analyzed the potential costs of fuel switching at the Capitol Power Plant to meet the needs of the Senate, our estimates for the House may provide some indication of the potential costs of such a directive. Additionally, AOC officials said that further directives to increase its reliance on natural gas in the plant could require equipment upgrades and related capital expenditures. Our May 2008 report also found that decreasing the plant’s reliance on coal could decrease greenhouse gas emissions by about 9,970 metric tons per year at an average cost of $139 per ton and could yield other environmental and health benefits by decreasing emissions of nitrogen oxides, particulate matter, and pollutants that cause acid rain. While fuel switching could decrease emissions of carbon dioxide and other harmful substances, it would also impose recurring costs because natural gas costs about four times as much as coal for an equal amount of energy input. Thus, fuel switching may prove less cost-effective than decreasing the demand for energy. Finally, a third option for the Senate to decrease greenhouse gas emissions and related environmental impacts includes purchasing electricity that is derived from renewable sources and paying external parties for carbon offsets. Neither of these activities would involve modifications to the Capitol Complex or its operations but could nonetheless lead to offsite reductions in emissions and related environmental impacts. Both options, if sustained, would result in recurring costs that should be considered in the context of other options for decreasing emissions that may prove more cost-effective. Madam Chairman, this completes my prepared statement. I would be pleased to answer any questions that you or Members of the Committee may have. For further information about this testimony, please contact Terrell Dorn at (202) 512-6923. Other key contributors to this testimony include Daniel Cain, Janice Ceperich, Elizabeth R. Eisenstadt, Michael Hix, Frank Rusco, and Sara Vermillion. Senate Employees Child Care Center CPP Storage (Butler) Building East and West Underground Garages Capitol Police Courier Acceptance Site BG Production Facility (Greenhouse) Construction Management Division Supreme Court Building 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. | In April 2007, GAO reported that 96 percent of the greenhouse gas emissions from the Capitol Hill Complex facilities--managed by the Architect of the Capitol (AOC)--resulted from electricity use throughout the complex and combustion of fossil fuels in the Capitol Power Plant. The report concluded that AOC and other legislative branch agencies could benefit from conducting energy audits to identify projects that would reduce greenhouse gas emissions. GAO also recommended that AOC and the other agencies establish a schedule for conducting these audits and implement selected projects as part of an overall plan that considers cost-effectiveness, the extent to which the projects reduce emissions, and funding options. AOC and the other agencies agreed with our recommendations. This statement focuses on (1) the status of AOC's efforts to implement the recommendations in our April 2007 report and (2) opportunities for the Senate to decrease greenhouse gas emissions and associated environmental impacts. The statement is based on GAO's prior work, analysis of AOC documents, and discussions with AOC management. AOC has made some progress toward implementing the recommendations in GAO's April 2007 report, but opportunities remain. For example, AOC has prioritized a list of Capitol Hill buildings that need energy audits but has not developed a schedule for conducting the audits that explains the prioritization scheme or provides information on the anticipated costs. AOC prioritized the order of energy audits based on each building's energy use and has begun conducting the first of the audits. In addition, AOC has contracted with a private firm to conduct preliminary audits of the Senate office buildings that could lead to more targeted audits and eventually identify cost-effective projects that would decrease energy use and related greenhouse gas emissions. We believe that developing a more detailed schedule for future audits that includes an explanation of the prioritization scheme and cost estimates would assist the Congress in its appropriations decisions and facilitate the completion of additional audits. With respect to our recommendation that AOC implement selected projects as part of an overall plan to reduce emissions, AOC has implemented projects to reduce energy use and related emissions, but the projects were not identified through the processes we recommended. AOC could more fully respond to our recommendation by first completing the energy audits and then evaluating the cost-effectiveness and relative merits of projects that could further decrease the demand for energy. The Senate's options for decreasing the greenhouse gas emissions and related environmental impacts associated with its operations fall into three main categories--implementing projects to decrease the demand for electricity and steam derived from fossil fuels, adjusting the Capitol Power Plant's fuel mix, and purchasing carbon offsets or renewable electricity from external providers. Of these options, efforts to decrease the demand for energy could lead to recurring cost savings through reductions in energy expenditures while the other options may prove less cost-effective and involve recurring expenses. However, a key challenge in identifying energy-saving opportunities results from limited data on the baseline level of energy use within each Senate building. Specifically, the meters for steam and chilled water no longer function or do not provide reliable data. In addition, the buildings are not equipped with submeters for electricity that, if installed, could enhance efforts to identify sections of the buildings that consume relatively high levels of energy. AOC has purchased but not installed new chilled water meters, is evaluating options for acquiring new steam meters, and plans to install submeters by February 2009. |
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Medicare Part D was established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.beneficiaries have been able to obtain prescription drug coverage through prescription drug plans offered by Part D plan sponsors that contract with CMS. Plan sponsors offer prescription drug coverage through stand-alone prescription drug plans (PDP) or through Medicare Advantage prescription drug plans (MA-PD), which combine medical and prescription drug benefits. In 2013, CMS had 75 PDP and 555 MA-PD contracts with Part D plan sponsors that together offered 2,660 plans. About 64 percent of beneficiaries with a Part D plan enrolled in PDPs and 36 percent enrolled in MA-PDs. Part D plan sponsors are required to offer plans that provide a minimum set of benefits to beneficiaries—the standard benefit—or an actuarially equivalent benefit. Under the standard benefit, beneficiaries pay monthly premiums and cost-sharing for drug purchases. Cost-sharing varies over the course of the year as beneficiaries move through the phases of the benefit. The standard benefit features a deductible and an initial coverage period during which beneficiaries pay coinsurance for prescription drugs until they reach the initial coverage limit. After the initial coverage period, beneficiaries enter the coverage gap, which is followed by the catastrophic coverage period in which beneficiaries pay a small share of total drug costs (see fig. 1). In addition to the standard Part D benefit, plan sponsors can offer a range of plans with different benefit structures that are actuarially equivalent to, or exceed the standard benefit. Under these plans, monthly premiums and cost-sharing arrangements can vary. For example, plans with enhanced benefits may charge higher monthly premiums than standard benefit plans, but may offer lower cost-sharing arrangements, such as a reduction or elimination of a deductible. Under Part D, certain individuals are also entitled to a low-income subsidy (LIS), through which they get reduced premiums and generally have zero or nominal cost-sharing. Subject to certain rules, the prescription drugs covered by Part D plans and the cost-sharing arrangements for covered drugs may differ between plans. Each Part D plan has a formulary—a list of the prescription drugs that it covers and the terms under which they are covered. While each plan may vary in the specific drugs it covers, plans must adhere to a minimum set of formulary requirements established in statute and regulation. In addition, a plan’s formulary may assign drugs to tiers that correspond to different levels of cost-sharing. For example, plans often assign generic drugs to the tier that requires the lowest cost-sharing level. Plans have flexibility in how they structure tiers, and different plans may place the same drug in different tiers. Plans may also subject drugs to utilization management practices, such as a limit on the amount of a drug that is covered. Part D cost-sharing for beneficiaries may also vary based on the pharmacies they use. Plan sponsors contract with retail and mail order pharmacies to dispense the drugs that plans cover. Plan sponsors negotiate the prices for covered drugs with pharmacies, and may negotiate different rates with different pharmacies. Some plans have “preferred” pharmacies within their pharmacy network that have agreed to offer drugs at lower cost-sharing levels. Since the beginning of the Part D program, CMS has administered the Plan Finder website to assist beneficiaries and their advisers in assessing Part D plan options by providing them with information on plan coverage and quality, and by estimating their annual drug costs. Beneficiaries can use Plan Finder to evaluate their plan options when they first become eligible for Part D or to reevaluate their options during the open enrollment period each year, and they can enroll in a plan through the website. To compare plans in Plan Finder, beneficiaries work their way through the website by entering information on where they live, the drugs they take, and the pharmacies they use. Plan Finder then identifies Part D plan options available to them and estimates their annual drug costs for each plan at their selected retail and mail order pharmacies (see fig. 2). It also provides information on how beneficiaries’ monthly drug costs change as they move through the Part D benefit over the course of the year. In addition to the website, customer service representatives for 1-800-MEDICARE—a nationwide toll-free telephone help line that beneficiaries and their advisers can call to ask questions about Medicare—also use a version of Plan Finder to provide information on Part D plan options and to enroll beneficiaries over the phone. CMS is responsible for overseeing plan sponsors’ compliance with their Part D contracts. CMS imposes program requirements on Part D plan sponsors—including a requirement that they submit accurate drug price, formulary, and pharmacy network information for Plan Finder—and sponsors are subject to possible compliance and enforcement actions for failure to meet those requirements. In addition, compliance and enforcement actions are included in the plan sponsor’s record of past performance, which CMS considers when reviewing applications for new or expanded Medicare contracts submitted by that plan sponsor. CMS can impose a range of compliance and enforcement actions to ensure compliance with program requirements, including requirements related to Plan Finder. The lowest-level compliance action is a notice of noncompliance, which notifies the Part D plan sponsor that it is in violation of program requirements under the terms of one or more of its contracts. The notice of noncompliance requests that the plan sponsor address the problem. If the noncompliance continues, CMS may issue a warning letter. significant number of beneficiaries, represents an ongoing or systemic inability to adhere to program requirements, or is particularly egregious, CMS may require the plan sponsor to develop and implement a corrective action plan. The corrective action plan must address the deficiencies identified by CMS, provide an attainable time frame for implementing corrective actions, and include a process for validating and monitoring that the corrective actions were taken and remain effective. CMS can also take enforcement actions for persistent noncompliance or to address more significant violations. Enforcement actions include civil money penalties; marketing, enrollment, and payment suspensions; and contract terminations. The nature of each instance of noncompliance is considered when determining the appropriate compliance or enforcement actions, and the actions generally proceed through the process in a step-by-step manner. However, for more serious violations, CMS may choose to immediately proceed to later-stage compliance or enforcement actions. In some instances, CMS may request in the warning letter that the sponsor submit a business plan for resolving issues related to the noncompliance. CMS also oversees the Part D program through its Star Ratings, which assigns scores to Part D contracts every year across a range of quality measures. CMS collects performance data on Part D plans covered under each individual contract for 18 quality measures—including a measure for Plan Finder drug pricing accuracy. CMS aggregates these quality measure scores and assigns an overall quality score between one and five stars, with five being the highest, to each contract. Each contract’s overall score and individual quality measure scores are applied to all plans covered under the contract, and CMS posts plans’ scores on the Plan Finder website to help beneficiaries choose high-quality plans.CMS also considers Star Ratings performance when reviewing sponsors’ applications for new or expanded Medicare contracts. To assess the accuracy of pricing information on Plan Finder, CMS performs computerized data checks on pricing information before it is displayed on Plan Finder and has taken compliance actions against certain Part D plan sponsors for submitting inaccurate and incomplete pricing information. In addition, CMS uses quality measures to retrospectively evaluate the accuracy of pricing information on Plan Finder. CMS performs computerized data checks to identify incomplete and potentially inaccurate pricing information before it is posted to Plan Finder. CMS requires Part D plan sponsors to submit drug pricing information for their plans on a biweekly basis—which Plan Finder uses to estimate beneficiaries’ cost-sharing amounts and expected drug costs. In 2013, CMS performed a set of over 25 data checks on the biweekly submission for each plan, including checks to identify outlying drug prices significantly higher or lower relative to the prices submitted by other plans and checks to identify missing data. If CMS’s data checks identify potentially inaccurate plan pricing information, CMS notifies the sponsor of the plan and gives the sponsor an opportunity to attest to the accuracy of the data, or correct it. If the sponsor does not verify or correct the pricing information, CMS will “suppress” the plan from Plan Finder for two weeks, or longer if the sponsor does not provide accurate pricing information for the next biweekly data update. When a Part D plan is suppressed from Plan Finder, its pricing information is removed and beneficiaries cannot enroll in the plan through the website. Plan Finder displays a warning notice alerting beneficiaries that the plan’s pricing information is unavailable and that they must contact the plan directly for cost information as well as to enroll. In 2012, 18 percent of Part D contracts had one or more plans that were suppressed from Plan Finder at least once, and, from January 1, 2013, through July 31, 2013, 25 percent of contracts had one or more plans that were suppressed at least once (see table 1). In addition to these quality assurance checks, CMS officials noted that they may identify Plan Finder pricing inaccuracies based on feedback provided by beneficiaries and organizations that provide assistance to beneficiaries, such as the State Health Insurance Assistance Programs (SHIP). According to CMS officials, SHIPs and other stakeholders can report inaccurate prices or other concerns through a Plan Finder email inbox maintained by CMS, and beneficiaries can report inaccuracies through 1-800-MEDICARE. SHIPs are state agencies that provide counseling and assistance to Medicare beneficiaries. noncompliance and 67 warning letters for inaccurate or incomplete drug pricing information. According to CMS documents, there has only been one instance in which CMS required a Part D plan sponsor to develop and implement a corrective action plan for compliance concerns related to Plan Finder pricing accuracy. CMS required this corrective action plan in 2008 after it found ongoing discrepancies between a plan’s drug prices submitted to Plan Finder and the prices beneficiaries paid at the point-of-sale. CMS found the discrepancies so egregious that the agency referred the issue to the Department of Justice. In 2012, the plan sponsor entered into a civil settlement agreement with the federal government to resolve allegations that the plan sponsor submitted false pricing information in 2007 and 2008. CMS’s processes for overseeing the accuracy of drug pricing information in Plan Finder are consistent with internal control standards for the federal government. These standards specify that agencies should have processes in place to oversee the accuracy of data and that they should design and implement controls and processes to ensure that ongoing monitoring occurs in the course of normal operations. CMS’s Star Ratings, which provide beneficiaries with information on plan quality, assigns scores to each Part D contract on the accuracy of pricing information on Plan Finder. To determine the annual quality ratings for drug pricing accuracy, CMS compares Plan Finder drug prices with beneficiaries’ point-of-sale drug costs and assigns scores based on the extent to which the point-of-sale costs were higher than prices posted on Plan Finder. For the 2013 Star Ratings, 6 percent of contracts had point-of-sale prices that were greater than Plan Finder prices by an average of 4 percent or more. This is a decrease from 13 percent of contracts in 2011 (see table 2). CMS officials stated that the Star Ratings drug pricing accuracy measure evaluates point-of-sale costs that are higher than Plan Finder prices because CMS particularly wants to discourage plan sponsors from using “bait and switch” tactics that would encourage beneficiaries to enroll in plans based on inaccurately low prices. The extent to which point-of-sale prices are lower than prices posted on Plan Finder are not reflected in the drug pricing accuracy measure. However, although not part of the Star Ratings, for 2014 CMS developed an additional “display” quality measure to track the extent to which point-of-sale costs were lower than prices posted on Plan Finder. According to CMS, this display measure is intended to discourage plan sponsors from potentially submitting inaccurate high prices for select drugs or drug classes to discourage enrollment by certain beneficiaries. CMS has assessed the usability of Plan Finder by obtaining feedback from a variety of sources and has implemented updates to the website to improve usability. The practices employed by CMS to obtain feedback on Plan Finder’s usability are consistent with leading practices identified by HowTo.gov, which recommends engaging users through surveys, user testing, and other outreach to collect feedback on usability. Howto.gov also recommends that agencies collect and analyze performance and other measures to identify potential improvements to the website’s organization and content. CMS officials told us that they have obtained user feedback and web performance data on Plan Finder from the following sources: Beneficiary assistance organizations. CMS has obtained feedback on Plan Finder from SHIPs and other organizations that provide assistance to Medicare beneficiaries. These organizations help beneficiaries navigate the website, and their staff often use Plan Finder when counseling beneficiaries. CMS officials told us that they hold regular meetings with these organizations and that they maintain a specific email inbox for SHIP officials and beneficiary advocacy groups to submit feedback on issues related to Plan Finder. A number of organizations that we spoke with have provided CMS with documents detailing suggestions for improving the website. In addition, several of these organizations noted that CMS has reached out to them to obtain feedback on planned changes and updates to the website. Beneficiary user testing. CMS has conducted user tests on the usability of Plan Finder with beneficiaries, beneficiary advisers, and SHIP counselors. The user tests involved interviewing beneficiaries as they worked their way through Plan Finder to gain insight into their experiences and any challenges that they faced. For example, the user tests have analyzed the ease with which beneficiaries can enter information about the prescription drugs they take and their ability to use Plan Finder to compare plans. CMS has also conducted user tests with certain Medicare beneficiary subpopulations. For example, CMS conducted user tests with LIS beneficiaries to obtain feedback on their ability to understand LIS-specific information on the website. A website survey. CMS employs a website customer satisfaction survey that measures and collects performance data on users’ experiences. For example, the survey asks users to rate the layout of Plan Finder and the extent to which the website’s design allows them to find plan information easily. It also asks about the usefulness of the resources that are available on the website to help users understand how to use Plan Finder to compare Part D plans. CMS has tracked several measures that are rated through these surveys, including measures related to how content is organized and the extent to which the website streamlines the plan comparison process. Website user data. CMS tracks Plan Finder website user data, such as the number of visitors to the website and the amount of time that users spend on specific webpages, to gain insight into users’ experiences and website navigation patterns. For example, if users are spending a long time on a specific Plan Finder webpage, it may indicate that they are having a hard time understanding the information that is being presented on the page, according to a CMS official. In addition, CMS officials said that they can also use this data to measure the number of users that work their way through Plan Finder to obtain information on Part D plan options available to them. For those that do not fully work their way through Plan Finder to obtain information on available plans, CMS tracks user data on when they exited the website. CMS has implemented updates to the website on a quarterly basis and, according to CMS officials, has used feedback on Plan Finder to address identified issues and improve the website’s usability. For example, CMS developed and added a “frequently asked questions” webpage to the website in 2013 to help beneficiaries with frequently encountered issues. Several of the questions explain how and why cost-sharing can vary under different circumstances. To help beneficiaries better understand plans’ pharmacy networks, CMS added an indicator that identifies whether the pharmacies they entered into Plan Finder are in-network, in- network preferred, or out-of-network in the plans that are available to them. In addition, CMS has added filters to help beneficiaries compare Part D plans and select plans that meet their needs. For example, the filters allow beneficiaries to look only at plans that cover all of the drugs they take, or plans that have limited premiums or deductibles. Although CMS has obtained feedback on Plan Finder, incorporating such feedback and addressing usability issues can present challenges. One CMS official we spoke with said that incorporating the feedback that CMS receives can sometimes be difficult since they try to balance the need to explain complex elements of the Part D benefit, while also keeping the website streamlined. For example, the official noted that providing too much information on the website can make it more difficult for beneficiaries to identify needed information. Officials from the beneficiary assistance organizations we spoke with generally told us that Plan Finder helps beneficiaries compare Part D plans and that the website’s usability has improved over time. However, certain beneficiaries may face barriers to using Plan Finder, regardless of the usability of the website. Most of the organizations we spoke with explained that some beneficiaries have a hard time using the information provided by Plan Finder to compare plans and identify plans that meet their needs because of the complexity of the Part D benefit and the variety of factors that influence cost-sharing. For example, a number of the beneficiary advocacy groups that we spoke with told us that some beneficiaries face difficulties understanding why cost-sharing varies between pharmacies under plans with preferred pharmacy networks. In addition, certain beneficiaries lack Internet access or do not have adequate levels of computer literacy to be able to use Plan Finder independently. Several officials noted, however, that beneficiaries aging into Medicare eligibility are increasingly experienced in using computers. Officials from the beneficiary assistance organizations also told us that beneficiaries enrolling in MA-PDs may have a harder time using Plan Finder and our analysis of CMS enrollment data found that beneficiaries enrolling in MA-PDs are less likely to use the Plan Finder website to enroll than beneficiaries enrolling in PDPs (see table 3). These officials noted that, in addition to comparing prescription drug benefits, beneficiaries enrolling in MA-PDs have to identify plans that provide medical coverage that meet their needs as well. For example, one official we spoke with said that beneficiaries may not be inclined to enroll in MA-PDs that offer low cost prescription drug coverage if the beneficiaries’ health care providers are not in-network. GAO provided a draft of this report to HHS. HHS agreed with GAO’s findings and provided a technical comment, which GAO incorporated. HHS’s written comments are reprinted in appendix I. We are sending copies of this report to the Administrator of CMS. We will also make copies available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [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. Kathleen King, (202) 512-7114, [email protected]. In addition to the contact named above, Martin T. Gahart, Assistant Director; Lori Achman; Michael Erhardt; Cathleen Hamann; Sara Rudow; and Hemi Tewarson made key contributions to this report. Managing for Results: Leading Practices Should Guide the Continued Development of Performance.gov. GAO-13-517. Washington, D.C.: June 6, 2013. Consumer Product Safety Commission: Awareness, Use, and Usefulness of SaferProducts.gov. GAO-13-306. Washington, D.C.: March 11, 2013. Medicare: Quality of CMS Communications to Beneficiaries on the Prescription Drug Benefit Could Be Improved. GAO-06-715T. Washington, D.C.: May 4, 2006. Medicare: Communications to Beneficiaries on the Prescription Drug Benefit Could Be Improved. GAO-06-654. Washington, D.C.: May 3, 2006. | The Medicare prescription drug program, known as Medicare Part D, provides a voluntary outpatient prescription drug benefit for Medicare beneficiaries. Beneficiaries may choose Part D plans from among multiple plans offered by private companies--plan sponsors--that contract with CMS. Plans may differ in their premiums and cost-sharing arrangements, the drugs they cover, and the pharmacies they contract with to fill prescriptions. CMS developed the Medicare Plan Finder interactive website in 2005 as a tool to help beneficiaries compare Part D plans and identify plans that meet their needs. For Plan Finder to serve its intended purpose, beneficiaries and their advisers need to be able to obtain accurate drug cost information, understand plan options, and navigate the website effectively. GAO was asked to review CMS's efforts to ensure that beneficiaries can use Plan Finder effectively. This report examines (1) how CMS oversees the accuracy of drug pricing information in Plan Finder; and (2) how CMS assesses the usability of Plan Finder and any steps CMS has taken to improve it. To conduct this work, GAO reviewed documentation detailing CMS's processes for overseeing Plan Finder pricing accuracy and obtained data on agency compliance actions. GAO also interviewed CMS officials and organizations that help Medicare beneficiaries navigate Plan Finder to learn about CMS's processes for obtaining feedback on Plan Finder's usability and steps the agency has taken to improve the website. The Centers for Medicare & Medicaid Services (CMS), the agency within the Department of Health and Human Services (HHS) that administers Medicare, uses data checks and quality measures to oversee the accuracy of Part D plan pricing information on the Plan Finder interactive website. Part D sponsors may have multiple contracts with CMS to provide drug coverage, with each contract covering one or more distinct Part D plans, and CMS is responsible for overseeing plan sponsors' compliance with their Part D contracts. CMS requires Part D plan sponsors to submit drug pricing information for their plans, which Plan Finder uses to estimate beneficiaries' cost-sharing amounts and expected annual drug costs. To ensure the accuracy of this information, CMS performs computerized data checks on the pricing information for each plan to identify incomplete and potentially inaccurate data before information is displayed on Plan Finder. If CMS's data checks identify potentially inaccurate plan pricing information, CMS gives the plan's sponsor an opportunity to attest to the accuracy of the data, or correct it. If the plan's sponsor does not verify or correct potential inaccuracies identified by these checks, CMS will "suppress" the plan from Plan Finder, which means that the plan's pricing information is removed and that beneficiaries cannot enroll in the plan through the website. In the first seven months of 2013, 25 percent of Part D contracts had one or more plans suppressed from Plan Finder at least once. CMS has taken compliance actions against plan sponsors for repeated suppressions--between January 1, 2009, and July 31, 2013, CMS issued 89 notices of noncompliance and 67 warning letters. CMS uses quality measures to evaluate the accuracy of pricing information on Plan Finder. As part of its Part D Star Ratings, which provide beneficiaries with information on plan quality, CMS collects performance data on Part D plans covered under each individual contract. CMS assigns scores to each contract based on the extent to which beneficiaries' point-of-sale costs were higher than prices posted on Plan Finder. For the 2013 Star Ratings, 6 percent of contracts had point-of-sale prices that were greater than Plan Finder prices by an average of 4 percent or more. CMS has assessed the usability of Plan Finder by obtaining feedback from a variety of sources, including beneficiary assistance organizations, user testing, a website survey, and website user data. CMS has used feedback on Plan Finder to update the website and improve usability. For example, CMS developed and added a "frequently asked questions" webpage to the website. Officials from the beneficiary organizations GAO spoke with generally said that Plan Finder helps beneficiaries compare Part D plans and that its usability has improved over time. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
Although estimates of the employment rate for individuals with disabilities vary, researchers and advocates agree that it is much lower than the employment rate for the U.S. workforce as a whole, particularly for individuals whose impairments are severe enough to affect their ability to work. The purpose of the provisions of section 14(c) of FLSA, as stated in the legislation, is to prevent the curtailment of employment opportunities for individuals with disabilities. An individual with a disability eligible to be paid special minimum wages is defined in the regulations as someone “whose earning or productive capacity is impaired by a physical or mental disability, including those relating to age or injury, for the work to be performed.” Determining the impact of the legislation on the employment opportunities of individuals with disabilities severe enough to be eligible to be paid special minimum wages, including whether the purpose of the legislation to not curtail employment opportunities for these individuals is achieved, however, is difficult. Most individuals with disabilities who are employed are not paid special minimum wages under the provisions of section 14(c) of FLSA. Many workers with disabilities cannot be paid special minimum wages because their impairments are not severe enough to affect their ability to perform their jobs; others receive accommodations and special support services that allow them to earn at least the minimum wage. Individuals with disabilities work in many different types of employment settings, including jobs in businesses where they work mainly with individuals who do not have disabilities and in work centers where they often work primarily with other individuals with disabilities. Some individuals with disabilities work in jobs with no special support services. In such cases, they generally are not paid special minimum wages under the provisions of section 14(c) because they are able to perform the work at a fully productive level. Individuals with impairments severe enough to affect their ability to perform the work, however, often require support services such as job coaches or special on-site supervision in order to obtain and retain their jobs and many are paid at special minimum wage rates. Many of the work centers that employ individuals with disabilities are nonprofit organizations established to provide support services and training as well as employment opportunities for these individuals. Many of these work centers were established by groups of parents of individuals with disabilities and by vocational rehabilitation specialists. Work centers receive much of their funding through state and county agencies from funds provided for support services and vocational training for individuals with disabilities. State and county agencies usually provide funds to work centers in the form of grants or reimbursements for services. To carry out Labor’s oversight of the provisions of section 14(c) of FLSA, the Secretary issued regulations that define the requirements of the law and delegated authority to WHD for the administration of the special minimum wage program. WHD staff review and approve employers’ applications for new 14(c) certificates and renewals that allow them to pay individuals with disabilities less than the federal minimum wage, which is currently $5.15 an hour. Work centers and hospitals are required to renew their 14(c) certificates every 2 years; businesses and schools must renew their 14(c) certificates annually. Because most 14(c) employers are work centers that have employed 14(c) workers for many years, most of the 14(c) certificate applications that WHD staff review are applications for renewal. In states that have a higher minimum wage rate than the federal minimum wage, the state rate takes precedence. Employers are required to establish the special minimum wage rate(s) for each worker they employ under the act and to show how they established these rates in the certificate application packages they submit to Labor. The process of establishing special minimum wage rates is complex. First, employers must identify the prevailing wage in their geographic area for experienced workers who do not have disabilities that affect their ability to perform the work and who perform the same or similar work. They must then measure the actual productivity of the workers for each job they perform as compared to the productivity of experienced workers who do not have disabilities. Finally, employers must calculate the special minimum wage rate by applying the worker’s productivity rate to the prevailing wage for the job and factoring in the quality of the work performed. For example, if a 14(c) worker’s productivity for a specific job is 50 percent of that of experienced workers who do not have disabilities that affect their work, and the prevailing wage paid to experienced workers for that job is $6.00 an hour, the special minimum wage rate for the 14(c) worker in performing that job would be $3.00 an hour. Workers are paid either hourly rates of pay or piece rates for the number of pieces they produce. Most service jobs are paid at an hourly rate, while most assembly work is paid at a piece rate. Employers are also required to obtain a 14(c) certificate in order to pay workers with disabilities less than the hourly wage for contracts covered under the Service Contract Act and the Walsh-Healey Public Contracts Act. These rates are often higher than the federal minimum wage, particularly for work performed under the Service Contract Act. Therefore, 14(c) workers employed under these contracts may earn more than the federal minimum wage. For example, a worker who has a disability might work under a contract covered by the Service Contract Act for which the contract rate is $15.00 an hour. If a 14(c) worker is only able to perform the work at 50 percent of the productivity level of workers who do not have disabilities that affect their ability to perform the work, he or she would be paid $7.50 an hour. Labor monitors and enforces employer compliance by reviewing employers’ 14(c) certificate application packages and by conducting investigations of employers. The 14(c) certification team in WHD’s Midwest Regional Office verifies that employers have correctly computed the special minimum wages of their workers by reviewing the documentation in their 14(c) certificate application packages. WHD selects employers for 14(c) investigations either through complaints filed on behalf of workers (by the workers themselves or by their parents or guardians) or by conducting self-initiated investigations of employers selected through criteria developed by WHD officials. The WHD Regional Administrators, with guidance from WHD’s national office, set the priorities for investigations of employers. Labor’s WHD investigators are responsible for enforcing compliance with all aspects of FLSA, including the provisions of section 14(c). When Labor determines through a review of an employer’s certificate renewal application package or an investigation that an employer has underpaid its 14(c) workers, it requires the employer to compute the amount of back wages owed to these workers for a period of 2 years prior to the date of Labor’s review. In addition to monitoring and enforcing compliance through its reviews of employer’s 14(c) certificate renewal applications and investigations of employers, Labor ensures employer compliance through its training and outreach efforts for its own staff and 14(c) employers. Because the process of establishing special minimum wage rates is complex, Labor considers these efforts to be an important aspect of its oversight responsibilities for the special minimum wage program. The majority of 14(c) employers are nonprofit work centers established to provide support services and employment to individuals with disabilities. The centers provide jobs for 14(c) workers most often in light assembly work done by hand or in service-oriented jobs such as grounds maintenance or janitorial work. Most of these jobs are carried out under contracts with government agencies and private companies. The major sources of funds for work centers are state and county agencies and contracts. While virtually all work centers offer one or more support services designed to help 14(c) workers perform their jobs, the range of services they are able to provide depends on the availability of funding and the eligibility criteria established by the funding agencies. About 5,600 employers were paying workers with disabilities special minimum wages under certificates issued under the provisions of section 14(c) at the time of our survey in 2001 (see table 1). About 4,700 (84 percent) of these employers were work centers. Work centers employed about 95 percent of all 14(c) workers. More than 80 percent of the work centers were private, nonprofit entities; 13 percent of the work centers were state or local government organizations. Businesses accounted for 9 percent of the employers, hospitals or other residential care facilities accounted for 5 percent, and less than 2 percent were schools. The work centers primarily employed workers who have disabilities, 90 percent of whom were 14(c) workers. On average, each work center employed 86 workers at special minimum wages. The work centers mainly employed workers with mental retardation or other developmental disabilities. Some work centers focused on employing workers who were blind or had other visual impairments, although they comprised a relatively small number (50 work centers). Work centers offer individuals with disabilities a variety of work, most of which involves assembly or is service-related. (See table 2.) Assembly jobs generally involve uncomplicated one- or two-step processes that are mainly performed by hand. For example, 14(c) workers at a work center in Illinois that we visited assembled small plastic automobile parts, while 14(c) workers at a New York work center snapped together plastic pieces to assemble a lint remover. The service-related jobs involved basic tasks, such as mopping floors and picking up trash. For example, 14(c) workers from a California work center maintained restrooms at public beaches under contracts with local city governments. Work center managers balanced their understanding of what work was feasible for their 14(c) workers with their knowledge of the work available in the area. Work center managers also considered where jobs were located. Most jobs in assembly, production, sorting, and collating could be easily performed in the work center. However, jobs such as grounds maintenance and janitorial work had to be performed off-site. If a work center was not located within a reasonable commuting distance, work center managers might decide that these jobs were not feasible for their 14(c) workers. For example, managers at a work center in Illinois did not pursue jobs in neighboring communities that posed a difficult commute for their workers. Most work centers provided jobs through contracts with government agencies and private companies. Work center managers at some of the sites we visited told us that they were most likely to contact local companies to find jobs that could be done by their 14(c) workers. According to the director of a work center in Virginia, contracts with private companies, particularly for products, were often for tasks in a production process that would not have been cost-effective for the company to automate. In addition, a manager at a California work center said that several of their contracts came from small companies that were marketing new products and did not yet have enough data to know how much their production costs would be. These companies found that work center contracts could be used to do test runs of a new product at a relatively low cost. Overall, we found that 22 percent of the work centers had preferential contracts with state or local governments, and 17 percent of the work centers had contracts with federal agencies. The photos in figure 1 depict examples of the types of jobs performed by 14(c) workers and the types of products they assemble. In addition to providing employment opportunities, work centers also offer a number of support services for 14(c) workers designed to enable them to obtain and perform their jobs. Depending on the type of support services needed by the 14(c) workers, work center staff either provide the services themselves or help to obtain these services from other sources. Essentially all (99 percent) of the work centers provided or helped obtain one or more of a wide range of support services that enabled 14(c) workers to obtain or perform their jobs. (See table 3.) For example, some workers with mental retardation could not drive and were unable to use public transportation without assistance. We found that almost all (97 percent) of the work centers provided or helped obtain transportation for their workers. They also provided support services such as psychological counseling and speech therapy to help 14(c) workers function more effectively both on and off the job. Most work centers also provided one or more accommodations consistent with the definition of reasonable accommodation in the Americans with Disabilities Act of 1990. Our survey showed that 95 percent of the work centers provided work schedule modifications, 85 percent provided job restructuring, and 72 percent provided specialized equipment not required by workers without disabilities. In many cases, work centers accomplished these accommodations through the support services they provided to their 14(c) workers. For example, job restructuring, an example of a reasonable accommodation, could be accomplished using task adaptation, such as breaking a complex task into several small tasks performed by more than one worker, or job station adaptation, such as lowering the height of a table to accommodate someone in a wheelchair. From our site visits, we found that the state and county agencies that provided funds to the work centers to pay for support services had different levels of funding available and different eligibility criteria for these services. State policies and criteria for reimbursements and grants varied across the states we visited. According to work center managers, the availability of state grants or reimbursements for services, and the centers’ or their workers’ ability to meet state eligibility criteria for these funds dictated the type and level of support services their centers provided. For example, for one program at the work center in California we visited, the state required workers to work at least 20 hours a week, have an attendance rate of 85 percent, and have a productivity level of at least 10 percent. Another program at the work center designed to prepare workers to move from the work center to jobs in the community was limited to 30 slots because of state funding limits. To pay for their operating costs, including the provision of support services, work centers obtain funds from two primary sources, government agencies and contracts. From the survey, we found that, on average, nearly half (46 percent) of the funds received by work centers were grants and reimbursements from third parties—mostly state and county government agencies—primarily for the provision of support services. The other major source of funding for work centers was contracts for the production of goods and services, which accounted for about 35 percent of their funding. Figure 2 shows the sources of the funding for all work centers. Each site we visited had several sources of funding; the proportion of funds from each source varied for each location. (See table 4.) For example, while the Virginia work center received most of its funds from its production contracts, the center in Georgia received almost all of its funds from state and county agencies. According to some of the work center managers who responded to our survey and managers at the sites we visited, without the provisions of section 14(c), work centers would need to obtain additional funds to continue to operate at their current levels. Work centers’ payroll expenses would increase, significantly in some cases, if they were required to pay their 14(c) workers the federal minimum wage of $5.15 an hour. For example, at one of the work centers we visited in New York, the total wages of the 14(c) workers would increase from about $77,000 to about $289,000 if the work center paid all of its current 14(c) workers at the federal minimum wage rate. (See table 5.) We also found from our site visits that the work centers’ funding from production of products and services did not cover all costs associated with production. For example, one of the New York work centers obtained about $275,000 from its production contracts. This amount did not cover its costs which, in addition to the wages of its 14(c) workers, included additional direct expenses of about $690,000 for the salaries of its supervisors and support staff and other expenses, such as the cost of materials. From the survey, we estimate that most 14(c) workers have mental retardation or another developmental disability as their primary impairment and earn very low wages. For more than half of the 14(c) workers, low productivity results in an hourly wage rate that is less than half the federal minimum wage. In addition, the majority of 14(c) workers work less than full-time. The 14(c) workers are primarily from 25 to 54 years of age and have been employed in the work centers for several years. At the sites we visited, we found that many 14(c) workers received federal cash disability benefits in addition to their earnings. We also found that the workers at the sites received nonmonetary benefits from being in a work environment, such as training designed to help them become more independent in their interactions with individuals in the community. Based on our survey and data obtained from Labor, we estimate that currently about 424,000 workers with disabilities earn special minimum wages. Over 400,000 of these 14(c) workers are employed by work centers. The remainder are employed by businesses, hospitals or other residential care facilities, or schools. Workers paid special minimum wages by work centers have a wide range of physical and mental conditions that impair their ability to be fully productive at their jobs. (See figure 3.) From the survey, we estimate that the primary impairment of nearly three-quarters of all 14(c) workers employed by work centers was mental retardation or some other developmental disability. About 46 percent of the workers had more than one disability. These impairments can affect a 14(c) worker’s productivity in several ways. Some workers with mental retardation, for example, need additional supervision to complete their tasks, something that, according to our survey, virtually all work centers provided. The level of supervision needed by workers with mental retardation, however, varies depending on the needs of the individuals. For example, the supervisor-to-worker ratio for most 14(c) workers at the California work center we visited was 1 to 15. However, this work center also had a special unit that provided an even higher level of supervision to those who needed it—1 supervisor to every 4 workers. Some 14(c) workers with mental retardation also require special devices that enable them to perform tasks involving measuring and counting— activities that may be difficult for those with mental retardation to perform. The work center we visited in Texas, for example, devised a wooden jig with holes drilled to a specific depth so that 14(c) workers could automatically attach brass couplings to refrigerator coils at the correct position without having to measure them. The California work center devised a counting board for some of its 14(c) workers who packaged materials. The board was divided into 12 squares so that, by placing one item in each square and putting all of the items in a package after filling up the board, 14(c) workers would know the correct number of items to put in each package without having to count them. Certain physical impairments, such as reduced visual acuity or cerebral palsy, also restrict 14(c) workers’ ability to perform tasks involved in performing their jobs. Workers with these types of impairments also receive special supports that enable them to work. For example, because some workers at an Illinois work center found it difficult to clip plastic automobile parts together using only their hands, supervisors built a lever that helped workers with less strength, or reduced manipulative ability, complete the task. At a work center that employed primarily the blind in New York, workers with limited or no vision used a wooden block as a form for folding visual testing equipment at the proper locations. The photos in figure 4 depict some of the special devices and support services that enable 14(c) workers to perform their jobs. The wages of 14(c) workers employed by work centers nationwide were very low. From the survey, we found that more than half of the 14(c) workers (54 percent) earned less than $2.50 an hour because the productivity levels of the workers, as reported by the work centers, were so low. In the survey, work center managers also reported that most of their 14(c) workers (70 percent) had a productivity level of less than half of that of workers without disabilities performing the same jobs. (See table 8.) The low productivity levels of 14(c) workers result in the low hourly wages they are paid. For example, the average productivity level of 14(c) workers at the sites we visited ranged from a low of 11 percent at the work center in Georgia to a high of 42 percent at the work center in Texas. The average hourly wage rates for 14(c) workers at these sites, which were as low as $0.63 per hour to as high of $3.74 per hour, mirrored the productivity levels at the sites. (See figure 5.) Most 14(c) workers (86 percent) worked part-time (less than 32 hours a week). Nearly half of these individuals worked less than 20 hours per week. (See table 9.) Three-fourths of the 14(c) workers employed by work centers (75 percent) as of the date of our survey were from 25 to 54 years of age. The remaining one-fourth of the workers was evenly divided between those younger than 25 and those 55 or older. A slightly higher percentage of the workers were male (55 percent) than female (45 percent). From the survey, we estimate that more than half of 14(c) workers (55 percent) employed by work centers had worked there for 5 years or more, while we found that some 14(c) workers at the sites we visited had worked there for more than 20 years. From employers’ responses to our survey, we also estimate that 13 percent of the 14(c) workers employed by work centers left the center during calendar year 2000. About 5 percent of the workers who left the center moved into jobs in the community. We do not, however, know whether these jobs were at special minimum wages or at or above the minimum wage. An additional 4 percent of the 14(c) workers remained at the work centers but moved from jobs that paid them special minimum wages to jobs that paid them the federal minimum wage or more. At six of the work centers we visited, at least half of their 14(c) workers received federal cash disability benefits. Depending on the site, anywhere from about half to almost all of their 14(c) workers received Social Security Disability Insurance benefits or Supplemental Security Income benefits for severe impairments that affected their ability to work. At all of these sites, the average monthly earnings of their 14(c) workers were lower than the average monthly Social Security Disability Insurance benefit amount of $787 and, at all but one site, lower than the average monthly Supplemental Security Income benefit of $412. In addition, although federal disability benefits are reduced or eliminated when beneficiaries earn more than certain amounts, most of the 14(c) workers’ earnings at each of the sites we visited were too low to significantly reduce their disability benefits. Most of these workers also qualified for health insurance (Medicaid or Medicare) linked to their disability benefits. Some 14(c) workers also received food stamps and housing subsidies. According to the work center managers and our discussions with a few 14(c) workers and parents or guardians of 14(c) workers at the sites we visited, the workers benefit from opportunities to develop self-esteem, exercise self-determination, and develop socialization skills that being in a work environment can provide. Many of the support services provided by the work centers give workers the opportunity to develop more than their vocational skills. At each of the work centers we visited, staff worked with the 14(c) workers to develop formal plans with both employment and nonwork goals. Employment-related goals usually involved strategies to improve productivity on the current job and included plans to achieve the next step in a career path, such as transition from the work center to work in the community. Nonwork goals involved a variety of activities. For example, the work centers in California and Texas offered classroom training in personal and social adjustment. Training focused on basic topics such as appropriate communication and social behaviors and continued through more advanced topics such as management of finances. Several of the work centers we visited also offered training designed to help 14(c) workers become more independent in their interactions with individuals in the community. For example, the work center in New York that primarily employed the blind offered training to its workers on the development of new skills and behaviors, such as problem-solving and assertiveness skills designed to help them, especially those who also had mental retardation, interact more effectively in the community. In addition, the center offered training to workers on how to shop, use banks, and eat in restaurants. The work centers we visited also focused on enabling 14(c) workers to make their own decisions about their lives, that is, to exercise self- determination. For example, the California work center competed with at least two other training and employment providers for every new client. In most cases, the potential 14(c) worker made the final choice of provider, often with the help of family members. At the California work center, the 14(c) worker was an active participant in the development of his or her individualized plan and participated in all meetings to decide the next step in the plan. The decisions about whether to move from a job at the work center to work in the community or whether to work at all were also left to many of the 14(c) workers at the work centers we visited. For example, at the work center in Georgia, staff helped 14(c) workers plan alternative activities when they no longer desired to work. In addition, the work center in California offered a variety of social activities to 14(c) workers who had retired. Labor’s management of the special minimum wage program is ineffective. Until recently, Labor gave the program low priority, including providing little training or guidance to its own staff or employers and conducting few self-initiated investigations of employers. Although Labor began to place more attention on the program in fiscal year 2000, the agency does not have the data it needs to manage the program and does not adequately ensure employer compliance with the requirements of the program. Labor does not have accurate data on the number of 14(c) employers and workers needed to assess the appropriate level of resources it should devote to the program, does not track the resources it devotes to overseeing the program, and does not compile information on the results of its efforts to ensure employer compliance. Labor also does not adequately ensure employer compliance with the program’s requirements because it does not systematically conduct self-initiated investigations of 14(c) employers and does not follow up when employers do not renew their 14(c) certificates. Finally, Labor does not ensure employer compliance by routinely providing guidance and training on the requirements of the special minimum wage program to its staff and 14(c) employers. Labor officials told us that they have given low priority to the special minimum wage program in past years because WHD’s resources were focused on other enforcement responsibilities, such as detecting violations of child labor laws and protecting low-wage workers in the garment industry. Enforcement was primarily limited to WHD’s reviews of employers’ 14(c) certificate applications. Although WHD reviewed all complaints about employers filed on behalf of 14(c) workers, the agency conducted few self-initiated investigations and there was no mandate from WHD headquarters to conduct self-initiated 14(c) investigations. In fiscal year 2000, according to WHD headquarters and regional officials, Labor began to place renewed emphasis on the program, including reinstating the 14(c) specialist positions in its regional offices, increasing training of its own staff and employers, updating the written guidance provided to its investigators, and selecting employers for self-initiated 14(c) investigations. However, despite this renewed emphasis, Labor’s performance plan for fiscal year 2000 contained no mention of the special minimum wage program, although the plan contains specific goals for other WHD special enforcement programs, such as child labor and agricultural workers. In addition, Labor has not systematically reviewed the results of its increased emphasis on the program, including obtaining the data it needs to effectively manage the program or reviewing the results of its increased enforcement efforts. Labor cannot properly manage the program because it does not have accurate information on the number of employers or workers that participate in the special minimum wage program, the resources it devotes to overseeing the program, or the results of its oversight efforts, including its reviews of employers’ 14(c) certificate applications and its investigations of employers. Labor is not able to provide accurate counts of the number of employers and workers participating in the special minimum wage program—the starting point for determining what resources it should allocate to the program. When asked to provide this information on employers, Labor gave us three different lists. The number of employers on these lists ranged from 4,795 to 8,493, and the number of workers ranged from 242,470 to 417,002. Although Labor officials were unable to explain these discrepancies, when we reviewed the information in its databases on 14(c) employers, we discovered that they contained out-of-date and duplicate information and that Labor overstated the number of 14(c) employers.For example, the databases contained information on 261 employers whose 14(c) certificates had expired between January 1, 2000, and August 31, 2000, but the database contained no indication that these certificates had been renewed. We followed up with some of these employers and found that, according to the employers, some of their certificates had actually been renewed, but Labor had not updated the information in the database. A few of the employers, however, told us they no longer employed workers at special minimum wages although Labor still counted them as current 14(c) employers. We also found, through our attempts to mail out our survey, that some employers had gone out of business and should have been deleted from Labor’s list of current 14(c) employers. In addition, from the survey we found that about 8 percent of work centers and businesses with 14(c) certificates did not employ any workers at special minimum wages. Nonetheless, Labor included these employers in its count of current 14(c) employers. We also found that Labor’s data on the number of 14(c) workers are inaccurate. When we compared the number of workers listed by employers on their 14(c) certificate applications to the number of workers on supplemental forms in their application packages, these numbers did not always match. These inconsistencies may have been caused by language in Labor’s application form that may be confusing to employers, as we reported in a previous correspondence to Labor. For example, the form requires employers to report the number of 14(c) workers they employ in two different places on the form. The instructions for both items, however, are confusing and, as a result, employers may report the wrong number of workers in one or both items on the form. WHD officials told us they are in the process of revising the 14(c) certificate application. They also indicated that, to improve the accuracy of the information in their database on 14(c) employers, they are in the process of verifying its accuracy by comparing the numbers of 14(c) employers and workers in the database to the numbers in employers’ 14(c) certificate application packages (the paper files maintained by WHD’s Midwest region). WHD officials told us they planned to complete this verification process in fiscal year 2001. In addition to the lack of data on the size of the special minimum wage program, Labor officials told us they do not compile the number of staff hours devoted to it. As a result, Labor cannot determine whether it is devoting an adequate amount of staff resources to the program. During 2001, there were about 15 WHD headquarters and regional staff members assigned to the program, but about half of them worked on the program only part-time. Because WHD officials do not routinely obtain reports from WHD’s investigations database on the amount of time spent on 14(c) investigations, they were unable to tell us how much time WHD investigators responsible for conducting various types of investigations spend on 14(c) cases, even though the investigators enter the number of hours they spend on 14(c) investigations into the database. Labor does not have accurate data on the number, timeliness, or results of its reviews of employers’ 14(c) certificate applications, its primary method of ensuring employer compliance with the requirements of the special minimum wage program. Employers submit applications to WHD’s 14(c) certification team for new 14(c) certificates and to renew existing certificates. WHD’s 14(c) certification team reviews the paperwork submitted by employers to make sure it is complete and checks for and corrects errors in employers’ calculations of special minimum wage rates. If the 14(c) certification team detects errors in the computation of workers’ special minimum wages in employers’ renewal applications, it assesses back wages for a period of 2 years prior to the date of the application. WHD officials told us that they do not collect information on the number of reviews of 14(c) certificate applications performed by the 14(c) certification team, the number of 14(c) certificates issued, or the timeliness of the process. This is information Labor needs to properly manage the workload of the team and to ensure that all employers who are required to have a 14(c) certificate in order to pay workers special minimum wages have a current certificate. For example, during our site visits, we found that one work center had not received its new 14(c) certificate 3 months after it had applied for renewal and had not been contacted by a member of the 14(c) certification team. WHD does, however, record information on the results of its reviews of 14(c) employers’ certificate renewal applications when employers are assessed back wages, although we found some problems with the accuracy of this information as noted below. WHD staff told us that many of its reviews of 14(c) certificate renewal applications were not recorded promptly and, in our reviews of WHD’s databases, we found that information on some of these reviews had not been correctly entered into the system. Labor also does not compile information on the results of all of its reviews of employers’ 14(c) certificate renewal applications. According to data recorded by WHD’s 14(c) certification team on its reviews of employers’ 14(c) certificate renewal applications from fiscal years 1997 through 2000, WHD identified 811 instances in which employers had miscalculated the special minimum wage rates and, as a result, owed back wages to their 14(c) workers. We could not determine, however, what proportion of its reviews of employers’ certificate renewal applications that these 811 cases represented, because WHD does not track the total number of reviews performed by the certification team. In 42 instances, the 14(c) workers were underpaid by relatively large amounts: the back wages assessed for the 2-year period were over $200 per worker, on average. However, when we asked WHD officials for information from its investigative database on these reviews, data that they do not routinely compile, they provided us with information that indicated that many of these reviews were not recorded accurately in the database. Labor does not have accurate data on investigations conducted of 14(c) employers, another method it uses to ensure employer compliance with the requirements of the special minimum wage program. We found that WHD’s database on investigations contains inaccurate information on its investigations of 14(c) employers. For example, when asked for the number of investigations conducted from fiscal years 1997 through 2000, data that Labor does not routinely compile, WHD officials gave us reports that showed that investigators completed a total of 234 14(c) investigations in that time period. However, after comparing the reports to records of the reviews of employers’ 14(c) certification renewal applications, we found that 93 of the investigations listed in the database were actually reviews of 14(c) certificate renewal applications. In addition to not having accurate information on its compliance efforts, Labor does not track the rate at which employers incorrectly calculate special minimum wage rates and consequently underpay 14(c) workers. Labor needs this information to properly assess the level of resources it should devote to its efforts to ensure employer compliance and to evaluate the effectiveness of its oversight of the special minimum wage program. Labor does not effectively ensure employer compliance with the requirements of the special minimum wage program. Labor does not monitor employer compliance with program requirements by systemically conducting self-initiated investigations of 14(c) employers, and does not follow up with employers when they do not respond to its 14(c) certificate renewal notices. In addition, Labor provides little guidance and training to its staff and 14(c) employers on the requirements of the special minimum wage program. Despite the results of its reviews of employers’ 14(c) certificate renewal applications that show that some 14(c) workers are underpaid because employers calculated their special minimum wage rates incorrectly, for several years WHD investigators only conducted 14(c) investigations when someone filed a complaint about an employer. WHD officials told us that, prior to 2000, they had not conducted self-initiated investigations of 14(c) employers for several years. In 2000, WHD began conducting self-initiated investigations as part of its renewed emphasis on the special minimum wage program. Unlike WHD’s reviews of employers’ 14(c) certificate renewal applications, self-initiated investigations are conducted at the employer’s work site. During these investigations, Labor reviews employers’ records for their 14(c) workers and verifies their measurements of workers’ productivity on which the special minimum wages are based. WHD officials told us they plan to conduct 70 self-initiated investigations of 14(c) employers in their Northeast Region during 2001 and use the results of these investigations to “discern compliance trends” in the special minimum wage program. According to these officials, they plan to investigate a nonrandom sample of five employers in each of the 14 districts in the region. In 2002, WHD plans to conduct 14(c) investigations in other regions, but it has developed no guidance for the regions on how to sample employers, how many to sample, how often these investigations will occur, or how to use the results of the investigations to calculate the employer compliance rate. Because Labor is not selecting employers for 14(c) investigations on a random basis, it will not be able to use the results of these investigations to estimate the rate of compliance for employers. In addition, because Labor currently has no plans to periodically measure employer compliance through self-initiated 14(c) investigations, it will not be able to examine trends in compliance over time. An indication that employers are not complying with the requirements of the special minimum wage program is their failure to renew their 14(c) certificates. WHD sends a renewal notice to employers about 2 months prior to the date their 14(c) certificates expire to remind them to submit an application for renewal. However, WHD does not follow up with employers when they do not respond to the renewal notices to make sure that they are not paying workers with disabilities special minimum wages without the authority to do so. WHD officials were not able to tell us how many employers fail to renew their 14(c) certificates because they do not track the number of employers that do not respond to the renewal notices. They told us they planned to develop this capability but had not done so at the time of our review. Until recently, Labor provided no formal training or up-to-date written guidance to its staff to prepare them to detect and prevent noncompliance, such as that caused by employer errors in the calculation of special minimum wage rates. The 14(c) certification team members who review employers’ application packages and issue the 14(c) certificates receive no formal training on the requirements of the special minimum wage program. Similarly, until fiscal year 2001, WHD investigators who conduct investigations of employer compliance with various provisions of FLSA received no formal training on 14(c) investigations. In addition, the 14(c) certification team and WHD investigators were working with guidance that had not been updated for many years. Until very recently, most of the sections of the Field Operations Handbook that described the requirements of the provisions of section 14(c) had not been revised since 1980, and portions of it were much older; the oldest section was last updated in 1963. Labor updated these sections of the handbook and officially issued the new version in June 2001. To address the lack of training for investigators, WHD’s regional staff recently began developing and scheduling training sessions on 14(c) investigations. For example, WHD’s Northeast Regional Office developed a 1-day course on 14(c) investigations that it plans to use to train investigators and had begun conducting training sessions at the time of our review. In addition, WHD headquarters officials told us they were considering incorporating training on 14(c) investigations into the basic training curriculum for investigators, but they had not done so as of the date of our review. Finally, several employers and consultants reported that employers had received inconsistent guidance from WHD staff on the provisions of section 14(c). For example, many employers received inconsistent guidance on the allowance factor for “personal, fatigue and delay” time used in computing piece rates for 14(c) workers. Although the employers had used one allowance factor for several years, many of them, starting in 2000, were told by WHD 14(c) certification team staff that the allowance factor they had been using was incorrect and, as a result, the employers owed back wages to their 14(c) workers. We asked staff in WHD’s Midwest Regional Office whether this was a change in policy and were told that this was not a change in policy but that its staff had not been properly applying the policy in previous years. In addition to not providing training to its own staff on the requirements of the special minimum wage program, Labor has provided little written guidance or outreach to 14(c) employers, although Labor considers this an important part of its efforts to ensure employer compliance. Although some guidance is available on WHD’s Web site—such as a fact sheet on the employment of workers with disabilities at special minimum wages— the guidance does not provide specific information, such as how to compute special minimum wages. Although WHD officials prepared a computer-based presentation for employers that contains specific guidance on how to compute special minimum wages and prepare 14(c) certificate application packages, only two of the employer groups that we contacted had received a copy of it. WHD officials also told us that they had stopped distributing copies of the computer presentation to employers because the presentation needs to be updated to match the information in the revised Field Operations Handbook. The guidance on the special minimum wage program Labor provides to employers is not sufficient. Reviews of employers’ 14(c) certificate application renewal packages by WHD’s 14(c) certification team showed patterns of errors. These errors included incorrect piece rate calculations, use of entry-level wages to determine prevailing wages, rounding errors, and failure to consider the quality of the work in computing special minimum wages. In addition, in the survey, 55 percent of the work center managers reported that they either received no guidance from Labor or considered the guidance they received on some requirements of the special wage program to be inadequate. Because Labor has provided little written guidance to 14(c) employers, several employer groups and consultants developed their own guidance on the requirements of the provisions of section 14(c). For example, we obtained copies of written guidance developed by NISH, the National Industries for the Blind, Goodwill Industries, and two consultants, including handbooks for employers on how to prepare their 14(c) certificate application packages. Recently, Labor developed plans to improve its written guidance to 14(c) employers. For example, WHD headquarters officials said that they plan to release the newly revised Field Operations Handbook to employers, possibly by posting it on WHD’s Web site, although they had not done so as of the date of our review. The officials also said that they have several other initiatives to increase technical assistance to employers, such as establishing a Web site for the special minimum wage program. In addition to providing little written guidance to employers, Labor has done little outreach to employers to inform them about the requirements of the special minimum wage program. For several years, Labor provided no outreach to 14(c) employers. Staff at one of the work centers we visited told us that the regional 14(c) specialist in Atlanta used to provide training at conferences for 14(c) employers on the requirements of the special minimum wage program. However, after WHD eliminated the regional 14(c) specialist positions in 1996, this outreach to 14(c) employers ended. WHD officials told us that they have recently improved their efforts to provide outreach to employers, including reinstating the regional 14(c) specialist positions in 2000. Some of the regional 14(c) specialists have recently begun making presentations to employer groups in their regions. Some employers we spoke with confirmed that Labor had contacted them recently to offer technical assistance. Nationwide, the special minimum wage program provides employment opportunities to over 400,000 workers with disabilities who are not fully productive on the job. The vast majority of these workers are employed by work centers that also offer them a range of support services designed to help them perform their jobs and function more independently in the community. Virtually all work centers that employ 14(c) workers also are nonprofit. Consequently, if these centers were required to pay their 14(c) workers the federal minimum wage, it is likely that the funds they currently receive from contracts that generate jobs for these workers and from other sources would not cover the increase in their payroll costs. Despite the benefits 14(c) workers may receive from the program, calculating special minimum wage rates for workers with disabilities is a complicated process that is prone to error. As a result, Labor’s oversight of the special minimum wage program is important in ensuring that 14(c) workers are not underpaid. Labor is not doing all it can, however, to provide this oversight, and Labor officials acknowledge that the special minimum wage program was given low priority in the past. While the agency is beginning to increase the resources it devotes to the program, it is doing so without adequately monitoring the effectiveness of its efforts. Labor does not know the program’s precise size, the resources currently devoted to it, the rate at which employers comply with program requirements, or the timeliness or results of its oversight activities. Without this information, Labor cannot be sure that it is giving the program the appropriate priority or gauge the effectiveness of its efforts to ensure employer compliance. Labor’s oversight of the special minimum wage program has consisted primarily of reviewing employers’ 14(c) certificate renewal applications and investigating complaints rather than systematically selecting employers for investigation. Labor also has done little to ensure that employers whose 14(c) certificates have expired do not continue to pay workers special minimum wages or to prevent errors in calculating special minimum wage rates by routinely providing training and guidance to its staff and 14(c) employers. In order to obtain the data needed to properly manage the special minimum wage program, we recommend that the Secretary of Labor implement the following: Improve the accuracy of its data on the number of 14(c) employers and workers by (1) deleting out-of-date and duplicate records in its database, (2) continuing to verify the accuracy of its database by periodically comparing it to information in Labor’s paper files and correcting any discrepancies, (3) identifying employers that indicate on their 14(c) certificate applications that they do not intend to employ any workers at special minimum wages and counting them separately from employers that do, and (4) implementing the suggestions in our April 6, 2001, letter to the Director of the Office of Enforcement Policy, Wage and Hour Division for improving the 14(c) certificate application form. Track the number of staff hours WHD headquarters, 14(c) certification team members, 14(c) regional specialists, and investigators devote to managing the special minimum wage program, reviewing applications for new and 14(c) certificates and renewals, investigating complaints related to special minimum wages, conducting self-initiated investigations of 14(c) employers, and other tasks aimed at ensuring compliance with the requirements of the special minimum wage program and use this information to manage the program. Collect and compile data on the number, timeliness, and results of WHD’s reviews of employers’ 14(c) certificate applications and use this information to set performance standards for the timeliness of this process and to determine the appropriate level of resources to allocate to the special minimum wage program. Using the results of its reviews of 14(c) certificate applications and its investigations of 14(c) employers conducted in response to complaints, estimate the rate at which employers miscalculate 14(c) workers’ special minimum wage rates and use this information to determine the appropriate level of resources to allocate to oversight of the special minimum wage program. In order to ensure employer compliance with the requirements of the special minimum wage program, we recommend that the Secretary of Labor carry out the following actions: Conduct self-initiated investigations of a randomly selected sample of 14(c) employers in all regions and use the results to estimate the rate of employer compliance nationwide. After initially estimating the employer compliance rate, Labor should continue to systematically conduct self- initiated investigations of employers as indicated by the results of its compliance efforts, including its reviews of employers’ 14(c) certificate applications and its investigations. Followup with employers that do not respond to 14(c) certificate renewal notices to ensure that they do not pay special minimum wages to their workers with disabilities without authorization and use the information obtained from its follow-up efforts on employers who no longer have 14(c) certificates to update the database on 14(c) employers. Train staff in all of its regions on the requirements of the special minimum wage program contained in the newly revised Field Operations Handbook and incorporate this training into its standard curriculum for investigators. Post the revisions of the sections of the Field Operations Handbook that relate to the special minimum wage program on Labor’s Web site so that they are available to employers. Regularly conduct outreach sessions for employers in each region on the requirements of the special minimum wage program, with special emphasis on correcting errors identified in WHD’s reviews of employers’ 14(c) certificate renewal applications and investigations of employers. We provided a draft of this report to Labor for review and comment. Labor’s comments are contained in appendix V. Labor acknowledged that, in the past, it may not have given sufficient priority to enforcing the provisions of section 14(c) of FLSA, and generally supported our recommendations, noting actions it is taking to implement them. While we commend Labor’s decision to begin placing a higher priority on the special minimum wage program and its efforts to improve the management of the program and ensure compliance with the requirements of the provisions of section 14(c), some of its actions fall short of our recommendations. Specifically, in its efforts to improve its information on 14(c) employers and workers, Labor stated that it intends to correct all database errors by September 30, 2001, and build safeguards into the system to maintain the accuracy and integrity of the data. The agency did not, however, specify what these safeguards would be, or whether it would periodically compare the information in its database to the paper files on 14(c) employers as we recommended. Labor also noted that it had revised the 14(c) certificate application form to include the suggestions contained in our letter dated April 6, 2001. Although Labor made some changes to the form in response to a draft of the letter that we provided to them in February 2001, none of the suggestions contained in the final letter have been made to the revised 14(c) certificate application form sent by Labor to the Office of Management and Budget for approval. We understand Labor’s concern that excluding some employers with 14(c) certificates from its count of employers that participate in the special minimum wage program ignores the fact that there are legitimate reasons why employers may not continuously employ workers at special minimum wages. Including all employers with 14(c) certificates, however, particularly those that do not intend to employ workers at special minimum wages, is misleading because it overstates the number of employers that participate in the program and the accompanying resources needed to ensure that employers are correctly computing special minimum wages for their workers. Therefore, we revised our recommendation to state that Labor should distinguish between employers that indicate on their 14(c) certificate applications that they do not intend to employ workers at special minimum wages from those that do, and count them separately. In response to our recommendation that Labor track the number of hours that WHD staff devote to the special minimum wage program, Labor stated that it is instituting a process for reporting time spent on the program by non-investigative staff and noted that it records the number of staff hours spent by WHD investigators. However, as noted in the report, WHD’s managers of the special minimum wage program do not use this information to manage the program. Therefore, we revised our recommendation to specify that, in addition to tracking the number of staff hours that WHD staff devote to the special minimum wage program, Labor should use this information to manage the program. In response to our recommendation that Labor use the results of its reviews of 14(c) certificate applications and investigations of complaints about 14(c) employers to estimate the rate at which employers miscalculate special minimum wage rates, and consider this rate in making resource allocation decisions, Labor stated that the 14(c) certification team shares information regarding compliance determinations made during the certification process with regional and district staff. Labor gave no indication, however, that it plans to use the results of either its reviews of employers’ certificate applications or its investigations of complaints about 14(c) employers to compute the rate at which employers miscalculate special minimum wages as we recommended. Moreover, Labor’s plan to use the results of its current self-initiated investigations of selected individual 14(c) employers to estimate the rate of employer compliance, rather than using a random sample of employers, as we recommended, is inadequate. Although Labor is conducting self- initiated investigations of 14(c) employers in one region and in each of several district offices, the employers investigated are not selected at random and, as a result, cannot be considered representative of 14(c) employers, in general, in any of those areas, much less the nation, or provide a credible estimate of the extent of noncompliance. We support the emphasis Labor has begun to place on preventing violations of special minimum wage program requirements through increased training of investigators and more concerted outreach efforts to employers. However, we urge Labor to implement our recommendation to incorporate formal training on the requirements of the special minimum wage program into WHD’s standard training curriculum for investigators rather than simply “considering exposing Investigators to the Section 14(c) program during the Basic II Investigator Training Course” because it is unclear how this will provide investigators with the training needed to conduct investigations of 14(c) employers. Copies of this report are being sent to the Chairman, Subcommittee on Workforce Protections, House Committee on Education and the Workforce; the Secretary of Labor; appropriate congressional committees; and other interested parties. The report is also available on GAO’s home page at http://www.gao.gov. If you have any questions concerning this report, please call me on (202) 512-7215. Other contacts and staff acknowledgements are listed in appendix VI. After determining that information on 14(c) employers and workers needed to meet the objectives of our review was not readily available from Labor or any other source, we elected to survey employers nationwide and conduct site visits of a few employers. To identify employers that employ workers with disabilities at special minimum wage rates under the provisions of section 14(c) of the Fair Labor Standards Act (FLSA), we asked Labor to provide us with information on all employers with current 14(c) certificates. Labor provided us with two databases that contained information on employers with 14(c) certificates. We used information from both databases because neither database contained all of the information we needed. We combined the two databases and eliminated records with duplicate certificate numbers and records with certificates that expired prior to January 1, 2000. We then verified the accuracy of this information by comparing the database records for employers in four states to the paper records maintained by the Midwest Regional Office of Labor’s Wage and Hour Division (WHD). Our analysis showed that the combined databases provided information that was sufficiently accurate to allow us to select a statistically valid sample of employers with current 14(c) certificates to receive our survey. We divided the combined data into four groups using the certificate number and another data element that identified the type of employer. These four groups represented the four types of employers: (1) work centers, (2) businesses, (3) hospitals and other residential care facilities, and (4) schools. We selected our samples only from the first two groups: work centers and businesses. We did not select any of the hospitals or schools because they employ only a small number of workers under the provisions of section14(c) and because they are not typical of most 14(c) employers. There were a total of 5,351 work centers and 729 businesses. Because of the special interest of our congressional requesters in how the special minimum wage program applies to individuals with visual impairments, we divided the 5,351 work centers into two subgroups: one for work centers that primarily employed 14(c) workers who are blind (visually impaired) and one for all other work centers. We selected work centers for the first subgroup by identifying work centers that either had the words “blind” or “visual” in the name of the work center or were listed in Labor’s database as having mainly workers whose predominate impairment was a “visual impairment.” We found 77 work centers that met these criteria. After deleting these work centers in the first subgroup, the second subgroup (all other work centers) contained 5,274 work centers. We drew a random sample from the second subgroup of 5,274 work centers and from the entire group of 729 businesses. Because there were so few work centers for the blind, we selected all 77 of them for our survey. Each sample represented the entire population of work centers and businesses with current 14(c) certificates in calendar year 2000 (all work centers and businesses authorized by Labor to employ workers with disabilities at special minimum wages). After selecting our sample, we found that Labor’s databases contained several duplicate records that had not been identified previously, and we deleted these records from our counts for each group of employers and from the sample. For the subgroup of all other work centers, we found that Labor’s databases contained 66 duplicate records (none that were included in the sample); for the subgroup of work centers for the blind, we found 1 duplicate record; and, for the businesses, we found 21 duplicates (12 of these records were included in the sample). Although we deleted the duplicate records, we did not redraw our sample because we determined that the adjusted totals did not affect the sample sizes. In addition, we found from our survey results that some of the businesses and one of the work centers had gone out of business and that Labor had incorrectly categorized some of the employers. We found that nine of the businesses and one of the work centers from the subgroup of all other work centers had gone out of business. We also found that one of the businesses and two of the work centers, one of the work centers for the blind and one from the subgroup of all other work centers, had been incorrectly categorized by type of employer. These errors indicated that the size of the populations for both work centers and businesses were overstated. Therefore, we adjusted our numbers by making the assumption that, if we had contacted all work centers and businesses to which Labor had issued 14(c) certificates, we would have found additional instances in which the employers had gone out of business or in which Labor had incorrectly categorized them. We used the proportion of the initial number of work centers and businesses found to be out of business or incorrectly categorized to estimate the total number of work centers and businesses on Labor’s list that were out of business or incorrectly categorized. We eliminated this estimated number from each group of employers. We adjusted the total numbers for each group and our samples to delete the duplicate records, work centers and businesses that were no longer in business, and those that were incorrectly categorized. After making these adjustments, the total number of all other work centers was 5,189 and the sample size for this group was 551. We received 443 responses for this group, a response rate of 80 percent. For the work centers for the blind, the adjusted total was 75 work centers. We sent out surveys to all of these work centers and received 63 responses, a response rate of 84 percent. For the businesses, the adjusted total was 690 and the sample size was 403.We received 284 responses from the businesses, a response rate of 71 percent. In the survey, we asked work center and business managers for information about their facility and the workers they employed under their 14(c) certificates. We asked them to fill out the survey only for the certificate selected (the certificate number shown on the mailing label), not for any other facilities they managed, if any. We mailed the survey to each work center and business selected to the address listed in Labor’s databases. In some cases, the work center or business gave the survey to another organization, such as a parent organization or work center responsible for completing the employer’s 14(c) certificate application package. See appendix II for a copy of the survey sent to the work centers. One of the objectives of our survey was to obtain a variety of information on the characteristics of 14(c) workers. During our pre-tests of the survey, however, we found that some work center managers had difficulty providing the specific information we requested, such as the number of 14(c) workers they employed at various wage levels. Work center managers told us that, while this information was available in each individual worker’s record, extracting and summarizing it specifically for 14(c) workers would be very time-consuming and would discourage them from responding to the survey. As a result, rather than asking work center managers to provide the precise number of 14(c) workers with a specific characteristic, we asked them to estimate the percentage of their 14(c) workers with the characteristic. We asked them to provide their estimates by checking one of six boxes with the following labels: “None (0%),” “Few (1-19%),” “Some (20-39%),” “About half (40-59%),” “Most (60-79%),” or “All or nearly all (80-100%).” To provide an estimate of the total number of 14(c) workers at each work center with a specific characteristic, it was necessary for us to convert each percentage range estimate provided by the work center manager into a single percentage. To do so, we began by assigning a value to each estimate in the midpoint of the range. For example, for an estimate of “Some (20-39%),” we assigned a value of 30 percent. Then, for each of the eight questions asked in this manner, we summed the midpoint percentage values to determine whether they totaled 100 percent, thus accounting for all 14(c) workers employed at the center. If the values totaled more than 100 percent, we reduced each of the individual midpoint percentage values by the percentage by which the total would have to have been reduced in order to total 100 percent. For example, if the midpoint percentage values we assigned totaled 130 percent, this means that the total would have to be reduced by 30 percentage points, or 23 percent (30 divided by 130), in order to reach 100 percent. In this case, we reduced each midpoint percentage value by 23 percent. Conversely, if the midpoint percentage values we assigned totaled less than 100 percent, we increased each value by the percentage by which the total would have to have been increased in order to reach 100 percent. Thus, using this method, we arrived at a single percentage estimate for each of the eight questions on workers’ characteristics posed in this manner. For each question, we converted each percentage estimate into an estimate of the number of 14(c) workers with the specified characteristic by multiplying the percentage estimate by the total number of workers at the center. Because of the manner in which we estimated the number of 14(c) workers with various employment and personal characteristics, the estimates should not be viewed as highly precise. They are much less precise than estimates based on accurate counts of 14(c) workers with the specified characteristics at each work center sampled. As stated previously, however, based on our experience during the pre-tests of the survey, we believed that it would not have been feasible to obtain such counts for the work centers. The businesses, however, were able to provide this information because they had so few 14(c) workers (three workers, on average) that they did not have difficulty providing this information. Thus, our estimates of the number of 14(c) workers employed by businesses with various employment and personal characteristics should be considered much more precise than those related to 14(c) workers employed by work centers. We also compared employers’ responses to the survey by testing them to determine whether there were any significant differences. We compared the two subgroups of work centers—work centers for the blind and all other work centers—and compared all work centers and businesses. We calculated the estimates included in this report and in appendixes III and IV using only the number of cases in which there was a usable response to a question; we did not include nonresponses in our calculations. Because the estimates we reported from the survey were based on samples of 14(c) certificates, a margin of imprecision surrounds them. This imprecision is usually expressed as a sampling error at a given confidence level. We calculated sampling errors for estimates based on our survey at the 95-percent confidence level. The sampling errors for percentage estimates cited in this report varied but did not exceed plus or minus 5 percentage points, unless otherwise noted. The sampling errors for our estimate of the number of work centers and businesses that employ 14(c) workers did not exceed plus or minus 138 and 27, respectively. The sampling errors for our estimate of 14(c) workers employed by work center and businesses did not exceed plus or minus 46,619 and 258, respectively. We used the data on 14(c) employers from which the survey samples were drawn to select the eight sites visited. We selected one work center each in California, Georgia, Illinois, Texas, and Virginia; two work centers in New York; and one business in California. We selected the sites on the basis of their geographic location, the predominant impairment of the facilities’ workers, and the number of workers paid special minimum wages. To ensure geographic diversity, we selected at least one site in each of Labor’s five regions. In each of the regions, we selected sites that were representative of states with the largest number of 14(c) employers. We also took into consideration the costs associated with visiting each potential site. Because our preliminary analysis of the data showed that the majority of 14(c) employers were work centers, we selected primarily work center sites. We visited seven work centers and one business. Our analysis also showed that most work centers employed 14(c) workers whose primary impairment was mental retardation or other developmental disability. Accordingly, five of the seven work centers we selected primarily employed workers with mental retardation. In addition, because of the interest of our congressional requesters in the special minimum wage program as it relates to workers with visual impairments, we selected one work center that primarily employed workers with visual impairments. Finally, we selected one work center that primarily employed 14(c) workers with mental illness because this group was the second most frequently found in work centers. Additional considerations for our site visit selection were the number of 14(c) workers and the type of work performed. From the information in Labor’s databases on the number of 14(c) workers employed by each work center and business, we determined that the median number of 14(c) workers at each work center was approximately 65 workers. We selected five of the seven work centers, in part, because the data showed that they employed about this number of 14(c) workers. The other two work centers employed a much larger number of workers. During our preliminary interviews, we learned that work centers provide jobs in both production and service-related work for their 14(c) workers. Therefore, we sought a mix of these types of jobs in selecting our sites. Because the Javits-Wagner-O’Day program is one of the sources of contracts for this work, we selected two sites that had contracts under this program, one site that produced products and one that provided service-related work. Because of the special interest of our congressional requesters in work centers that primarily employ 14(c) workers with visual impairments (work centers for the blind), we analyzed their responses separately and compared them with those of all other work centers that employ 14(c) workers. The following tables provide selected statistics that compare data on work centers for the blind with data on all other work centers. We determined whether there was a statistically significant difference between the responses for work centers for the blind and all other work centers by comparing each category with the rest of the categories in the table combined. All of the cited differences are statistically significant unless otherwise noted. The sampling errors for the data in this appendix do not exceed plus or minus 6 percentage points. Work centers for the blind represent about 1 percent of all work centers, and the centers employ less than 1 percent of all 14(c) workers in work centers. The proportion of 14(c) workers to total workers at work centers for the blind was much lower than at other work centers (table 10). Nearly 80 percent of the 14(c) workers at work centers for the blind had a visual impairment as their primary impairment, compared with less than 4 percent at all other work centers. A much higher percentage of 14(c) workers at work centers for the blind had more than one impairment that limited their productivity—70 percent, compared with about 46 percent at all other work centers (table 11). Work centers for the blind provided jobs more often in assembly work or production of a product and much less often in service jobs than other work centers. To provide these job opportunities, work centers for the blind were more likely to rely on contracts for products with federal agencies than other work centers and were much more likely to rely on preferential contracts with state or local agencies than other work centers (table 12). Although work centers for the blind provided a higher proportion of jobs that paid a prevailing wage of less than $7.00 per hour than other work centers, a much higher proportion of these 14(c) workers earned $2.50 or more per hour. The 14(c) workers in work centers for the blind also had higher productivity levels and worked a greater number of hours each week than 14(c) workers at other work centers. Moreover, 14(c) workers at work centers for the blind tended to be older, and a greater proportion of them had worked 5 years or more for their current employer than 14(c) workers at other work centers (table 13). Although the majority of 14(c) employers are work centers, we also surveyed a random sample of businesses that employ workers at special minimum wage rates under the provisions of section 14(c) of FLSA. The following tables provide selected statistics that compare data for work centers that employ 14(c) workers with data for businesses that employ 14(c) workers. We only reported the data elements for which the differences between work centers and businesses were statistically significant; all the differences in the tables were statistically significant unless otherwise noted. The sampling errors for work centers did not exceed plus or minus 5 percentage points and for businesses it did not exceed plus or minus 10 percentage points, unless otherwise noted. Approximately 10 times as many work centers employed 14(c) workers as businesses. Businesses, on average, employed 3 workers at special minimum wage rates, while work centers employed 86 workers (table 14). Businesses were much less likely than work centers to provide work opportunities in assembly and production jobs. The businesses were also less likely to provide accommodations to 14(c) workers to help them perform their jobs, although this difference may relate to differences in the types of work provided (table 15). A greater proportion of 14(c) workers employed by businesses than work centers earned $2.50 or more per hour and their productivity levels, in general, were higher than that of 14(c) workers employed by work centers. However, 14(c) workers in businesses tended to work fewer hours with nearly 70 percent working less than 20 hours a week as compared with 45 percent of the 14(c) workers in work centers (table 16). A higher proportion of 14(c) workers employed by businesses than by work centers had mental retardation or another developmental disability as their primary impairment, while the primary impairment of a lower proportion or 14(c) workers employed by businesses was mental illness. Moreover, a lower percentage of 14(c) workers in business had more than one impairment that limited their productivity than workers employed by work centers. The 14(c) workers employed by businesses tended to be a younger and had not worked as long for their current employer as workers employed by work centers (table 17). Other major contributors to this report are Beverly A. Crawford, Angela A. Miles, Katherine M. Raheb, Ellen L. Soltow, Linda W. Stokes, Ann T. Walker, Joel I. Grossman, Barbara W. Alsip, Corinna A. Nicolaou, and James P. Wright. SSA Disability: Other Programs May Provide Lessons for Improving Return-to-Work Efforts (GAO-01-153, Jan. 12, 2001). Adults With Severe Disabilities: Federal and State Approaches for Personal Care and Other Services (GAO/HEHS-99-101, May 14, 1999). Social Security Disability: Multiple Factors Affect Return to Work (GAO/T-HEHS-99-82, Mar. 11, 1999). Social Security Disability Insurance: Factors Affecting Beneficiaries’ Return to Work (GAO/T-HEHS-98-230, July 29, 1998). Social Security Disability Insurance: Multiple Factors Affect Beneficiaries’ Ability to Return to Work (GAO/HEHS-98-39, Jan. 12, 1998). Social Security Disability: Improving Return-to-Work Outcomes Important, but Trade-Offs and Challenges Exist (GAO/T-HEHS-97-186, July 23, 1997). Social Security: Disability Programs Lag in Promoting Return to Work (GAO/HEHS-97-46, Mar. 17, 1997). Department of Labor: Challenges in Ensuring Workforce Development and Worker Protection (GAO/T-HEHS-97-85, Mar. 6, 1997). People With Disabilities: Federal Programs Could Work Together More Efficiently to Promote Employment (GAO/HEHS-96-126, Sep. 3, 1996). SSA Disability: Return-to-Work Strategies From Other Systems May Improve Federal Programs (GAO/HEHS-96-133, July 11, 1996). Social Security: Disability Programs Lag in Promoting Return to Work (GAO/T-HEHS-96-147, June 5, 1996). | To prevent the curtailment of employment opportunities for disabled persons, the Fair Labor Standards Act allows employers to pay individuals less than the minimum wage if they have a physical or mental disability that impairs their earning or productive capacity. The Department of Labor's Wage and Hour Division (WHD) administers the special minimum wage program. More than 5,600 employers nationwide pay special wages to workers with disabilities; about 84 percent are work centers established to provide employment opportunities and support services to individuals with disabilities. Businesses comprise about 9 percent of these employers; the remaining 7 percent are hospitals or other residential care facilities and schools. Seventy-four percent of the workers paid special minimum wages by work centers have mental retardation or another developmental disability as their primary impairment, and 46 percent have multiple disabilities. From the data received by employers on the productivity of their disabled workers, it is estimated that 70 percent of the workers are less than half as productive as workers without disabilities performing the same jobs. Labor has not effectively managed the special minimum wage program to ensure that disabled workers receive the correct wages because, according to WHD officials, the agency placed a low priority on the program in past years. |
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IRCA provided for sanctions against employers who do not follow the employment verification (Form I-9) process. Employers who fail to properly complete, retain, or present for inspection a Form I-9 may face civil or administrative fines ranging from $110 to $1,100 for each employee for whom the form was not properly completed, retained, or presented. The Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA) of 1996 limited employer liability for certain technical violations of Form I-9 paperwork requirements. According to the act, a person or entity is considered to have complied with the employment verification process if the person or entity made a good faith attempt to properly complete the Form I-9. Employers who knowingly hire or continue to employ unauthorized aliens may be fined from $275 to $11,000 for each employee, depending on whether the violation is a first or subsequent offense. Employers who engage in a pattern or practice of knowingly hiring or continuing to employ unauthorized aliens are subject to criminal penalties consisting of fines up to $3,000 per unauthorized employee and up to 6 months imprisonment for the entire pattern or practice. ICE is primarily responsible for enforcing the employer sanction provisions of IRCA as well as many other immigration-related laws. ICE has approximately 5,000 investigative agents in 26 Office of Investigations field offices that are headed by special agents in charge. ICE’s Worksite Enforcement/Critical Infrastructure Unit oversees programs to protect U.S. critical infrastructure, including military, economic, industrial, and transportation infrastructure, and manages the agency’s worksite enforcement efforts. Prior to the creation of ICE in March 2003, INS enforced IRCA and other immigration-related laws. IIRIRA required INS to operate three voluntary pilot programs to test electronic means for employers to verify an employee’s eligibility to work: the Basic Pilot Program, the Citizen Attestation Verification Pilot Program, and the Machine-Readable Document Pilot Program. The three pilot programs were to test whether pilot verification procedures could improve the existing Form I-9 process by reducing (1) document fraud and false claims of U.S. citizenship, (2) discrimination against employees, (3) violations of civil liberties and privacy, and (4) the burden on employers to verify employees’ work eligibility. IIRIRA established the three pilot programs to be in effect for 4 years, but Congress extended authorization for the pilots for an additional 2 years in 2002 and for another 5 years in 2003. Congress also mandated DHS to expand the Basic Pilot Program to employers in all 50 states by December 2004, which DHS did. DHS terminated the Citizen Attestation Verification Pilot Program and the Machine-Readable Document Pilot Program in 2003 because of technical difficulties and unintended consequences, such as increased fraud and discrimination, identified in evaluations of the programs. The Basic Pilot Program is a part of USCIS’s Systematic Alien Verification for Entitlements Program, which provides a variety of verification services for federal, state, and local government agencies. USCIS estimates that there are more than 150,000 federal, state, and local agency users that verify immigration status through the Systematic Alien Verification for Entitlements Program. In fiscal year 2004, about 2,300 employers actively used the Basic Pilot Program within the Systematic Alien Verification for Entitlements Program. The Basic Pilot Program provides participating employers with an electronic method to verify their employees’ work eligibility. Employers may participate voluntarily in the Basic Pilot Program but are still required to complete Forms I-9 for all newly hired employees in accordance with IRCA. After completing the forms, these employers query the pilot program’s automated system by entering employee information provided on the forms, such as name and Social Security number, into the pilot Web site within 3 days of the employees’ hire date. The pilot program then electronically matches that information against information in SSA and, if necessary, DHS databases to determine whether the employee is eligible to work, as shown in figure 1. The Basic Pilot Program electronically notifies employers whether their employees’ work authorization was confirmed. Those queries that the DHS automated check cannot confirm the pilot refers to USCIS staff, called immigration status verifiers, who check employee information against information in other DHS databases. In cases when the pilot system cannot confirm an employee’s work authorization status either through the automatic check or the check by an immigration status verifier, the system issues the employer a tentative nonconfirmation of the employee’s work authorization status. In this case, the employers must notify the affected employees of the finding, and the employees have the right to contest their tentative nonconfirmations within 8 working days by contacting SSA or USCIS to resolve any inaccuracies in their records. During this time, employers may not take any adverse actions against those employees, such as limiting their work assignments or pay. When employees do not contest their tentative nonconfirmations within the allotted time, the Basic Pilot Program issues a final nonconfirmation for the employees. Employers are required to either immediately terminate or notify DHS of the continued employment of workers who do not successfully contest the tentative nonconfirmation and those who the pilot program finds are not work-authorized. There is ongoing congressional consideration about employment verification and worksite enforcement efforts, and various initiatives have been proposed related to these issues, including possible new temporary worker programs. Since January 2004, the current administration has discussed the possibility of initiating a guest worker program in which foreign workers would be granted status for employment in the United States for a specified period of time. Similarly, some recent legislative proposals would provide a means for foreign workers to obtain temporary employment and possible permanent residency or citizenship at a later date. Other initiatives propose revising visa programs to increase the number of foreign workers legally admitted to the United States. In addition, legislative proposals have addressed methods for enhancing employment verification and worksite enforcement efforts. For example, one proposal would make use of the Basic Pilot Program mandatory for all employers, and another would increase the fine amounts for employers who knowingly hire unauthorized workers. These initiatives reflect differing perspectives on employment verification and worksite enforcement and touch on a variety of related issues, such as the number of foreign workers, if any, needed in the United States, the economic impact of illegal aliens residing in the country, and policy decisions on ways to address the millions of illegal aliens in the United States. The current employment verification process relies on employers’ review of work eligibility documents to determine whether employees are authorized to work, but the process has several weaknesses. Document and identity fraud have hindered employers’ efforts to reliably verify employees’ work eligibility under the Form I-9 process. In addition, the large number and variety of documents acceptable for proving work eligibility have undermined the process. We have previously reported on the need to reduce the number of acceptable work eligibility documents and to improve the integrity of the documents. The Basic Pilot Program, as a voluntary, automated verification program, offers a mechanism with potential to enhance the employment verification process by reducing document fraud. ICE officials said that access to Basic Pilot Program information could help the agency better target its worksite enforcement efforts by identifying employers who do not follow program requirements. However, existing weaknesses in the program, such as the inability of the program to detect identity fraud, delays in entering data into DHS databases, and some employer noncompliance with pilot program requirements, could become more significant and additional resources could be needed if employer participation in the program greatly increased or was made mandatory. In 1986, IRCA established the employment verification process based on employers’ review of documents presented by employees to prove identity and work eligibility. Under the process, employers must request that newly hired employees present a document or documents that confirm employees’ identity and work eligibility. On the Form I-9, employees must attest that they are U.S. citizens, lawfully admitted permanent residents, or aliens authorized to work in the United States. Employers must then certify that they have reviewed the documents presented by their employees to establish identity and work eligibility and that the documents appear genuine and relate to the individual presenting them. In making their certifications, employers are expected to judge whether the documents presented are obviously counterfeit. Employers are deemed in compliance with IRCA if they have followed the verification procedures, including instances when an unauthorized alien may have presented fraudulent documents that appeared genuine. In addition, on the Form I-9, employers are required to reverify the employment eligibility of individuals whose work authorization has expired, such as aliens with temporary work authorization, to determine whether the individuals are authorized to continue to work. Since the passage of IRCA in 1986, document fraud (use of counterfeit documents) and identity fraud (fraudulent use of valid documents or information belonging to others) have made it difficult for employers who want to comply with IRCA to ensure that they employ only authorized workers through the current verification and reverification processes. In its 1997 report to Congress, the U.S. Commission on Immigration Reform noted that the widespread availability of false documents made it easy for unauthorized aliens to obtain jobs in the United States. In 1999, we reported that large numbers of unauthorized aliens have either fraudulently used valid documents that belong to others or presented counterfeit documents as evidence of employment eligibility. Furthermore, in 2004 we reported that unauthorized workers were able to use false documents to illegally gain entry to secure areas of critical infrastructure sites, such as airports, nuclear power plants, and military bases. Representatives from some of the employers and employer associations we interviewed for this review indicated that, in cases where employees present documents that employers suspect of being counterfeit, employers may not request that these employees present other documents proving their work eligibility because the employees could claim that employers are discriminating against them. To help protect against discriminatory hiring practices, such as employers requesting specific documents from foreign-looking or sounding employees, employers are prohibited under IRCA from requesting that new employees present specific documents from among the list of acceptable documents to prove their identity and work eligibility. Although studies suggest that the majority of employers comply with IRCA and try to hire only authorized workers, the studies have also noted that some employers knowingly hire unauthorized workers, often to exploit the workers’ low cost labor. In 1997, the U.S. Commission on Immigration Reform reported that the minority of employers who knowingly hired illegal aliens avoided sanctions by going through the motions of compliance while accepting false documents. Likewise, in 1999 we concluded that those employers who do not want to comply with IRCA can intentionally hire unauthorized aliens under the guise of having complied with the employment verification requirements by claiming that unauthorized workers presented false documents to obtain employment. The large number and variety of documents that are acceptable for proving work eligibility have also complicated employer verification efforts under IRCA. Following passage of IRCA in 1986, employees could present any of 29 different documents to establish their identity and/or work eligibility. In a 1997 interim rule, INS reduced the number of acceptable work eligibility documents from 29 to 27. Eight of these documents establish both identity and employment eligibility (e.g., U.S. passport or permanent resident card); 12 documents establish identity only (e.g., driver’s license); and 7 documents establish employment eligibility only (e.g., Social Security card without the legend “Not Valid for Employment”). The interim rule implemented changes to the list of acceptable work eligibility documents mandated by IIRIRA and was intended to serve as a temporary measure until INS issued final rules on modifications to the Form I-9. In 1998, INS proposed a further reduction in the number of acceptable work eligibility documents to 14 but did not finalize the proposed rule. Since the passage of IRCA, various studies have addressed the need to reduce the number of acceptable work eligibility documents to make the employment verification process simpler and more secure. In 1990, we reported that the multiplicity of work eligibility documents contributed to (1) employer uncertainty about how to comply with the employment verification requirements and (2) discrimination against authorized workers. A 1992 report prepared by the Senate Committee on the Judiciary noted that the first step to simplifying the employment verification process was to reduce the current list of acceptable work eligibility documents and make them more counterfeit-proof. In 1998, INS noted that, when IRCA was first passed, a long, inclusive list of acceptable work eligibility documents was allowed for the Form I-9 to help ensure that all persons who were eligible to work could easily meet the requirements, but as early as 1990, there had been evidence that some employers found the list confusing. In 1999 we reported that various studies of IRCA’s employment verification process advocated that the number of documents that employees can use to demonstrate employment eligibility should be reduced to make the employment verification process more secure and easier to understand. Additionally, some of the employers, employer associations, and immigration experts we interviewed for this review told us that the large number of documents acceptable for proving work eligibility and the fact that the Form I-9 has not been updated have impeded employer efforts to verify employment eligibility. Representatives from three employer associations said that member employers have expressed concerns that the Form I-9 has not been updated to reflect changes in the list of acceptable work eligibility documents, causing confusion among some employers regarding which documents are acceptable. In addition, among the 23 employers we interviewed, 5 discussed the need to update the Form I-9 to reflect revisions to the list of acceptable work eligibility documents. Two of these employers told us that they manually edit the Form I-9 to reflect the changes in the list of acceptable work eligibility documents. DHS officials told us that the department is assessing possible revisions to the Form I-9 process, including revisions to the number of acceptable work eligibility documents, but has not established a target time frame for completing this assessment. They said that the Handbook for Employers, which provides guidance for completing the Form I-9, would also need to be updated. In May 2005, DHS released an updated version of the Form I-9 that changed references from INS to DHS but did not modify the list of acceptable work eligibility documents on the Form I-9 to reflect changes made to the list by the 1997 interim rule. In the absence of final regulations and an updated Form I-9 and handbook, employers, employees, and other stakeholders may not clearly understand the Form I-9 process, particularly which documents are acceptable for proving work eligibility. We have previously reported on efforts to enhance the integrity of acceptable work eligibility documents, which could help reduce document fraud and make the employment verification process more secure, especially if the number of acceptable documents was reduced. For example, in 1999 we reported that INS had taken steps to increase the integrity of immigration documents, such as by issuing new employment authorization documents with visible security features like holograms and by issuing permanent resident cards with digital photographs and fingerprint images. We noted that, although INS enhanced the integrity of its documents, unauthorized aliens could present non-INS documents, such as Social Security cards, to employers to prove work eligibility. In 1998, we reported on estimates of costs associated with alternative proposals for SSA issuance of enhanced Social Security cards. We are currently reviewing SSA efforts to enhance the integrity of Social Security cards and how enhanced cards might strengthen the employment verification process and plan to report on these issues next year. In addition, we have previously reported on the possible use of biometrics in verification and identification processes—such as those used at U.S. ports of entry. Biometrics covers a wide range of technologies that can be used to verify identity by measuring and analyzing human characteristics. Biometrics can theoretically be very effective personal identifiers because the characteristics they measure are thought to be distinct to each person. Because they are tightly bound to an individual, biometrics are more reliable, cannot be forgotten, and are less easily lost, stolen, or guessed. While biometrics may show promise in enhancing verification and identification processes, we have also reported on the trade-offs for using biometric indicators, such as concerns regarding the protections under current law for biometric data, the absence of clear criteria governing data sharing, and infrastructure processes such as the binding of an identity to the biometric data. We reported that while a biometric placed on a token, such as a passport or visa, cannot necessarily link a person to his or her identity, it can reduce the potential for an individual to assume multiple identities. We also reported that although federal agencies are required by statute to provide security protections for information collected and maintained by or for the agency commensurate with the risk and magnitude of harm that would result from unauthorized disclosure, disruption, modification, or destruction of the information, poor information security is a widespread federal problem with potentially severe consequences. In reporting on the possible use of biometrics in verification and identification processes, we identified several examples of such risks associated with using biometric data. Recent laws and legislative proposals have addressed possible ways to enhance the integrity of documents and strengthen the employment verification process. The Real ID Act of 2005 mandated that states must meet minimum standards in developing and issuing driver’s licenses before federal government authorities can accept state driver’s licenses as identification for official purposes. These standards include (1) adding physical security features to prevent counterfeiting and tampering, (2) including common machine-readable technology on driver’s licenses, and (3) requiring driver’s license applicants to provide evidence of their dates of birth and Social Security numbers. The Intelligence Reform and Terrorism Prevention Act of 2004 required SSA to form a task force to, among other things, establish standards for safeguarding Social Security cards from counterfeiting, tampering, alteration, and theft. In addition to these laws, various legislative proposals address possible ways to make identity and work eligibility documents more secure and to enhance the employment verification process. For example, one recent proposal would mandate that individuals can present only machine-readable, counterfeit and tamper-resistant Social Security cards to obtain employment. According to the proposal, these machine-readable cards would allow employers to check employees’ work authorization status against information maintained in an employment eligibility database. These laws and proposals differ in the extent to which they address issues related to enhancing employment verification through electronic means, such as the availability and accessibility of machine-readable technology and the security and privacy of information maintained on documents and in databases. Various immigration experts have noted that the most important step that could be taken to reduce unlawful migration is the development of a more effective system for verifying work authorization. In particular, the U.S. Commission on Immigration Reform concluded that the most promising option for verifying work authorization was a computerized registry based on employers’ electronic verification of an employee’s Social Security number with records on work authorization for aliens. The Basic Pilot Program, which is currently available on a voluntary basis to all employers in the United States, operates in a similar way to the computerized registry recommended by the commission. Yet only a small portion—about 2,300 in fiscal year 2004—of the approximately 5.6 million employer firms nationwide actively used the pilot program. The Basic Pilot Program assists employers in detecting document fraud by helping to eliminate employer guesswork as to whether information contained on work eligibility documents presented by employees is authentic or counterfeit. If newly hired employees present counterfeit documents containing false information, the pilot program would not confirm the employees’ work eligibility because the employees’ Form I-9 information, such as a false name or Social Security number, would not match SSA and DHS database information when queried through the Basic Pilot Program. In the evaluation of the Basic Pilot Program, the Institute for Survey Research at Temple University and Westat found that the program appeared to reduce unauthorized employment arising from employee presentation of counterfeit or altered documents containing false information. Twenty of the 22 employers we interviewed who participated in the Basic Pilot Program indicated that the program helps them to reliably verify newly hired employees’ work authorization status. ICE has no direct role in monitoring employer use of the Basic Pilot Program and does not have direct access to program information, which is maintained by USCIS. ICE officials noted that, in a few cases, they have requested and received pilot program data from USCIS on specific employers who participate in the program and are under ICE investigation. ICE officials told us that program data could indicate cases in which employers do not follow program requirements and therefore would help ICE better target its worksite enforcement efforts toward those employers. For example, the Basic Pilot Program’s confirmation of numerous queries of the same Social Security number could indicate that the Social Security number is being used fraudulently or that an unscrupulous employer is knowingly hiring unauthorized workers by accepting the same Social Security number for multiple employees. However, USCIS officials stated that they have concerns about providing ICE with broader access to Basic Pilot Program information for the worksite enforcement program. USCIS officials said that, if ICE has access to pilot program information for worksite enforcement purposes, that access might create a disincentive for employers to participate in this voluntary program and could be used for purposes other than identifying potentially unscrupulous employers. These officials stated that employers may be less likely to join or participate in the program because the employers may believe that they are more likely to be targeted for a worksite enforcement investigation as a result of program participation. ICE suggested that there could be possible benefits to their worksite enforcement efforts if employers were required to participate in a mandatory automated verification program like the Basic Pilot Program. ICE officials said that a mandatory automated verification system could help ICE focus worksite enforcement efforts on employers who try to evade using the program. They also stated that a mandatory system like the pilot program could limit the ability of employers who knowingly hired unauthorized workers to claim that the workers presented false documents to obtain employment, assisting ICE agents in proving employer violations of IRCA. Officials from 7 of the 12 Special Agent in Charge field offices we interviewed suggested that a mandatory Basic Pilot Program could help them better target their worksite enforcement efforts. Although an automated verification program like the Basic Pilot Program has potential to enhance the employment verification process and help employers detect use of counterfeit documents, the program cannot currently help employers detect identity fraud. In 2002 we reported that, although not specifically or comprehensively quantifiable, the prevalence of identity fraud seemed to be increasing, a development that may affect employers’ ability to reliably verify employment eligibility. If an unauthorized worker presents valid documentation that belongs to another person authorized to work, the Basic Pilot Program may find the worker to be work-authorized. Similarly, if an employee presents counterfeit documentation that contains valid information and appears authentic, the Basic Pilot Program may verify the employee as work- authorized. DHS officials told us that the department is currently considering possible ways to enhance the Basic Pilot Program to help it detect cases of identity fraud, for example, by modifying the program to provide a digitized photograph associated with employment authorization information presented by an employee. Yet, DHS cannot fully assess possible ways to modify the Basic Pilot Program to address identity fraud in the absence of data on the costs and feasibility of implementing such modifications. In addition, the Basic Pilot Program does not assist employers in verifying the work authorization status of employees whose status requires reverification and therefore does not help employers detect document or identity fraud in the reverification process. Employers currently may not use the Basic Pilot Program to re-verify the employment eligibility of individuals whose work authorization has expired, and employers agree not to use the pilot program for reverification when registering to participate in the program. Therefore, participating employers cannot fully use the Basic Pilot Program to verify the work authorization status of all employees for whom verification, including reverification, is required under the Form I-9 process. According to one USCIS official, the pilot program does not face any technological or other limitations that would prevent the program from being used for reverification purposes, if such use was required or allowed as part of the pilot program. Another current weakness in the Basic Pilot Program that could affect the program’s success if use increased or was made mandatory is delays in the entry of information on immigrants’ and nonimmigrants’ arrivals and employment authorization into DHS databases. Although the majority of pilot program queries entered by participating employers are confirmed via the automated SSA and DHS verification checks, about 15 percent of queries authorized by DHS required manual verification by immigration status verifiers in fiscal year 2004. According to USCIS, immigration status verifiers typically resolve cases referred to them for verification within 24 hours, but a small number of cases take longer. For example, nine employers we interviewed reported that a small number of immigration status verifier verifications took longer than 24 hours to resolve, with a few verifications taking as long as 2 weeks to resolve. Immigration status verifiers reported that the primary reason for queries to require verification by them is because of delays in entry of employment authorization information into DHS databases. USCIS officials told us that those verifications that take longer than a few days to resolve are generally caused by delays in the entry of data on employees who received employment authorization documents generated by a computer and camera that are not directly linked to DHS databases, such as those used at ports of entry for refugees and at USCIS field offices. They said that information on the employment authorization documents generated through this process is electronically sent to USCIS headquarters for entry but is sometimes lost or not entered into databases in a timely manner. By contrast, employment authorization documents issued at USCIS service centers are produced via computers that are used to update data in USCIS databases, which USCIS officials told us represent the majority of employment authorization documents currently issued by USCIS. The Temple University Institute for Survey Research and Westat found that verifications that require immigration status verifiers’ review lengthen the time needed to complete the employment verification process. In addition, among the 22 employers we interviewed, 7 reported that they may experience some losses in work time, training, or money for background checks and physicals when employees contest tentative nonconfirmations. USCIS has taken steps to increase the timeliness and accuracy of information entered into databases used as part of the Basic Pilot Program. In June 2004, USCIS reported that, among other improvements, it had started work to expedite data entry for new lawful permanent residents and arriving nonimmigrants and to improve data entry for changes in work authorization status. For example, USCIS said that it has worked to reduce the time in which data are available for Basic Pilot Program verifications by expediting submission of data on newly arrived immigrants and nonimmigrants from ports of entry and field offices to USCIS service centers for data entry. The agency reported that, as a result of its efforts, data on new immigrants are now typically available for verification within 10 to 12 days of an immigrant’s arrival in the United States while previously, the information was not available for up to 6 to 9 months after arrival. Moreover, USCIS reported it has worked to increase the timeliness and availability of temporary work authorization information in its databases by increasing the number of employment authorization documents issued by service centers as compared with the number of documents issued through computers not directly linked to DHS databases. The department reported that, while in 1999 less than half of all employment authorization documents were issued by service centers, over three-quarters of the cards are now issued through service centers. USCIS officials told us that the agency has continued these efforts to improve the timeliness and accuracy of information entered into DHS databases and noted that the agency is currently planning to fund another evaluation of the Basic Pilot Program that will include a review of the accuracy of DHS database information. Furthermore, analysis of the Basic Pilot Program database indicates that the timeliness and accuracy of the DHS automated checks against the Basic Pilot Program database have improved. In fiscal year 2004, about 10 percent of all queries were referred to DHS for verification. Among those queries authorized by DHS, the percentage of queries verified by the DHS automated check increased from about 67 percent in fiscal year 2000 to about 85 percent in fiscal year 2004, as shown in figure 2. Although USCIS has taken some steps to improve the timeliness and accuracy of information entered into databases used as part of the Basic Pilot Program and plans to review the accuracy of database information as part of its planned evaluation of the pilot program, USCIS cannot effectively assess future use of the pilot program, including possible increased program usage, without information on the costs and feasibility of ways to further reduce delays in the entry of information into DHS databases. Another factor that may reduce the effectiveness of the pilot program if usage is increased or made mandatory is employer noncompliance with Basic Pilot Program requirements. These requirements are intended to safeguard employees queried through the program from such harm as discrimination or reduced training and pay. The Temple University Institute for Survey Research and Westat evaluation of the Basic Pilot Program concluded that the majority of employers surveyed appeared to be in compliance with Basic Pilot Program procedures. However, the evaluation found evidence of some noncompliance with these procedures that specifically prohibit screening job applicants and taking actions that adversely affect employees while they are contesting tentative nonconfirmations, such as limiting employees’ work assignments or pay. For example, 30 percent of the employers surveyed for the evaluation reported restricting work assignments while employees contested tentative nonconfirmations, a practice that is prohibited under the Basic Pilot Program. Of the 22 employers we interviewed who participate in the pilot, 7 reported using the Basic Pilot Program in a way that did not conform with pilot program procedures, including using the pilot program to screen job applicants before offering jobs to the applicants. The Basic Pilot Program provides a variety of reports that may help USCIS determine whether employers follow program requirements. For example, these reports could help USCIS identify employers who do not appear to refer employees contesting tentative nonconfirmations to SSA or DHS, which is required under pilot program procedures. USCIS could then follow up to determine if such employers are following pilot procedures that require employers to refer all employees with tentative nonconfirmations to SSA or DHS. USCIS officials told us that efforts to review employers’ use of the pilot program have been limited by lack of staff available to oversee and examine employer use of the program, and they noted that there are currently 15 USCIS headquarters staff members responsible for administering USCIS verification programs, including the Basic Pilot Program. The officials said that, as part of the next evaluation of the pilot program, USCIS plans to assess the extent to which employers follow pilot program requirements and procedures, such as employer adherence to requirements to notify employees of tentative nonconfirmations. However, without information on the costs and feasibility of routinely reviewing employers’ use of the pilot program, USCIS cannot fully determine possible ways to regularly examine employer use of the program and therefore the extent to which employers comply with pilot program requirements. According to USCIS officials, due to the growth in other USCIS verification programs, current USCIS staff may not be able to complete timely verifications if the number of employers using the Basic Pilot Program were to significantly increase. In particular, these officials said that if a significant number of new employers registered for the program or if the program were mandatory for all employers or a segment of employers, additional resources would be needed to maintain timely verifications, given the growth in other verification programs. For example, the REAL ID Act of 2005 mandated that states must meet minimum standards in issuing driver’s licenses and nondriver identification cards, including verifying the immigration status of all noncitizen applicants, before federal government authorities can accept the licenses and cards for official purposes beginning in 2008. Currently, USCIS has approximately 38 immigration status verifiers available for completing Basic Pilot Program verifications, and these verifiers reported that they are able to complete the majority of current required checks within their target time frame of 24 hours. However, USCIS officials said that because of the growth in other verification programs that would increase the number of verifications that require checks by immigration status verifiers, the agency has serious concerns about its ability to complete timely verifications if the number of Basic Pilot Program users greatly increased. USCIS officials also stated that the agency lacks funding to further expand the Basic Pilot Program. The Basic Pilot Program and other verification programs have been funded by fees USCIS receives from applicants for adjudication of immigration and citizenship benefits. USCIS allocated about $3.5 million from its fee accounts for all of its verification programs, including the Basic Pilot Program, in fiscal year 2005. USCIS officials said that this allocation included a $500,000 increase for additional employee verifications by employers using the Basic Pilot Program. However, these officials told us that current funding levels allocated for USCIS verification programs would not be sufficient to cover costs associated with mandatory use of the Basic Pilot Program for all employers, should this be adopted. In 2004, we reported that USCIS fees were not sufficient to fully fund the agency’s operations but noted that cost data were insufficient to determine the full extent of the funding shortfall. The Temple University Institute for Survey Research and Westat estimated a range of costs associated with expanding the dial-up version of the pilot program, including costs for making the program mandatory for a selected group of employers, like employers with more than 10 employees, and making the program mandatory for all employers, regardless of the number of employees. The report estimated that a mandatory dial-up version of the pilot program for all employers would cost the federal government, employers, and employees about $11.7 billion total per year, with employers bearing most of the costs. USCIS has worked with participating employers to switch them to the Web-based version of the program and discontinued the dial-up version in June 2005. The Temple University Institute for Survey Research and Westat did not estimate costs for a mandatory Web-based version, although they noted that operating costs associated with such a program would be less than for the dial-up version because employer computer maintenance and telephone costs would be lower. As part of the next evaluation of the pilot program, USCIS plans to assess the costs and potential time frames associated with making the Web-based version mandatory for all employers or specific segments of employers. Given the growth in other USCIS verification programs, USCIS cannot effectively assess potential costs for making the Web-based version of the Basic Pilot Program mandatory without information on other possible resources needed for the program, such as staff needed for conducting manual verifications. The worksite enforcement program is one of various ICE immigration enforcement programs, and has been a relatively low priority. Since fiscal year 1999, the number of notices of intent to fine issued to employers for violations of IRCA and the number of administrative worksite arrests have declined, which, according to ICE, are due to various factors, such as the widespread use of counterfeit documents that make it difficult for ICE agents to prove employer violations. INS and ICE have also faced difficulties in setting and collecting meaningful fine amounts and in detaining unauthorized workers arrested at worksites. In addition, ICE has not yet developed outcome goals and measures for the worksite enforcement program, making it difficult for ICE and Congress to assess program performance and determine resource levels for the program. Worksite enforcement is one of various immigration enforcement programs formerly managed by INS and now managed by ICE, and competes for resources with these other program areas, such as alien smuggling and fraud. Among INS and ICE responsibilities, worksite enforcement has been a relatively low priority. For example, in the 1999 INS Interior Enforcement Strategy, the strategy to block and remove employers’ access to undocumented workers was the fifth of five interior enforcement priorities. In this same year, we reported that, relative to other enforcement programs in INS, worksite enforcement received a small portion of INS’s staffing and enforcement budget. We noted that the number of employer investigations INS was able to conduct each year covered only a fraction of the estimated number of employers who may have hired unauthorized aliens. In keeping with the primary mission of DHS to combat terrorism, after September 11, 2001, INS and then ICE focused investigative resources primarily on national security cases, such as investigations of aliens in the United States who may have overstayed their authorized time periods for being in the country and the National Security Entry and Exit Registration System; on participation in Joint Terrorism Task Forces; and on critical infrastructure protection. In particular, INS and then ICE focused available resources for worksite enforcement mainly on identifying and removing unauthorized workers from critical infrastructure sites, such as airports and nuclear power plants, to help reduce vulnerabilities at those sites. In 2004, we reported that, if critical infrastructure-related businesses were to be compromised by terrorists, this would pose a serious threat to domestic security. In 2003, we testified that, given ICE’s limited resources, it needs to ensure that it targets those industries where employment of illegal aliens poses the greatest potential risk to national security. According to ICE officials, the agency adopted this focus on critical infrastructure protection because the fact that unauthorized workers can obtain employment at critical infrastructure sites indicates that there are vulnerabilities in those sites’ hiring and screening practices, and unauthorized workers employed at those sites are vulnerable to exploitation by terrorists, smugglers, traffickers, or other criminals. Consistent with these priorities, in 2003 ICE headquarters issued a memo requiring field offices to request approval from ICE headquarters prior to opening any worksite enforcement investigation not related to the protection of critical infrastructure sites, such as investigations of farms and restaurants. ICE officials told us that the purpose of this memo was to help ensure that field offices focused worksite enforcement efforts on critical infrastructure protection operations. Field office representatives told us that noncritical infrastructure worksite enforcement was one of the few investigative areas for which offices had to request approval from ICE headquarters to open an investigation. According to ICE, the agency recently issued a memo delegating authority to approve noncritical infrastructure worksite enforcement cases to field offices’ Special Agents in Charge. Eight of the 12 offices we interviewed told us that worksite enforcement was not an office priority unless the worksite enforcement case related to critical infrastructure protection. ICE has inspected Forms I-9 and employer records at hundreds of critical infrastructure sites as of March 2005. For example, as part of Operation Tarmac, ICE conducted investigations at nearly 200 airports nationwide and, as part of Operation Glow Worm, conducted investigations at more than 50 nuclear power plants as of March 2005. Between October 2004 and the beginning of May 2005, about 77 percent of the worksite enforcement cases opened by ICE were related to critical infrastructure protection. Since fiscal year 1999, INS and ICE have dedicated a relatively small portion of overall agent resources to the worksite enforcement program. As shown in figure 3, in fiscal year 1999, INS allocated about 240 full-time equivalents to worksite enforcement efforts, while in fiscal year 2003, ICE allocated about 90 full-time equivalents. Between fiscal years 1999 and 2003, the percentage of agent work-years spent on worksite enforcement efforts generally decreased from about 9 percent to about 4 percent. Although worksite enforcement may remain a low priority relative to other programs, ICE has proposed increasing agent resources for the worksite enforcement program by adding staff to its headquarters’ worksite enforcement unit, which was comprised of three staff members as of July 2005, and hiring additional worksite enforcement staff for field offices. In particular, ICE plans to use the $5 million provided for fiscal year 2005 by a congressional conference report for the worksite enforcement program to fund additional headquarters positions for the worksite enforcement unit. In its fiscal year 2006 budget submission, ICE requested funding for 117 compliance officers, 20 additional investigative agents, and 6 additional program managers for worksite enforcement. ICE has proposed hiring these compliance officers to conduct the administrative elements of worksite enforcement cases, such as the inspection of Forms I-9 and other employment records. ICE officials said that these officers would pass cases involving potential criminal violations to investigative agents for review. ICE officials told us that the agency would use the compliance officers only for worksite enforcement efforts. According to ICE, compliance enforcement officers are less costly than investigative agents. ICE estimates that each investigative agent would cost the agency approximately $167,000 to $176,000 in fiscal year 2006, while one compliance enforcement officer would cost about $76,000. At this point, it is unclear what impact, if any, these additional resources would have on worksite enforcement efforts. The number of notices of intent to fine issued to employers as well as the number of unauthorized workers arrested at worksites have generally declined. Between fiscal years 1999 and 2004, the number of notices of intent to fine issued to employers for improperly completing Forms I-9 or knowingly hiring unauthorized workers generally decreased from 417 to 3. (See figure 4.) The number of unauthorized workers arrested during worksite enforcement operations has also declined since fiscal year 1999. As shown in figure 5, the number of administrative worksite arrests declined by about 84 percent from 2,849 in fiscal year 1999 to 445 in fiscal year 2003. According to ICE records, worksite enforcement criminal arrests totaled 159 in fiscal year 2004 and 81 in the period from October 2004 through April 2005. ICE attributes the decline in the number of notices of intent to fine issued to employers and number of administrative worksite arrests to various factors including the widespread availability and use of counterfeit documents and the allocation of resources to other priorities. Various studies have shown that the availability and use of fraudulent documents have made it difficult for ICE agents to prove that employers knowingly hire unauthorized workers. For example, in previous work we reported that the prevalence of document fraud made it difficult for INS to prove that an employer knowingly hired an unauthorized alien. In 1996, the Department of Justice Office of the Inspector General reported that the proliferation of cheap fraudulent documents made it possible for the unscrupulous employer to avoid being held accountable for hiring illegal aliens. ICE officials told us that employers who agents suspect of knowingly hiring unauthorized workers can claim that they were unaware that their workers presented false documents at the time of hire, making it difficult for agents to prove that the employer willfully violated IRCA. In commenting on a draft of this report, ICE also noted that the IIRIRA provision that limited employer liability for certain Form I-9 paperwork violations affects ICE’s ability to substantiate employer charges for knowingly hiring unauthorized workers and, therefore, the number of notices of intent to fine that ICE issues. This provision came into effect in 1996, so it is unclear what effect, if any, the provision had on the decline in the number of notices of intent to fine issued between fiscal years 1999 and 2004. In addition, according to ICE, the allocation of INS and ICE resources to other priorities has contributed to the decline in the numbers of notices of intent to fine and worksite arrests. For example, INS focused its worksite enforcement resources on egregious employer violators who were linked to other criminal violations like smuggling, fraud, or worker exploitation, and de-emphasized administrative employer cases and fines. Furthermore, INS investigative resources were redirected from worksite enforcement activities to criminal alien cases, which consumed more investigative hours by the late 1990s than any other enforcement activity. After September 11, 2001, INS and ICE focused investigative resources on national security cases and, in particular, focused worksite enforcement efforts on critical infrastructure protection, which is consistent with DHS’s primary mission to combat terrorism. According to ICE, the redirection of resources from other enforcement programs to perform national security- related investigations resulted in fewer resources for traditional program areas like fraud and noncritical infrastructure worksite enforcement. Additionally, some ICE field representatives, as well as immigration experts we interviewed, noted that the focus on critical infrastructure protection does not address the majority of worksites in industries that have traditionally provided the magnet of jobs attracting illegal aliens to the United States. INS and ICE have faced difficulties in setting and collecting final fine amounts that meaningfully deter employers from knowingly hiring unauthorized workers and in detaining unauthorized workers arrested at worksites. ICE officials told us that because fine amounts are so low, the fines do not provide a meaningful deterrent. These officials also said that when agents could prove that an employer knowingly hired an unauthorized worker and issued a notice of intent to fine, the fine amounts agents recommended were often negotiated down in value during discussions between agency attorneys and employers. The amount of mitigated fines may be, in the opinion of some ICE officials, so low that they believe that employers view the fines as a cost of doing business, making the fines an ineffective deterrent for employers who attempt to circumvent IRCA. ICE officials at 11 of the 12 field offices at which we interviewed staff said that they experienced instances in which fine amounts were mitigated down in value. According to ICE, the agency mitigates employer fine amounts because doing so may be a more efficient use of government resources than pursuing employers who contest or ignore fines, which could be more costly to the government than the fine amount sought. Recently, ICE settled a worksite enforcement case with a large company without going through the administrative fine process. As part of the settlement, the company agreed to pay $11 million and company contractors agreed to pay $4 million in forfeitures—more than any administrative fine amount ever issued against an employer for IRCA violations, according to ICE. One ICE official said that use of such civil settlements instead of pursuit of administrative fines, specifically in regard to investigations of noncritical infrastructure employers, could be a more efficient use of investigative resources. ICE officials also said that use of civil settlements could help ensure employers’ future compliance by including in the settlements a requirement to enter into compliance agreements, such as the Basic Pilot Program. ICE recently employed this strategy in its $15 million settlement with the large company. As part of the settlement, the company agreed to enter into a compliance program with ICE. Other compliance agreements with employers could involve mandatory participation in the Basic Pilot Program. Additionally, ICE officials said that the agency has proposed working with employers who are not the subjects of worksite enforcement investigations to help them ensure compliance with IRCA through enhanced education and partnerships. In April 2005, ICE issued its interim strategic plan, which, as part of its objective on identifying critical industries for worksite enforcement operations, included an approach for partnering with businesses to help them comply with IRCA. This partnership program, called the ICE Mutual Agreement between Government and Employers, is intended to provide employers with training and best practices for complying with IRCA. In addition to implementing this partnership program, ICE plans to promote expanded use of the Basic Pilot Program to help encourage employers in critical industries to strengthen their ability to verify employees’ work eligibility. The practice of civil settlements with employers and joint compliance programs are in the early stages of implementation; therefore the extent to which they may address the difficulties faced in setting fine amounts that provide a meaningful deterrent is not yet known. The former INS also faced difficulties in collecting total fine amounts from employers, but collection efforts have improved. We previously reported that the former INS faced difficulties in collecting total fine amounts from employers for a number of reasons including that employers went out of business, moved, or declared bankruptcy. In 1996, the Department of Justice Office of the Inspector General reported that the deterrent effect of civil fines on sweatshop operators was adversely affected by collection difficulties and noted that INS had no national system for billing, tracking, and collecting employer fines. In 1998, INS created the Debt Management Center to centralize the collections process, and the center is now responsible for collecting fines ICE issued against employers for violations of IRCA and providing other collection services for ICE and USCIS. The ICE Debt Management Center has collected total amounts on most of the invoices issued to employers for final fine amounts between fiscal years 1999 and 2004—about 94 percent as of the end of June 2005. In addition, ICE’s Office of Detention and Removal has limited detention space, and unauthorized workers detained during worksite enforcement investigations are a low priority for that space. In 2004, the Under Secretary for Border and Transportation Security sent a memo to the Commissioner of U.S. Customs and Border Protection and the Assistant Secretary for ICE outlining the priorities for the detention of aliens. According to this memo, aliens who are subjects of national security investigations were among those groups of aliens given the highest priority for detention, while aliens arrested as a result of worksite enforcement investigations were among those groups of aliens given the lowest priority. Officials in 8 of the 12 field offices we interviewed told us that lack of sufficient detention space has limited the effectiveness of worksite enforcement efforts. For example, ICE officials stated that if investigative agents arrest unauthorized aliens at worksites, the aliens would likely be released because the Office of Detention and Removal detention centers do not have sufficient space to house the aliens. Field office representatives said that offices can expend a large amount of resources to arrest unauthorized aliens at worksites and that these aliens would likely be released and may re-enter the workforce, in some cases returning to the worksites from where they were originally arrested. As a result, the use of resources to arrest unauthorized aliens at worksites may be unproductive. A congressional conference report for fiscal year 2005 provided funds to the Office of Detention and Removal for an additional 1,950 bed spaces. Given competing priorities for detention space, the effect, if any, these additional bed spaces will have on ICE’s priority given to workers detained as a result of worksite enforcement operations cannot currently be determined. Given ICE’s limited resources and competing priorities for those resources, ICE’s lack of performance goals and measures for the worksite enforcement program may hinder the agency’s ability to effectively determine and allocate resources for the program. Performance goals and measures are intended to provide Congress and agency management with the information to systematically assess a program’s strengths, weaknesses, and performance. A performance goal is the target level of performance—either output or outcome—expressed as a tangible, measurable objective against which actual achievement will be compared. A performance measure can be defined as an indicator, statistic, or metric used to gauge program performance and may typically include outputs and outcomes. Outputs provide status information about an initiative or program in terms of completing an action in a specified time frame. Outcomes show results or outcomes related to an initiative or program in terms of its effectiveness, efficiency, or impact. Outputs should support or lead to outcomes and, for each outcome goal, there are typically several output goals. Outputs and outcomes together help agencies determine and report on products or services provided through a program and the results of those products or services. ICE lacks output goals and measures necessary to inform its resource allocation decisions. Output goals and measures are an essential management tool in managing programs for results. They help provide the information that agencies need to aid in determining resources for a program and whether they are using program resources efficiently and effectively. ICE officials told us that the agency does not plan to focus on developing and using output goals and measures for worksite enforcement, such as the number of cases initiated or number of worksite arrests made, because they believe that such goals and measures do not adequately indicate ICE’s level of effort for worksite enforcement. Therefore, the ICE officials said that ICE plans to focus on developing outcome goals and measures for the program that better reflect the program’s effect. Yet in its fiscal year 2006 budget request, ICE identified two output measures for its worksite enforcement program: a 20 percent increase in the number of administrative worksite case completions and criminal employer case presentations made to the U.S. Attorney’s Office in fiscal year 2007 and a 30 percent increase in these two indicators in fiscal year 2008. Although these two measures would provide a general indication of ICE’s level of worksite enforcement activity, these measures alone would not allow ICE or Congress to effectively determine resources needed for the worksite enforcement program because these indicators address only two elements of the worksite enforcement program and do not address other program elements, such as critical infrastructure protection. Furthermore, in July 2005 the Secretary of Homeland Security discussed the need for DHS, of which ICE is a part, to be an effective steward of its resources. Without additional output goals and measures for worksite enforcement, ICE’s ability to effectively determine and allocate worksite enforcement resources needed to meet program goals, especially given other agency priorities for resources, and to fully assess whether the agency is using those resources effectively and efficiently in implementing the program may be hindered. In addition, ICE lacks outcome goals and measures that may hinder its ability to effectively assess the results of its worksite enforcement program efforts, including critical infrastructure protection efforts. Outcome measures provide agencies with an assessment of the results of a program activity or policy compared to its intended purposes. ICE officials told us that the agency plans to develop outcome goals and measures for its worksite enforcement program, but it has not yet developed these goals and measures. As a first step, ICE officials told us that field offices conducted baseline threat-level assessments in August and September 2004 to help identify regional risks, such as risks to critical infrastructure sites. These officials stated that an action plan will be developed to address these risks. Field office agents will then measure how well a particular threat has been addressed by measuring the impact of ICE’s investigative activities on deterring threats or decreasing vulnerabilities to national security. ICE has not yet established target time frames for developing worksite enforcement program outcome goals and measures and, without these goals and measures, ICE may not be able to effectively assess the results of program efforts. For example, until ICE fully develops outcome goals and measures, it may not be able to completely determine the extent to which its critical infrastructure protection efforts have resulted in the elimination of unauthorized workers’ access to secure areas of critical infrastructure sites, one possible goal that ICE may use for its worksite enforcement program. Efforts to reduce the employment of unauthorized workers in the United States necessitate a strong employment eligibility verification process and a credible worksite enforcement program to help ensure that employers are meeting verification requirements. The current Form I-9 employment verification process has not fundamentally changed since its establishment in 1986, and ongoing weaknesses in the process have undermined its effectiveness. Although DHS and the former INS have been assessing changes in the process since 1997, DHS has not yet issued final regulations on these changes, and it has not established a definitive time frame for completing the assessment. Completion of this assessment and issuance of final regulations should strengthen the current employment verification process and make it simpler and more secure. Furthermore, the Basic Pilot Program, or a similar automated verification system, if implemented on a much larger scale, shows promise for enhancing the employment verification process and reducing document fraud. However, current weaknesses in pilot program implementation would have to be fully addressed to help ensure the efficient and effective operation of an expanded or mandatory pilot program, or a similar automated employment verification program, and the cost of additional resources would be a consideration. Although USCIS plans to review current pilot program weaknesses, additional information on the costs and feasibility of addressing these weaknesses is needed to assist USCIS and Congress in assessing possible future use of the Basic Pilot Program, including increased program usage. Even with a strengthened employment verification process, a credible worksite enforcement program is needed because no verification process is foolproof and not all employers may want to comply with the law. ICE’s focus on critical infrastructure protection since September 11, 2001 is consistent with the DHS mission to combat terrorism by detecting and mitigating vulnerabilities to terrorist attacks at critical infrastructure sites which, if exploited, could pose serious threats to domestic security. This focus on critical infrastructure protection, though, generally does not address noncritical infrastructure employers’ noncompliance with IRCA. As a result, employers, particularly those not located at or near critical infrastructure sites, who attempt to circumvent IRCA face less of a likelihood that ICE will investigate them for failing to comply with the current employment verification process or knowingly hiring unauthorized workers. ICE is taking some steps to address difficulties it has faced in its worksite enforcement efforts, but it is too early to tell whether these steps will improve the effectiveness of the worksite enforcement program. In addition, given ICE’s limited resources and competing priorities for those resources, additional output goals and measures are needed to help ICE track the progress of its worksite enforcement efforts, effectively determine the resources needed to meet worksite enforcement program goals, and ensure that program resources are used efficiently and effectively. Moreover, a target time frame for developing outcome goals and measures is needed to assist Congress and ICE in determining whether the worksite enforcement program, including critical infrastructure protection, is achieving its desired outcomes. To strengthen the current employment verification process, we recommend that the Secretary of Homeland Security take the following action: set a specific time frame for completing the department’s review of the Form I-9 process, including an assessment of the possibility of reducing the number of acceptable work eligibility documents, and issuing final regulations on changes to the Form I-9 process and an updated Form I-9. To assist Congress and USCIS in assessing the possibility of increased or mandatory use of the Basic Pilot Program, we recommend that the Secretary of Homeland Security direct the Director of USCIS to take the following action: include, in the planned evaluation of the Basic Pilot Program, an assessment of the feasibility and costs of addressing the Basic Pilot Program’s current weaknesses, including its inability to detect identity fraud in the verification and reverification processes, delays in entry of new arrival and employment authorization information into DHS databases, and employer noncompliance with program procedures, and resources needed to support any increased or mandatory use of the program. To assist Congress and ICE in determining the resources needed for the worksite enforcement program and to help ensure the efficient and effective use of program resources, we recommend that the Secretary of Homeland Security direct the Assistant Secretary for ICE to take the following two actions: establish additional output goals and measures for the worksite enforcement program to clearly indicate the target level of ICE worksite enforcement activity and the resources needed to implement the program, and set a specific time frame for completing the assessment and development of outcome goals and measures for the worksite enforcement program to provide a target level of performance for worksite enforcement efforts and measures to assess the extent to which program results have met program goals. We requested comments on this report from the Secretary of Homeland Security. In its response, DHS agreed with our recommendations. DHS’s comments are reprinted in Appendix V. DHS also provided technical comments, which we considered and incorporated where appropriate. We also received technical comments from SSA, which we considered and incorporated where 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 Secretary of Homeland Security, the Secretary of Labor, the Attorney General, the Commissioner of the Social Security Administration, the Director of the Office of Management and Budget, and appropriate congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Appendix I: Employment Eligibility Verification Form (Form I-9) To determine how the employment eligibility verification (Form I-9) process functions, we examined laws related to the employment verification process, including the Immigration Reform and Control Act of 1986 and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996; federal regulations on the Form I-9 process; and former U.S. Immigration and Naturalization Service (INS) guidance on the Form I-9, such as the Handbook for Employers, which provides instructions for completing the form. We evaluated this information to identify the Form I-9 requirements, including employer and employee responsibilities for completing the form, and challenges to meeting those requirements. We examined our past reports and other studies, such as the 1997 U.S. Commission on Immigration Reform Report to Congress, to obtain further information on the employment verification process. We analyzed former INS plans for addressing Form I-9 challenges, including its plans to modify the list of acceptable work eligibility documents. We also examined U.S. Immigration and Customs Enforcement’s (ICE) interim guidelines on the electronic Forms I-9 to determine what guidance, if any, they provide to employers using the electronic form. To determine challenges to the Form I-9 process and obtain information on the Basic Pilot Program, we also interviewed and obtained information from U.S. Citizenship and Immigration Services (USCIS), ICE, and Social Security Administration (SSA) officials. In addition, we interviewed representatives of 23 employers; 12 employer, employee, and advocacy groups; and 6 immigration experts to obtain their views on employment verification and worksite enforcement. We selected the employers to interview based on a mix of the following criteria: the total number of Basic Pilot Program queries; the total number or percentage of pilot program queries that resulted in authorized employment, tentative nonconfirmations, and final nonconfirmations; geographic proximity to the ICE field offices we visited; previous records of being sanctioned for Form I-9 violations; and industry categorization. The 23 employers we interviewed were located in the following states: California, Illinois, Michigan, New Jersey, New York, and Texas. The 23 employers were also part of the following industries: meat processing, transportation, health care, landscaping, manufacturing, accommodation, food services, agriculture, janitorial and maintenance, temporary employment, critical infrastructure, local government, and newspaper. One of the employers we interviewed did not participate in the Basic Pilot Program. As a result, when we discuss employers’ views on the Basic Pilot Program, we refer to the views of the 22 employers we interviewed who participated in the Basic Pilot Program. We selected the 9 employer and employee associations with which to meet based on a mix of criteria, including industry categorization, gross output by industry in 2002, number of paid employees by industry in 2002, and estimates of the number of illegal immigrants employed by industry. We interviewed officials from employer and employee associations in the following industries: construction, agriculture, accommodation, food services, retail, health care, and meat. We selected the 3 advocacy groups to interview based on the groups’ interest in issues related to employment verification and worksite enforcement efforts and interviewed officials from advocacy groups that represent a range of views on these issues. We selected the 6 immigration experts to interview based on the experts’ range of views on immigration issues. We analyzed information from these agencies, employers, groups, and experts to determine their views on the Form I-9 process and difficulties in verifying work eligibility through the process. We used information obtained from employers, employer and employee associations, and advocacy groups only as anecdotal examples, as information from these entities cannot be generalized to all employers and groups in the United States. Furthermore, we evaluated information from USCIS and SSA on the Basic Pilot Program, including the Basic Pilot Program user’s manual and memorandum of understanding for employers, to determine how the pilot program functions and how it might assist participating employers in reliably verifying employees’ work eligibility and in detecting counterfeit documents. We analyzed this information to determine ongoing challenges in implementing the Basic Pilot Program and ways these challenges could affect increased or mandatory use of the pilot program. We did not evaluate security measures in place for the Basic Pilot Program or the program’s vulnerability to security risks. To identify pilot program challenges, we examined the findings and methodology of the evaluation of the Basic Pilot Program completed by the Institute for Survey Research at Temple University and Westat in June 2002. In addition, we analyzed data on employer participation in and use of the Basic Pilot Program, including data on Basic Pilot Program employment authorizations, to determine how participation and use have changed since fiscal year 2000. We assessed the reliability of these data by reviewing them for accuracy and completeness, interviewing agency officials knowledgeable about the data, and examining documentation on how the data are entered, categorized, and verified in the databases. We determined that the independent evaluation and these data were sufficiently reliable for the purposes of our review. To obtain information on the implementation of the worksite enforcement program, we interviewed officials from ICE, the SSA Office of the Inspector General, the Department of Labor, the Federal Bureau of Investigation, and the Office of Special Counsel for Immigration-Related Unfair Unemployment Practices. We also interviewed officials from 12 of the 26 ICE Special Agent in Charge field offices. We met with officials from the following 8 field offices: Los Angeles and San Diego, California; Chicago, Illinois; Detroit, Michigan; Newark, New Jersey; New York City, New York; and Houston and San Antonio, Texas. We spoke with officials from the following 4 field offices over the telephone: Denver, Colorado; Miami, Florida; Buffalo, New York; and Seattle, Washington. We selected the 12 field offices based on a mix of the following criteria: the number of investigators in each field office in fiscal year 2003, the number of investigations conducted by each field office in fiscal year 2003, the estimated number of undocumented immigrants in the state in which each field office was located, the number of sanctions issued to employers as a result of closed cases located in the same city as the field office between calendar years 1986 and 2000, the number of critical infrastructure operations in which the field office participated from October 2001 through April 2004, the number of employers located in the same city as the field office that participated in the Basic Pilot Program, and geographic area. We also interviewed officials from 4 U.S. Attorney’s Offices that were located in the same areas as 4 of the field offices we visited. We met with officials from the following 3 U.S. Attorney’s Offices: the Southern District of New York U.S. Attorney’s Office; the Southern District of Texas U.S. Attorney’s Office; and the Western District of Texas U.S. Attorney’s Office. We spoke with the Southern District of California U.S. Attorney’s Office over the telephone. We used information obtained from the field offices only as anecdotal examples, as information from these entities cannot be generalized to all field offices in the United States. We analyzed ICE headquarters and field office guidance, memos, and other documents on worksite enforcement to evaluate ICE’s priorities for and management of worksite enforcement efforts and to identify any challenges in program implementation. We analyzed ICE’s April 2005 Interim Strategic Plan to determine ICE’s strategy for its worksite enforcement program. We also examined former INS guidance and strategies and other studies, such as reports from the Department of Justice Office of the Inspector General, to determine how worksite enforcement priorities, implementation, and challenges have evolved. In addition, we separately analyzed ICE and INS data on the worksite enforcement program and assessed their validity and reliability by reviewing them for accuracy and completeness, interviewing agency officials knowledgeable about the data, and examining documentation on how the data are entered, categorized, and verified in the databases. We determined that the data from each agency were sufficiently reliable for the purposes of our review. However, we could not compare the INS and ICE data because, following the creation of ICE in March 2003, the case management system used to enter and maintain information on immigration investigations changed. With the establishment of ICE, agents began using the legacy U.S. Customs Service’s case management system, called the Treasury Enforcement Communications System, for entering and maintaining information on investigations, including worksite enforcement operations. Prior to the creation of ICE, the former INS entered and maintained information on investigative activities in the Performance Analysis System, which captured information on immigration investigations differently than the Treasury Enforcement Communications System. Additionally, ICE officials indicated that, in a few cases, the INS and ICE data did not completely account for all worksite enforcement operations results. ICE officials told us that agents use judgment in categorizing cases entered into both systems and there are a limited number of instances in which agents did not appropriately categorize cases. For example, ICE officials told us that, in reviewing worksite enforcement cases in the ICE system for fiscal year 2004, they found a few cases that agents inappropriately categorized as worksite enforcement. To determine the investigative agent work-years, or full-time equivalents, that INS spent on the worksite enforcement program for each fiscal year from 1999 through 2003, we divided the total hours INS reported spending on employer investigations by the total hours spent on all investigations, including agent hours spent on leave, training, and other administrative and noninvestigative work. We then multiplied this result by 2,080 hours, which constitute one work-year, to determine the number of work-years spent on worksite enforcement. We conducted our work from September 2004 through July 2005 in accordance with generally accepted government auditing standards. In October 2004, Congress authorized the electronic Form I-9 to be implemented by the end of April 2005. ICE has provided interim guidelines for using electronic Forms I-9, until the agency issues final regulations on their use. The interim guidelines specify that employers will have options for completing, signing, storing, and presenting for inspection electronic Forms I-9. For example, the guidelines note that employers may choose to complete Forms I-9 on paper and store the forms electronically or they may choose to both electronically complete and store Forms I-9. The guidelines also state that electronic signatures could be generated through various technologies such as electronic signature pads, personal identification numbers, biometrics, and dialog boxes. The guidelines also state that employers could use electronic storage systems to retain Forms I-9 that include quality assurance steps to prevent and detect the unauthorized creation, addition, alteration, deletion, or deterioration of electronically stored data. In addition, employers may consider an electronic storage system that includes an indexing system and ability to reproduce legible and readable hard copies of electronically stored forms. Employer participation in and use of the Basic Pilot Program has generally increased. Between fiscal years 2002 and 2004, the number of employers actively using the Basic Pilot Program increased from 1,205 to 2,305. In addition, as shown in figure 6, the number of total queries processed through the Basic Pilot Program has generally increased since fiscal year 2000. As shown in figure 7, the majority of Basic Pilot Program queries that resulted in employment authorizations for each fiscal year from 2000 through 2004 were issued by SSA. In addition to the contact named above, Orlando Copeland, Michele Fejfar, Ann H. Finley, Rebecca Gambler, Kathryn Godfrey, Charles Michael Johnson, Eden C. Savino, and Robert E. White made key contributions to this report. | The opportunity for employment is one of the most important magnets attracting illegal immigrants to the United States. Immigration experts state that strategies to deter illegal immigration require both a reliable employment eligibility verification process and a worksite enforcement capacity to ensure that employers comply with immigration-related employment laws. This report examines (1) the current employment verification (Form I-9) process and challenges, if any, facing verification; and (2) the priorities and resources of U.S. Immigration and Customs Enforcement's (ICE) worksite enforcement program and any challenges in implementing the program. The current employment verification process is based on employers' review of documents presented by new employees to prove their identity and work eligibility. On the Form I-9, employers certify that they have reviewed employees' documents and that the documents appear genuine and relate to the individual presenting them. However, various studies have shown that document fraud (use of counterfeit documents) and identity fraud (fraudulent use of valid documents or information belonging to others) have made it difficult for employers who want to comply with the employment verification process to hire only authorized workers and easier for unscrupulous employers to knowingly hire unauthorized workers. The large number and variety of documents acceptable for proving work eligibility have also hindered verification efforts. In 1997, the former Immigration and Naturalization Service (INS), now part of the Department of Homeland Security (DHS), issued an interim rule on a reduction in the number of acceptable work eligibility documents and, in 1998, proposed a further reduction, but this proposal has not yet been finalized. DHS is currently reviewing the list of acceptable work eligibility documents, but has not established a target time frame for completing this review. The Basic Pilot Program, a voluntary program through which participating employers electronically verify employees' work eligibility, has potential to help enhance the verification process and substantially reduce document fraud. Yet, current weaknesses in the program, such as the inability of the program to detect identity fraud, DHS delays in entering data into its databases, and some employer noncompliance with pilot program requirements could, if not addressed, have a significant impact on the program's success. Furthermore, U.S. Citizenship and Immigration Services officials stated that the current Basic Pilot Program may not be able to complete timely verifications if the number of employers using the program significantly increased. Worksite enforcement is one of various immigration enforcement programs that compete for resources and, under the former INS and now under ICE, worksite enforcement has been a relatively low priority. Consistent with DHS's mission to combat terrorism, after September 11, 2001, INS and then ICE focused worksite enforcement resources mainly on removing unauthorized workers from critical infrastructure sites to help address those sites' vulnerabilities. Since fiscal year 1999, the numbers of employer notices of intent to fine and administrative worksite arrests have generally declined, according to ICE, due to various factors such as document fraud, which makes it difficult to prove employer violations. ICE has not yet developed outcome goals and measures for its worksite enforcement program, which, given limited resources and competing priorities for those resources, may hinder ICE's efforts to determine resources needed for the program. |
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The 1952 Immigration and Nationality Act (INA), as amended, is the primary body of law governing immigration and visa operations. Among other functions, the INA defines the power given to the Attorney General, the Secretary of State, immigration officers, and consular officers; delineates the categories of and qualifications for nonimmigrant visas; and provides a broad framework of operations through which foreign citizens are allowed to enter the United States. The Homeland Security Act of 2002 establishes the role of the Department of Homeland Security in the visa process, and a subsequent Memorandum of Understanding between the Secretaries of State and Homeland Security further outlines the visa issuance authorities. According to the memorandum, the Department of Homeland Security is responsible for establishing visa policy, reviewing implementation of the policy, and providing additional direction, while the State Department is responsible for managing the visa process and carrying out U.S. foreign policy. The visa adjudication process has several steps (see fig. 1). Visa applicants generally begin the visa process by scheduling a visa interview. On the day of the appointment, a consular officer reviews the application, checks the applicant’s name in the Consular Lookout and Support System (CLASS), and interviews the applicant. Based on the interview and a review of pertinent documents, the consular officer determines if the applicant is eligible for nonimmigrant status under the Immigration and Nationality Act. If the consular officer then determines that the applicant is eligible to receive a visa, the applicant is notified right away and he or she usually receives the visa within 24 hours. In some cases, the consular officer decides that the applicant will need a Security Advisory Opinion (SAO), which provides an opinion or clearance from Washington on whether to issue a visa to the applicant. SAOs are required for a number of reasons, including concerns that a visa applicant may engage in the illegal transfer of sensitive technology. An SAO based on sensitive technology transfer concerns is known as a Visas Mantis and, according to State officials, is the most common type of SAO applied to science applicants. It is also the most common type of SAO sent from most of the posts we visited in China, Russia, and India. In deciding if a Visas Mantis check is needed, the consular officer determines whether the applicant’s background or proposed activity in the United States could involve exposure to technologies on the Technology Alert List (TAL). The list includes science and technology-related fields where, if knowledge gained from research or work in these fields were used against the United States, it could potentially be harmful. If a Visas Mantis is needed, the consular officer generally informs the applicant that his or her visa is being temporarily refused under Section 221(g) of the U.S. Immigration and Nationality Act, pending receipt of security clearance. After a consular officer decides that a Visas Mantis is necessary for an applicant, several steps are taken to resolve the process. The officer drafts a Visas Mantis cable, which contains information from the applicant’s application and interview. The cable is then generally reviewed by a consular section chief or other consular official at post, who then approves the Visas Mantis cable for transmission to Washington for an interagency security check. Once the cable is sent, the State Department’s Bureau of Nonproliferation, the FBI, and other agencies review the information in the cable and provide a response on the applicant to the Consular Affairs section of State headquarters. The Bureau of Nonproliferation and other agencies are given 15 working days to respond to State with any objections. However, State has agreed to wait for a response from the FBI before proceeding with each Visas Mantis case. State’s Bureau of Consular Affairs receives all agency responses pertaining to an applicant, summarizes them, and prepares a response to the consular posts. A cable is then transmitted to the post which indicates that State does or does not have an objection to issuing the visa, or that more information is needed. Generally, a consular official at post reviews the cable and, based on the information from Washington, decides whether to issue the visa to the applicant. The officer then notifies the applicant that the visa has been issued or denied, or that more information is needed. According to consular officials, in the vast majority of the cases the visa is approved. However, even when the visa is issued, the information provided by the consular posts on certain visa applicants is very useful to certain agencies in guarding against illegal technology transfer. As a result, according to the State Department, the Visas Mantis program provides State and other interested agencies with an effective mechanism to screen out those individuals who seek to evade or violate laws governing the export of goods, technology, or sensitive information. This screening, in turn, addresses significant issues of national security. State Department data are not available on the number of visas that were issued or denied to science students and scholars or the length of time it takes to issue visas to these people. Consular Affairs officials told us that State’s systems can track aggregate student or scholar data by F and J visa categories, but they cannot narrow their query search to specifically identify science students or scholars. Table 1 shows the number of visas issued and denied for students and scholars seeking visas by selected nationalities in fiscal year 2003. In addition, State data are not available on the overall number of Visas Mantis cases in fiscal year 2003 or on the Visas Mantis cases by visa category. State’s systems can track the visa process for individual cases but do not allow for aggregate queries of Visas Mantis cases. For example, State does not have data on how many Visas Mantis cases involved student visas. State also lacks data on the number of science students and scholars that undergo a Visas Mantis security check. Furthermore, State did not have aggregate data on the time frame for adjudicating a visa that required a Visas Mantis security check. The length of time for a science student or scholar to obtain a visa is not known, but a key factor in the time frame can be attributed to whether an applicant must undergo a Visas Mantis check. Since State could provide information on individual cases, we conducted our own sample of Visas Mantis cases that we obtained from State for the period between April and June 2003 and found that for these applicants, it took an average of 67 days for the security check to be processed and for State to notify the post of the results. Furthermore, our visits to posts showed that as of October 1, 2003, 410 Visas Mantis cases submitted by 7 posts in fiscal year 2003 were still pending after more than 60 days. We also found that interoperability problems among the systems that State and FBI use contributed to the time taken to process a Visas Mantis check. In addition, officials at posts we visited told us they were unsure whether they were adding to the lengthy waits by not having clear guidance on when to apply the Visas Mantis process and not receiving feedback on the amount of information they provided in their Visas Mantis requests. Aside from the time it takes to process Visas Mantis checks, we found during our fieldwork that an applicant also has to wait for an interview. Post officials and representatives of higher education scientific and governmental organizations indicated that delays in processing visas for science students and scholars could negatively affect U.S. national interests. To obtain visa data on science students and scholars, and to determine how long the visa process takes, we reviewed all Visas Mantis cables received from posts between April and June 2003, which totaled approximately 5,000. Of these cases, 2,888 pertain to science students and scholars, of which approximately 58 percent were sent from China, about 20 percent from Russia, and less than 2 percent from India. Appendix II provides additional information on the number of science student and scholar cases sent from each post. We drew a random sample of 71 cases from the 2,888 science student and scholar visa applications to measure the length of time taken at selected points in the visa process. The sample of 71 cases is a probability sample, and results from the data in this sample project to the universe of the 2,888 science visa applications. We found that visas for science students and scholars took on average 67 days from the date the Visas Mantis cable was submitted from post to the date State sent a response to the post. This is slightly longer than 2 months per application, on average. In the sample, 67 of the visa applications completed processing and approval by December 3, 2003. In addition, 3 of the 67 completed applications had processing times in excess of 180 days. Four of the cases in our sample of 71 remained pending as of December 3, 2003. Of the 4 cases pending, 3 had been pending for more than 150 days and 1 for more than 240 days as of December 3, 2003. In addition to our sample of 71 cases, State provided us with data on two samples it had taken of Visas Mantis case processing times. Data on the first sample was provided on December 11, 2003, and included 40 visa cases taken from August to October 2003. Data on the second sample was provided on February 13, 2004, and included 50 Visas Mantis cases taken from November and December 2003. State indicated that both samples show improvements in processing times compared to earlier periods in 2003. Based on the documentation of how these cases were selected, we were unable to determine whether these were scientifically valid samples and therefore we could not validate that processing times have improved. For the first sample, the data show that 58 percent of the cases were completed within 30 days; for the second sample, the data show that 52 percent were completed within this time frame. In addition, the data for both samples show that lengthy waits remain in some cases. For example, 9 of the 40 cases had been outstanding for more than 60 days as of December 3, 2003, including 3 cases that had been pending for more than 120 days. Also, 9 of the 50 cases were still pending as of February 13, 2004, including 6 that had been outstanding for more than 60 days. State officials commented that most of the outstanding cases from both samples were still being reviewed by the agencies. Moreover, for one case sent in December 2003, the FBI showed no record of the Visas Mantis request. While Consular Affairs officials were not able to query their systems for aggregate Visas Mantis data, we were able to obtain aggregate data from the posts we visited. During our field visits, we found most posts track Visas Mantis cases they send to State. Some posts designate a consular official to track Visas Mantis cases while others had no designated officers for this purpose. Overall, we found that most posts kept a spreadsheet on the Visas Mantis cases, which generally contained Visas Mantis applicant data such as when the cable was sent to State and when a response was received at post. However, we found no standard method for data or tracking. In addition, we found that most posts did not have accurate data on the number of Visas Mantis cases they sent to headquarters in a fiscal year. Posts could provide us with F and J visa category data but could not break down the data by science students and scholars. During our fieldwork at posts in China, India, and Russia, we obtained data indicating that 410 Visas Mantis cases submitted by 7 posts in fiscal year 2003 were still outstanding more than 60 days as of October 1, 2003. In addition, we found numerous cases—including 27 from Shanghai—that were pending more than 120 days as of October 16, 2003. The following are examples of data we collected during our fieldwork regarding the processing of Visas Mantis cases: In September 2003, the three posts we visited in China had approximately 174 security checks for students and exchange visitors that had been pending between 60 and 120 days, and 49 that had been pending for more than 120 days. In Shanghai in fiscal year 2003, it took approximately 47 days for a Visas Mantis case for a student or scholar to be processed from the time a cable was sent from post to the time the visa was issued. Approximately 25 percent of Chennai’s Visas Mantis cases in fiscal year 2003 took between 60 and 120 days to process, and 58 percent took more than 120 days to process from application date to the date a response was received from Washington. Further, the average time for Visas Mantis cases to be processed in Chennai in fiscal year 2003 was approximately 5 months or 144 days. Post officials told us that the processing time has improved; however, the data show there are still lengthy waits in Chennai. For example, of the 6 visa applications submitted in October 2003 that required a Visas Mantis check, 4 were still pending as of January 9, 2004, and the other 2 took an average of 55 days to process. Of the Visas Mantis applications completed in Moscow in fiscal year 2003, approximately 21 percent took between 60 and 120 days, and 10 percent took more than 120 days to process. In September 2003, Moscow had 544 outstanding Visas Mantis cases. Of these cases, about 28 percent had been pending more than 60 days. In addition, in fiscal year 2003, the average time to adjudicate a visa for those requiring a Visas Mantis security check was 53 days. Because many different agencies, bureaus, posts, and field offices are involved in processing Visas Mantis security checks and each has different databases and systems, we found that Visas Mantis cases can get delayed or lost at different points in the process. We found that in fiscal year 2003, some Visas Mantis cases did not always reach their intended recipient and, as a result, some of the security checks were delayed. For example, we followed up with the FBI on 14 outstanding cases from some of the posts we visited in China in September 2003 to see if it had received and processed the cases. FBI officials provided information indicating that they had no record of 3 of the cases, they had responded to State on 8 cases, and they were still reviewing 3 cases. FBI officials stated that the most likely reasons why they did not have a record of the 3 cases from State were due to cable formatting errors and duplicate cases that were rejected from the FBI database. State did not comment on the status of the 14 cases we provided to the FBI for review. However, a Consular Affairs official told us that in fall 2003, there were about 700 Visas Mantis cases sent from Beijing that did not reach the FBI for the security check. The official did not know how the cases got lost but told us that it took Consular Affairs about a month to identify that there was a problem and provide the FBI with the cases. As a result, several hundred visa applications were delayed for another month. Figure 2 illustrates some of the time-consuming factors in the Visas Mantis process for our sample of 71 cases. While the FBI received most of the cases from State within a day, 7 cases took a month or more, most likely because they had been improperly formatted and thus were rejected by the FBI’s system. In more than half of the cases, the FBI was able to complete the clearance process the same day, but some cases took more than 100 days. These cases may have taken longer because (1) the FBI had to investigate the case or request additional information from State; (2) the FBI had to locate files in field offices, because not all of its name check files are electronic; or (3) the case was a duplicate, which the FBI’s name check system also rejects. In most of the cases, the FBI was able to send a response—which it generally does in batches of name checks, not by individual case—to State within a week. The FBI provides the results of name checks for Visas Mantis cases to State on computer compact disks (CDs), which could cause delays. In December 2003, a FBI official told us that these CDs were provided to State twice a week. However, in the past, the CDs were provided to State on a less frequent basis. In addition, it takes time for data to be entered into State’s systems once State receives the information. In the majority of our sample cases, it took State 2 weeks or longer to inform post that it could issue a visa. State officials were unable to explain why it took State this long to respond to post. Officials told us that the time frame could be due to a lack of resources at headquarters or because State was waiting for a response from agencies other than the FBI. However, the data show that only 5 of the 71 cases were pending information from agencies other than the FBI. Appendix IV provides additional information on the distribution of processing time for our sample of Visas Mantis cases. During our fieldwork, some consular officials expressed concern that they could be contributing to the time it takes to process Visas Mantis requests because they lacked clear guidance on determining Visas Mantis cases and feedback on whether they were applying checks appropriately and providing enough data in their Visas Mantis requests. According to the officials, additional information and feedback from Washington regarding these issues could help expedite Visas Mantis cases. Currently, State provides some guidance to posts on Visas Mantis requirements and processing, including how to use the TAL to determine if a visa applicant should undergo a security check. However, consular officers told us that they would like the guidance to be simplified—for example, by expressing some scientific terms in more comprehensible language. Several consular officers also told us they had only a limited understanding of the Visas Mantis process, including how long the process takes. They told us they would like to have better information on how long a Visas Mantis check is taking so that they can more accurately inform the applicant of the expected wait. Since our visits to posts, State has issued additional updated guidance on applying the TAL. However, after receiving the new guidance, consular officials at some posts told us that although it was an improvement, the updated guidance is still confusing to apply, particularly for junior officers without a scientific background. Consular officers at most of the posts we visited also told us they would like more feedback from State on whether the Visas Mantis cases they are sending to Washington are appropriate, particularly whether they are sending too many or too few Visas Mantis requests. They said they would like to know if including more information in the security check request would reduce the time to process an application in Washington. Moreover, consular officers indicated they would like additional information on some of the outstanding Visas Mantis cases, such as where the case is in the process. State confirmed that it has not always responded to posts’ requests for feedback or information on outstanding cases. Officials at State’s Bureau of Consular Affairs told us that their office facilitates the Visas Mantis process but is not in a position to provide feedback to consular posts on the purpose of Visas Mantis or how the information is being used. However, officials from the FBI and State’s Bureau of Nonproliferation told us that Consular Affairs should take the lead in providing feedback to posts because it administers the program and supervises the consular officers. In addition to the time needed for Visas Mantis checks, another contributing factor in the length of time it takes to adjudicate a visa is how long an applicant must wait to get an interview appointment at post. State does not have data or criteria for the length of time applicants at its overseas posts wait for an interview, but at the posts we visited in September 2003, we found that it generally took 2 to 3 weeks. Furthermore, post officials in Chennai, India, told us that the interview wait time was as long as 12 weeks during the summer of 2003 when the demand for visas was greater than the resources available at post to adjudicate a visa. Officials at some of the posts we visited indicated they did not have enough space and staffing resources to handle interview demands and the new visa requirement. Factors such as the time of year an applicant applies for a visa, the appointment requirements, and the staffing situation at posts generally affect how long an applicant will have to wait for an interview. All the posts we visited had high and low seasons in which the visa application volume fluctuated. For example, June was the busiest month in Chennai, India, in 2000, 2001, and 2002, with the average number of visa applicants exceeding 18,000. By contrast, Chennai saw an average of 10,000 visa applicants in October during these same years. During the summer months of 2003, the high demand for visas was compounded by the new visa interview requirement State established in May 2003. The new requirement, which went into effect on August 1, 2003, states that, with a few exceptions, all foreign individuals seeking to visit the United States need to be interviewed prior to receiving a visa. As a result, interview volumes have increased at some posts we visited. For example, in September 2002, consular officials in Chennai interviewed 25 percent of visa applicants, but by August 2003, that number had increased to 75 percent and was projected to continue to rise. In addition, a consular official in Moscow estimated that the volume of interviews increased from about 60 percent before August 2003 to about 90 percent in December 2003. However, the interview requirement did not have a significant effect on posts in China since the posts were already interviewing about 70 percent of the visa applicants. In early summer 2003, Consular Affairs requested that posts give priority to students and exchange visitors when scheduling visa interviews. Below are the wait times at each post we visited and some of the initiatives the posts have taken to accommodate applicants. At the time of our field visit in September 2003, two of the three posts we visited in China had a 2-week wait for an interview. However, applicants at one post were facing waits of about 5 to 6 weeks. The extended waits for interviews were due to an imbalance between demand for visas and the number of consular officers available to interview applicants and staff to answer phone lines. Consular officials told us that to reduce these waits, they were relying on temporary duty help and also planned to request an additional consular officer at post. To facilitate the issuance of visas to students who underwent a Visas Mantis security check, one post in China opened on one weekend to issue hundreds of visas and also allowed students and scholars to fax in requests for expedited interviews. In such cases, interviews were scheduled within a matter of days. During our field visit in September 2003, consular officers in New Delhi and in Chennai told us that the wait for an interview was 2 to 3 weeks at each post. However, during the 2003 summer months, the wait was as long as 12 weeks in Chennai. To help reduce lengthy waits, applicants were allowed to interview at the U.S. Embassy in New Delhi or at the U.S. Consulate in Calcutta. In addition, the posts we visited instituted longer interview hours, as well as overtime for consular staff and the use of temporary staff to conduct interviews to reduce interview wait times for all applicants. According to consular officials in Chennai and New Delhi, some lengthy waits were attributed to staffing shortages. In a May 2003 assessment conducted by Consular Affairs, State officials concurred that staffing levels in Chennai’s consular section are below what is necessary to meet a rapidly increasing workload. Since late summer 2003, the consulate in Chennai has reserved interview appointments on Fridays for students and temporary workers. However, an official at the consulate in Chennai told us that unless students who go through a Visas Mantis security check apply 2 to 3 months in advance, a significant portion of them will start school late. Consular officials in Moscow told us that at the end of September 2003, the wait for an interview was 1 week, while in St. Petersburg the wait averaged 2 to 3 weeks. In Moscow the recent additions of new junior officers and longer interviewing hours have helped officers keep up with current visa demands. Both posts have also arranged for some visa applicant groups, such as business applicants and official delegations, to be interviewed separately. In addition, a consular official in Moscow told us that the post is able to accommodate most requests for students or scholars who need an expedited appointment. In St. Petersburg, approximately 5 to 10 interview slots per day are reserved for students and scholars. Although we did not attempt to measure the impact of the time it takes to adjudicate a visa, consular officials and representatives of several higher education, scientific, and governmental organizations expressed concern that visa delays could be detrimental to the scientific interests of the United States. Although they provided numerous individual examples of the consequences of visa delays, they were unable to measure the total impact of such lengthy waits. Embassy officials in Moscow told us that visa delays are hindering congressionally mandated nonproliferation goals. Department of Energy officials at post explained that former Soviet Union scientists have found it extremely difficult getting to the United States to participate in U.S. government-sponsored conferences and exchanges that are critical to nonproliferation. Furthermore, many officials with whom we spoke cited specific examples where scientific research and collaboration was delayed or prevented due to delays in obtaining a visa. National Aeronautics and Space Administration officials at post also noted that up to 20 percent of their time is spent dealing with visa issues when they should be focusing on program issues. During our field visits, Beijing’s Deputy Chief of Mission and consular officials at the embassy and consulates in China stated that visa delays could have a negative impact on student and scholar exchanges. They told us that the lengthy waits to obtain a visa might lead Chinese students and scholars to pursue studies or research in countries where it is easier to obtain a visa. A consular chief in Chennai, India, agreed, saying that lengthy waits are also causing Indian students to decide to study in countries where it is easier to get a visa and, therefore, the United States could lose out on intellectual knowledge these visa applicants bring to our country. Further, embassy officials in Beijing reported that visa delays in nonproliferation cooperation and scientific exchange could have enormous and lasting consequences. Finally, research organizations and associations of American universities have cited the difficulties their international students and faculty are having in obtaining visas. According to a survey conducted by a national scientific organization, applicants from 26 different countries, most notably Russia and China, have been delayed or prevented from entering the United States. Another survey conducted by a national educational association reported that hundreds of students and scholars experienced delays in receiving a visa or were denied a visa. According to several surveys, scientific research was postponed, jobs were left unstaffed, and conferences and meetings were missed as a result of the delays. FBI and State officials acknowledged that lengthy visa waits have been a problem, but said they are implementing improvements to the process and working to decrease the number of pending Visas Mantis cases. Improvements include implementation of customer service initiatives, coordination between agencies to identify and resolve outstanding cases, and upgrades in information systems. In addition, State and FBI officials told us that the validity of Visas Mantis checks for students and scholars has been extended to 12 months. State, FBI, and consular officials at posts have made customer service improvements related to Visas Mantis checks that allow them to address questions and provide information to people inquiring about a status of a visa case. For example, consular officials at some of the posts we visited told us that they have established inquiry lines at post for visa applicants to check the status of their case and remind consular officials that their case is still pending. This also helps consular officers to monitor cases that have been outstanding. In addition, State set up an inquiry desk at the beginning of 2003, and the FBI set one up during the summer of 2003 to accommodate calls from the public about the status of pending visa applications that have been submitted for Visas Mantis checks. State has set up a separate e-mail address for inquiries from agencies involved in Visas Mantis processing. Consular Affairs officials also told us they have set up an inquiry line where post officials can obtain additional information on outstanding cases. However, some post officials told us that they would still like more information on how long the Visas Mantis check takes. Officials from State’s Consular Affairs and the FBI told us they are coordinating efforts to identify and resolve outstanding Visas Mantis cases. For example, Consular Affairs officials have been working with FBI officials on a case-by-case basis to make sure that cases outstanding for several months to a year are completed. However, State officials said they do not have a target date for completion of all the outstanding cases, which they estimated at 1,000 in November 2003. According to these officials, while about 350 of these outstanding cases required further review or more information, State has not yet begun working to reconcile them. FBI officials also told us that to address some of the delays on their end, such as those that occur due to problems with lost case files or inoperable systems, the FBI has taken several actions to improve its Visas Mantis clearance process. For example, the officials indicated that the FBI is working on automating its files and setting up a common database between the field offices and headquarters. FBI officials also told us that they have set up a tracking system for all SAOs, including Visas Mantis cases. In addition, they said the FBI has established new procedures to deal with name check files the agency cannot locate within a certain amount of time. In a July 2003 letter to State, the FBI said it would notify State after 90 days that it could proceed with visa processing in the event that the FBI could not locate relevant files and there were no security concerns. Consular Affairs officials told us that State has invested about $1 million on a new information management system that it said would reduce the time it takes to process Visas Mantis cases. They described the new system as a mechanism that would help strengthen the accountability of Visas Mantis clearance requests and responses, establish consistency in data collection, and improve data exchange between State and other agencies involved in the clearance process. In addition, officials said the system would allow them to improve overall visa statistical reporting capabilities and data integrity for Visas Mantis cases. The new system will be paperless, which means that the current system of requesting Visas Mantis clearances by cable will be eliminated. Through an intergovernmental network known as the Open Source Information System, the new system will allow most government agencies involved in the Visas Mantis process, such as the FBI, to obtain visa applicant information and coordinate Visas Mantis responses. State officials told us that the system is on schedule for release early this year, and that the portion relating to SAOs will be operational sometime later this year. However, challenges remain. FBI officials told us that the name check component of the FBI’s system would not immediately be interoperable with State’s new system, but that they are actively working with State to seek solutions to this problem. However, FBI and State have not determined how the information will be transmitted in the meantime. We were not able to assess the new system since it was not yet functioning at the time of our review. In addition to improvements to the Visas Mantis process, State officials told us that they are taking some actions to continue to monitor the resource needs at post. To alleviate concerns about staffing, Consular Affairs officials told us that temporary adjudicating officers are sent to the posts as needed. These officials also told us that State added 66 new officers in 2003 and plans to add an additional 80 in 2004. However, the decision to add these new officers was made before the new August 2003 interview requirements were implemented and thus it is unknown if there are enough resources for the task at hand. In addition, post officials told us that State plans to expand some consular sections, such as in Chennai, India, where the consulate is scheduled to undergo an expansion in spring 2004. Agency officials recognize that the process for issuing a visa to a science student or scholar can be an important tool to control the transfer of technology that could put the United States at risk. They also acknowledge that if the process is lengthy, students and scholars with science backgrounds might decide not to come to the United States, and technological advancements that serve U.S. and global interests could be jeopardized. Our analysis of a sample of Visas Mantis cases from April to June 2003 show that some applicants faced lengthy waits. While the State Department and the FBI report improvements in visa processing times, our analysis of data from the posts we visited in September 2003 and our contact with post officials in January 2004 show that there are still some instances of lengthy waits. State’s and FBI’s implementation of the Visas Mantis process still has gaps that are causing lengthy waits for visas. Consular officers believe that if they receive clearer guidance and feedback on Visas Mantis cases, they could help reduce the time it takes for Washington to process applications and provide better information to applicants. Finally, State and FBI do not have interoperable systems that would help complete security checks of visa applicants more quickly. State’s new information management system could improve the Visas Mantis process. Nevertheless, it is unclear whether the new system will address all the current issues with the process. To help improve the process and reduce the length of time it takes for a science student or scholar to obtain a visa, we are recommending that the Secretary of State, in coordination with the Director of the FBI, and the Secretary of Homeland Security, develop and implement a plan to improve the Visas Mantis process. In developing this plan, the Secretary should consider actions to establish milestones to reduce the current number of pending Visas Mantis develop performance goals and measurements for processing Visas Mantis provide additional information through training or other means to consular posts that clarifies guidance on the overall operation of the Visas Mantis program, when Mantis clearances are required, what information consular posts should submit to enable the clearance process to proceed as efficiently as possible, and how long the process takes; and work to achieve interoperable systems and expedite transmittal of data between agencies. We provided a draft of this report to the State Department, the Federal Bureau of Investigation, and the Department of Homeland Security. State’s and FBI’s written comments are presented in appendix V and VI, respectively. The Department of Homeland Security did not provide official written comments, but provided technical comments that we have incorporated in the report where appropriate. The State Department commented that it is committed to providing the best possible visa services while also maintaining security as its first obligation. State indicated that it had taken a number of recent actions to improve the Visas Mantis process that we believe are positive steps in implementing our recommendation. For example, State said that it has started to provide feedback to posts regarding the information contained in Visas Mantis cables and is providing expanded briefings on the Visas Mantis process to new consular officers at the National Foreign Affairs Training Center. State also said that it would study our recommendation to explore possibilities for further improvements to the Visas Mantis security check process. State emphasized the importance of the Visas Mantis clearance process in protecting U.S. national security and acknowledged that in the past some visa applicants have been required to wait long periods to obtain a visa. However, as a result of recent improvements, State claims that most security checks are now being completed within 30 days and therefore our analysis of Visas Mantis cases from April to June 2003 does not represent current processing times. State commented that it had recently conducted two samples of Visas Mantis cases that show improvements in processing times. However, we were unable to independently validate either sample. In addition, the data for both samples show that lengthy waits remain for some cases. Moreover, because State’s sample selection methods were different from ours, and because its samples would have a wide margin of error, its samples cannot demonstrate improvements in processing times. Thus we are not in a position to conclude that the Visas Mantis processing turnaround times have improved. The Federal Bureau of Investigation did not comment on our recommendation. The FBI acknowledged that the visa program was overwhelmed in the summer of 2002. However, the FBI believes that it is now processing the name checks more quickly and today only a few applicants encounter a significant wait for the FBI to complete the security review process. The FBI indicated that it is working closely with State and other agencies to improve the Visas Mantis process. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time we will send copies of this report to interested congressional committees and to the Secretary of State, the Director of the FBI, and the Secretary of Homeland Security. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions concerning this report, please contact me at (202) 512-4128. Additional GAO contacts and staff acknowledgments are listed in appendix VII. To determine (1) how long it takes a science student or scholar from another country to obtain a visa and the factors that contribute to the length of time and (2) what measures are under way to improve the visa issuance process and decrease the number of pending cases, we collected data from agencies in Washington, as well as at U.S. embassies and consulates overseas, and conducted interviews with agency officials. We reviewed the Immigration and Nationality Act and associated legislation, the State Department’s Foreign Affairs Manual, and cables and other related documents from State’s Bureau of Consular Affairs. In addition, we reviewed State’s data on visa applications and issuances worldwide and for selected posts. We also requested data from State to conduct a sample of Visas Mantis cases to help us determine the number of science students and scholars that were undergoing a Visas Mantis security check and how long those applicants waited for a visa. In Washington, we interviewed officials from the Departments of State, Homeland Security, and Justice. At State, we met with officials from the Bureau of Consular Affairs, the Bureau of Nonproliferation, the Office of the Science and Technology Adviser to the Secretary, and the Office of Science and Cooperation in the Bureau of Oceans and International Environmental and Scientific Affairs. At the Department of Homeland Security, we met with officials from the Directorate of Border Transportation and the Office of Policy and Planning. At the Department of Justice, we met with officials from the Federal Bureau of Investigation’s Name Check Unit and country desk officers for China and Russia. We requested meetings with officials from the Central Intelligence Agency and the White House Office of Science and Technology Policy (OSTP), but they declined to meet with us. However, OSTP provided us with written answers to questions pertaining to its involvement in visa policies for science students and scholars. Based on our review of State Department data systems regarding visas, we determined that visa data are collected for students (F visas) and for exchange visitors (J visas), but State’s data systems do not track science applicants within these categories. Thus, data are not available to report how long it takes science applicants to obtain a visa. However, agency officials identified a special security review procedure known as Visas Mantis as the factor most likely to affect the timeliness of science student and scholar applicant visas. Consequently, we focused our review on the length of time it takes an applicant to acquire a visa if he or she must undergo a security review. Using State documents, we were able to compile data on science applicants for this analysis. To obtain data for our sample of Visas Mantis cases, we asked State in July 2003 to provide us all the incoming Visas Mantis cables for the first 6 months of 2003. State indicated that our request would yield approximately 9,000 cables, and that such a large volume would be too time consuming to compile. To address State’s concern, we requested Visas Mantis cables from April 1 through June 30, 2003. We requested these 3 months because they were the most recent months from our initial request and would include some of the summer student visa applicants. Because Consular Affairs did not have electronic, aggregated data on Visas Mantis cases, they provided us with 5,079 hard copy cables submitted during that time period. We reviewed the cables to determine which ones pertained to a science student or scholar or other categories, including business. The science student and research scholar category included applicants studying at universities or conducting research at universities, national laboratories, and medical centers. We included applicants attending conferences, symposiums, workshops, and meetings hosted or sponsored by universities, professional institutes, and other organizations. We did not include in our sample universe business-related cables, cables that were incomplete, and cables that were duplicates. We entered all the data from the cables into an Excel spreadsheet, gave each a GAO number for control and identification purposes, and verified that there were no duplicates. We ended up with 2,888 Visas Mantis entries in the Excel database. From these 2,888 Visas Mantis cases, we took a computer-generated random sample of 124 cases and requested further data on those cases and their time frames from State. State replied that our request was too labor intensive and asked that we modify it. Therefore, we took a smaller subsample of 71 cases from the 124. Of the 71 cases we received from State, 67 were processed by December 3, 2003. Four cases were still pending. The 71 cases yielded an average completion time of 67 days. This estimate is accurate to within plus or minus 17 days at the 95 percent level of confidence. We assessed the reliability of the sample data provided by State by tracing a statistically random sample of data to source documents. We determined that the data was sufficiently reliable for the purposes of this report. State created its own two randomly selected samples of Visas Mantis cases. However, based on the documentation of how these records were selected, GAO was not able to determine whether these were scientifically valid samples whose results project to the entire population of all science student and scholar visa applications. As such, results reported by the agency from these application records should be treated as testimonial information from a judgmental sample rather than data from a probability sample. We conducted fieldwork at seven visa-issuing posts in three countries— China, India, and Russia. We chose these countries because they are leading places of origin for international science students and scholars visiting the United States. We limited our review to nonimmigrant visa applicants. During our visits at all of these posts, we observed visa operations, reviewed selected Visas Mantis data, and interviewed consular staff about visa adjudication procedures. In China, we met with consular officers at the U.S. Embassy in Beijing and the consulates in Shanghai and Guangzhou. We also met with the Deputy Chief of Mission, as well as officers from the Office of Environment, Science, Technology, and Health in Beijing. In India, we visited the U.S. Embassy in New Delhi and the U.S. consulate in Chennai. We met with consular officers at both posts as well as the Consul General in Chennai and officials from the FBI and the Office of Environment, Science, and Technology in New Delhi. In addition, we met with three students who had outstanding visa applications in Chennai; a Honeywell business representative; and administrators, professors, and students at the Bharath Institute of Higher Education and Research in Chennai. In Russia, we visited the U.S. Embassy in Moscow and the U.S. consulate in St. Petersburg and met with consular officials there. While in Moscow, we also met with officials from the economic section of the embassy, Office of Environment, Science, and Technology, the Department of Energy, and the National Aeronautics and Space Administration. In addition, we spoke with a representative of the International Science and Technology Center in Moscow. While in the field, we collected data and reviewed documents pertaining to the visa process for science students and scholars at all posts. Because post tracking and recording of Visas Mantis data varied, we could not make post comparisons of Visas Mantis cases. Finally, to gather information on the visa issues that science students and scholars face, we spoke with representatives from educational organizations, including the National Academies, the Association of International Educators, the American Council on Education, and the Association of American Universities. We also obtained information from the American Physical Society and the International Institute for Education. We conducted our work from May 2003 through January 2004 in accordance with generally accepted government auditing standards. This appendix provides information on the Visas Mantis cables State received from posts between April and June 2003. Table 2 shows the breakdown of the 2,888 Visas Mantis cases we identified pertaining to science students and scholars. In our sample, we identified a total of 57 posts that had sent one or more Visas Mantis cables to Washington. This appendix provides selected visa statistical information for the posts we visited in China, India, and Russia. Table 3 shows the number of visas issued, visa refusal rates, and interview wait times at posts. This appendix provides information on the distribution of processing time for our sample of Visas Mantis cases. The following are GAO’s comments on the State Department’s letter dated February 11, 2004. 1. The report does not assume that all nonimmigrant visa applicants are qualified for a visa as indicated in footnote 6 on page 5 and discussion on pages 5-6. To further clarify that some applicants are eligible for a visa and some are not, we modified our discussion of the visa adjudication process as presented in figure 1. 2. We acknowledge the importance of the Visas Mantis screening process in protecting U.S. national security. We discuss the utility and value of the Visas Mantis process on pages 7-8. In addition, we modified footnote 11 on page 7 to indicate State’s views on the importance of the Visas Mantis process. 3. On December 11, 2003, State provided us with a study of 40 randomly selected Visas Mantis cases that posts submitted in August, September, and October 2003. In addition, on February 13, 2004, State provided us with another random study of 50 cases from November and December 2003. We discuss both samples on pages 11-12 and how the data was developed. 4. We added wording to footnote 22 on page 11 to acknowledge that in some cases the length of time to process a Visas Mantis check is not under the control of State. 5. We modified the chart on the introductory page to clarify that the Visas Mantis processing time begins when the post sends a Visas Mantis cable request to Washington. The chart shows the total length of time it could take an applicant to obtain a visa if a Visas Mantis security clearance is needed. 6. Our data for the 410 Visas Mantis cases pending after more than 60 days is based on information collected at 7 posts. We were not able to determine the total number of Visas Mantis cases sent in fiscal year 2003 from these posts. In addition, at the time of our review State was not able to provide data on the total number of Visas Mantis cases sent from all posts in fiscal year 2003. 7. We modified the text on page 13 of the report to reflect the number of cases pending from Chennai, India. The information was provided by consular officials at post. For our analysis of Visas Mantis processing time frames, we used the date of application, not the date the Visas Mantis request was submitted, as stated in footnote 28. The following are GAO’s comments on the Federal Bureau of Investigation’s letter dated February 5, 2004. 1. Because State’s new system is not currently operational, we did not assess its technology improvements and therefore could not assess whether the information in State’s new database is eliminating delays attributable to format errors. We discuss that FBI is working together with State to achieve interoperability between their systems on page 23 of the report. 2. We modified the draft to reflect that State Department data are not available on how long it takes for a science student or scholar to obtain a visa. 3. We discuss FBI’s improvements to its visa screening process, including cooperation with State on pages 21-23. 4. We modified the text in the footnote on page 14 to reflect that the FBI has no way to ensure that its Visas Mantis security check results are forwarded to the posts. 5. We added a footnote on page 15 to reference the distribution of FBI’s processing times. In addition to the above named individuals, Jeanette Espinola, Heather Barker, Janey Cohen, and Andrea Miller made key contributions to this report. Martin de Alteriis, Carl Barden, Laverne Tharpes, and Mary Moutsos provided technical assistance. | Each year thousands of international science students and scholars apply for visas to enter the United States to participate in education and exchange programs. They offer our country diversity and intellectual knowledge and are an economic resource. At the same time, the United States has important national security interests in screening these individuals when they apply for a visa. At a hearing held by the House Committee on Science on March 26, 2003, witnesses raised concern about the length of time it takes for science students and scholars to obtain a visa and about losing top international students to other countries due to delays in the visa process. GAO reviewed 1) how long it takes a science student or scholar from another country to obtain a visa and the factors contributing to the length of time, and 2) what measures are under way to improve the process and decrease the number of pending cases. State Department (State) data are not available on how long it takes for a science student or scholar to obtain a visa. While State has not set specific criteria or time frames for how long the visa process should take, its goal is to adjudicate visas as quickly as possible, consistent with immigration laws and homeland security objectives. During this review, GAO found that the time it takes to adjudicate a visa depends largely on whether an applicant must undergo a security check known as Visas Mantis, which is designed to protect against sensitive technology transfers. Based on a random sample of Visas Mantis cases for science students and scholars sent from posts between April and June 2003, GAO found it took an average of 67 days for the security check to be processed and for State to notify the post. In addition, GAO's visits to posts in China, India, and Russia in September 2003 showed that many Visas Mantis cases had been pending 60 days or more. GAO also found that the way in which Visas Mantis information was disseminated at headquarters made it difficult to resolve some of these cases expeditiously. Furthermore, consular staff at posts GAO visited said they were unsure whether they were contributing to lengthy waits because they lacked clear guidance on when to apply Visas Mantis checks and did not receive feedback on whether they were providing enough information in their Visas Mantis requests. Another factor that may effect the time taken to adjudicate visas for science students and scholars is the wait for an interview. The wait time at posts GAO visited was generally 2 to 3 weeks but could be longer depending on the time of the year. While State and Federal Bureau of Investigation (FBI) officials acknowledged there have been lengthy waits, they report having measures under way that they believe will improve the process and that they are collaborating to identify and resolve outstanding Visas Mantis cases. In addition, State officials told GAO they have invested about $1 million to upgrade the technology for sending Visas Mantis requests. According to State officials, the new system will help to reduce the time it takes to process Visas Mantis cases. But despite State's plans to improve the Visas Mantis process, challenges remain. For example, the FBI's systems will not immediately be interoperable with State's. GAO was unable to assess State's new system since it was not yet functioning at the time of the review. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
During the last decade, a new kind of entity has emerged in public education: the for-profit provider of education and management services. Historically, school districts have contracted with private companies for noninstructional services, such as transportation and food service, and have also relied on contractors in some cases to provide limited instructional services to specified populations. Until recently, public schools have generally not contracted for the comprehensive programs of educational and management services that these companies typically offer. In recent years, the options available to public schools considering contracting with private companies have steadily grown. Today, approximately 20 major companies manage public schools. Nationally, it is estimated that these companies as well as other smaller companies serve over 300 schools out of the nation’s approximately 92,000 public schools. Although these companies manage public schools at all grade levels, most such privately managed public schools are elementary and middle schools. In these public schools, companies generally provide the same kinds of educational and management services that school districts do for traditional public schools. Educational services typically include a curriculum as well as a range of services designed to enhance or support student achievement, such as professional development opportunities for teachers, opportunities for parental involvement and school environments that aim to facilitate student support. Management services typically include personnel, payroll, and facilities management. Although these are the services that are typically offered to schools, companies also may adapt their services to respond to the preferences or needs of individual schools. For example, while some companies offer a particular curriculum or educational approach, others appear more willing to work with the curriculum the school or school district has already adopted. Typically, companies provide their services to public schools in one of two ways. First, they can contract directly with school districts to manage traditional public schools; such schools are known as “contract schools.” Second, they can manage charter schools, which are public schools that receive a degree of autonomy and freedom from certain school district requirements in exchange for enhanced accountability. Generally, charter schools are run by individual boards of trustees, which in most states and the District of Columbia have the authority to decide whether to contract with a private company. Both contract schools and charter schools remain public schools, however, and are generally subject to federal and state requirements for public schools in areas such as the application of standardized tests and special education. While the reasons public schools turn to private companies vary, the potential to increase student achievement appears to be one factor. In particular, according to certain experts and company officials we spoke to, school districts that seek a company’s help often do so with the expectation of raising achievement in struggling or failing schools. While management services appear to be especially important for charter schools that contract with such companies, charter schools also consider the potential to raise student achievement or a particular educational approach consistent with the school’s mission, according to school officials and experts we spoke with. Both types of schools that seek these companies’ assistance—struggling schools and charter schools—appear concentrated in urban areas. Further, several of the major companies reportedly serve a predominantly disadvantaged urban and minority student population. Recent changes in federal law have implications for the role played by these companies in public schools. The No Child Left Behind Act of 2001requires that schools that fail to meet state student achievement standards for 5 consecutive years must be restructured by implementing one or more alternative governance actions. One of the alternatives available to states and districts is to contract with an education management company. Three companies currently operate in the District of Columbia: Edison Schools, Mosaica Education, and Chancellor Beacon Academies. Edison began operating its first District school in 1998, and Mosaica and Chancellor Beacon first contracted with the District schools they manage in 2001. Throughout this report, these companies will generally be discussed in this order. Mergers and acquisitions are common among such companies. In 2001, Edison acquired nine schools nationwide through a merger with LearnNow. In the same year, Mosaica acquired nine schools nationwide through its acquisition of Advantage Schools. In addition, Chancellor and Beacon merged into a single company. Such changes can have several outcomes: in some cases, the company may operate schools that continue to use the educational program of another company; in other cases, the school may consider adopting the educational program of the new company or terminating the contract. The companies that operate public schools in the District of Columbia offer management and educational services as part of their programs; the extent to which District schools managed by these companies implemented all of the components of the companies’ programs varied. All of these companies offer programs that include management and educational services, such as curricula that integrate technology and professional development opportunities for teachers. Of the 10 District schools managed by these companies, 4 had completely implemented their company’s program. In school year 2001-02, all 10 District schools managed by these companies were charter schools with predominantly poor and minority student populations; most enrolled elementary and middle school students. Similar to traditional public schools, the District schools managed by these companies were required to be open to all students, up to their enrollment limits, and to meet District standards in areas such as health, safety, standardized testing, and compliance with federal special education requirements. The three for-profit companies that operate in the District of Columbia— Edison, Mosaica, and Chancellor Beacon—share common elements in terms of the management and educational services they offer to schools nationwide as well as those company officials described as distinctive. Each of the three companies generally offers similar management services. For example, all three offer management services such as personnel, payroll and facilities management, services that can be important for charter schools. In addition, the three companies employ some common approaches designed to improve student achievement. All three companies offer an extended school day and year. All three integrate technology in their educational programs. For example, all three offer students access to classroom computers. Similarly, all organize schools into smaller units to facilitate their tracking of students’ progress. All three provide summer training to teachers as well as other forms of professional development. Additionally, all have activities designed to involve and support parents and students. For example, each company uses parent satisfaction surveys. Experts we spoke to noted that these same approaches were being used in some other public schools. Finally, officials of all three companies stated that their companies contributed positively to school climate—a sense of mission and an environment conducive to learning—and cited aspects of school climate such as a safe and orderly school environment and teacher motivation. In addition to the characteristics they had in common, company officials identified others they believed were distinctive. These include, for example, their programs’ curriculum and instruction as well as the ability to provide economies of scale, develop community partnerships, and provide strong administrative support. As Table 1 shows, all three companies provided their services to schools in multiple states in 2001-02. According to Edison officials, its program has a number of distinctive characteristics. The first of these is its curriculum, which emphasizes basic skills, especially reading as the basis for future learning. It also includes enrichment in areas such as world languages (e.g., Spanish) and art. Edison’s basic skills curriculum includes components developed by Edison, such as a remedial reading program, and other components that Edison states are supported by research, such as Chicago Math and the Success for All reading program. Instructional methods are a second characteristic of Edison’s program. Edison schools use a variety of instructional methods. One of these, direct instruction, relies on repetition and drill. Other methods use projects, small groups, and individualized lessons. A third characteristic of Edison schools is their use of assessments. According to Edison officials, their program uses frequent assessments and the results of these assessments are promptly provided to teachers to assess student needs and provide appropriate additional help. “Systems and scale” is another key characteristic of Edison schools according to company officials. The company views its schools as part of a national system linked by a common purpose, and because of the system’s size, the company says it is able to purchase supplies at lower costs. Mosaica officials also identified certain distinctive characteristics of their company’s program. The first is the program’s curriculum, which has two parts. According to Mosaica officials, its morning program features instruction in traditional subjects such as reading and math. In the afternoon, students use Paragon—Mosaica’s own curriculum. According to company officials, Paragon stresses multidisciplinary learning, uses projects to emphasize the humanities, and recognizes students’ different learning styles. For example, students may use their reading, math, and social studies learning to build a pyramid or a Viking ship and thus study a period of history. According to company officials, projects accommodate a variety of learning styles—for example, some students learn visually, others by performing. Community involvement is a second key characteristic of Mosaica’s program. Company officials say that Mosaica brings community support into the school by networking with various community organizations. According to company officials, this provides its schools with access to additional resources. Chancellor Beacon officials also identified distinctive characteristics of their program. One is their willingness to customize their educational program to meet the needs and preferences of local schools. For example, in response to community interest, some Chancellor Beacon schools feature a cultural heritage element in the curriculum while one of its schools emphasizes the environment. Chancellor Beacon’s own curriculum was recently finalized in July 2002 and is based on an integration of the curricula of Chancellor and Beacon before they merged. One component of its curriculum is Core Knowledge—a program that expects students to master specific content in language arts, history, geography, math, science and fine arts. Other components emphasize ethics, morality and community volunteerism. A second key characteristic of Chancellor Beacon’s program is its operational support, according to company officials. These officials told us that in focusing on operational support, Chancellor Beacon allows schools to focus on academics. While the Chancellor Beacon program emphasizes customization as a key characteristic, the other two companies also allow schools to modify their programs. For example, in its reading program, Edison allows schools some flexibility regarding what books to read and in what order. In addition, up to one-fourth of its curriculum can be determined by the local school. Similarly, Mosaica allows its schools to use different approaches or materials in their morning session. While all of the 10 District schools managed by the companies during the 2001-02 school year obtained management services from these companies, the schools were more selective in implementing the companies’ educational programs. Of the 10 District schools, 4 have completely implemented the companies’ educational programs and 6 have adopted selected elements of their companies’ programs or chosen other programs, typically those of a previous company. A key factor that helps explain the difference between the programs the companies offer and what has been implemented by District schools is that recent mergers and acquisitions have led to changes in management companies in these 6 schools; these schools have generally left in place the educational programs of the companies that formerly managed them. Four schools, all managed by Edison, implemented the company’s educational program completely, according to company officials. These 4 schools all opened in 1998 as the result of a partnership between Friendship House, a nonprofit community organization serving District children and youth since 1904, and Edison. According to a Friendship House official, these schools completely implemented Edison’s program because they saw it as complementing their own goals. One of these schools—a high school—has supplemented the Edison program by developing a program to expose certain students to college through campus visits and workshops for parents. Six District schools adopted selected elements of their companies’ educational programs or chose other educational programs. These 6 schools include 2 schools managed by Edison, 2 by Mosaica, and 2 by Chancellor Beacon. All 6 schools have had recent changes in management companies as a result of mergers or acquisitions. The 2 schools that received services from Edison have opted to retain the curriculum already in place at the schools, rather than adopt the Edison program. In 2001, Edison bought LearnNow, the company that formerly provided services to the 2 schools. According to an Edison official knowledgeable about the schools formerly managed by LearnNow, the primary difference between the companies’ curricula was in elementary language arts, for which LearnNow preferred a different reading program than Success for All, which the Edison program uses in its other schools. The 2 schools managed by Mosaica have adopted some elements of the company’s educational program, and have plans to adopt more by 2003. In 2001, Mosaica bought Advantage, the company that formerly managed these schools. Both schools retained an instructional approach put in place by the previous company. This approach—direct instruction— emphasizes drill and repetition. By school year 2003, both schools expect to use direct instruction during the morning session and Paragon in the afternoon. The 2 schools managed by Chancellor Beacon both had distinct curricula in place before being managed by this company; one has combined its existing curriculum with elements of Chancellor Beacon’s, and the other has left its existing curriculum in place. The school that has adopted elements of Chancellor Beacon’s curriculum has done so by integrating the company’s language arts and math curriculum with the school’s existing curriculum, according to company officials. This school, which serves at-risk youth, had a curriculum called expeditionary learning, which focuses on learning through field trips and experiences. The other Chancellor Beacon school opted to retain its existing basic-skills curriculum, relying instead on the company’s management services and selected educational services, such as assessments. Chancellor Beacon officials support the schools’ choices regarding what company components to adopt. Company and school officials identified several reasons why these 6 schools did not completely implement the current company’s educational program, opting instead to continue with an existing curriculum. These included continuity for students, the company’s flexibility with regard to local customization, and the right of charter school boards to make broad curriculum decisions. The 10 schools in the District managed by these companies shared certain characteristics and served similar student populations in 2001-02. All were public charter schools governed by their own boards and accountable to District oversight authorities. Most (9) were combined schools spanning elementary and middle school grades. As public schools, they were required to accept any student who applied, up to their enrollment limit. Their student populations were substantially minority and poor: 92 to 100 percent African American and 48 to 95 percent receiving free or reduced school lunch. All served some students with special needs, such as learning disabilities: in 9 of the schools, the percentage ranged from 5 to 13 percent, and in one school, 32 percent of the student population had special needs. All but one served no or very few students with limited English proficiency; at the remaining school, students with limited English proficiency represented about 12 percent of all students enrolled. Little rigorous research exists on the effectiveness of the three educational management companies—Edison, Mosaica, and Chancellor Beacon—in the schools they manage across the country; as a result, we cannot draw conclusions about the effect that these companies’ programs have on student achievement, parental satisfaction, parental involvement, or school climate. Students in company managed schools have demonstrated academic progress, but more research is needed to determine if this improvement is directly the result of the companies’ programs and if this progress is different from that of comparable students in traditional public schools. We reviewed five studies that addressed student achievement, but only one was conducted in a way that allows an assessment of the effect the company’s program had on student achievement in one school. The remaining studies had methodological limitations that precluded such assessments. In an effort to learn more about effectiveness, Edison has recently commissioned RAND, a nonprofit research organization that has evaluated educational reforms, to complete a study to assess its program’s impact. Determining the effect of an educational company’s program can be challenging for researchers. Ideally, evaluations of program effectiveness should involve a comparison of outcomes for one group exposed to a particular program with outcomes of a second group not exposed to the program. Some evaluations assign participants randomly to one group or the other to increase the likelihood that the two groups are roughly equivalent on all characteristics that could affect outcomes. This technique of random assignment is often problematic in educational research because public school enrollment is generally based on residency requirements. Therefore the most common way to compare student achievement results from two different groups of students is to ensure the groups are similar in a number of ways, including socioeconomic status, ethnicity, and performance on prior academic assessments. In addition to controlling for the effects of these background characteristics, it is critical to follow the performance of students over time, preferably before any group has been exposed to the program, and at least one point thereafter.It is also beneficial to analyze individual student data, rather than grade or school-level averages, to account for individual differences and to factor in the effects of missing data. Within the context of rigorous educational program evaluations, various measurements can be used to capture a student’s performance on standardized tests. According to several experts, it is important to examine both the percent of students in a particular grade or school making yearly gains and the distribution of these gains across ability levels to ensure that students of all achievement levels are demonstrating academic growth. Another point of interest relates to the length of time students participate in a particular program. Some experts claim that students will exhibit greater gains the longer they participate in a program. However, it is particularly challenging to design studies that address this claim, because educational companies are still a relatively new phenomenon. We identified five studies concerning the three companies operating in the District that met the criteria for our review: inclusion of comparison groups, measurement over time, and focus on academic achievement, parental satisfaction, parental involvement, or school climate. All of the studies addressed the effectiveness of schools managed by Edison. One study also addressed the effectiveness of schools managed by all three private companies— Edison, Mosaica, and Chancellor Beacon. We were unable to identify any rigorous studies that included analysis of District public schools managed by any of these three companies. Of the studies included in our review, four studies addressed only outcomes related to student achievement, while one study addressed student achievement and other outcomes such as parental satisfaction and school climate. Only one of the studies, A Longitudinal Study of Achievement Outcomes in a Privatized Public School: A Growth Curve Analysis, based on one Edison school in Miami-Dade County, Florida, was conducted in a way that allows an assessment of the program’s effect on student achievement. This study followed individual student standardized test scores over a 3-year period and found that Edison students progressed at similar rates to those in the traditional Miami-Dade County Public Schools (MDCPS); this finding is not generalizable to other schools managed by Edison or any other private company. The study was designed to ensure that the Edison students were similar to the random sample of students drawn from MDCPS in terms of school grade, socioeconomic status, as indicated by the percent eligible for free/reduced price lunch, ethnicity, and achievement levels, as indicated by comparability in test scores prior to students enrolling in the Edison school. The study employed two different analytical techniques and both resulted in the finding that the Edison students progressed at similar rates to the traditional public school students. Several methodological techniques that would have strengthened its overall findings could have been employed. These include controlling more specifically for school-level differences between the participating students as well as better ensuring the two groups of students remained equivalent despite study dropouts (subsequently referred to as attrition). Differences in the composition of these groups, after attrition, could affect the test score results. This study did not examine the effect of this company’s program on parental satisfaction, parental involvement, or school climate. Significant limitations in the other four studies preclude our making assessments of the effectiveness of schools managed by Edison, Chancellor Beacon, or Mosaica that were included in the studies. These limitations included use of comparison groups that did not adequately control for differences between the students in the company’s schools and the students in traditional public schools, instances where achievement data were not available for all students, and lack of adjustment for high attrition rates. Company officials report that one way to determine if their programs are effective is to assess whether students demonstrate academic growth as evidenced by improvement on standardized tests. There is evidence to support the assertion that students enrolled in schools managed by Chancellor Beacon, Mosaica, and Edison have demonstrated academic improvement from one point in time to another, but it is important to determine if these gains are specifically the result of company programs. Additional research is in progress. Edison commissioned RAND to evaluate Edison schools across the country. Where possible, RAND plans to compare the scores of individual Edison students to those of traditional public schools students with similar characteristics. Since it is often difficult to gather individual level student data, RAND will also compare Edison data, either at the grade or school level, to publicly available state data at that same level. RAND expects to publish its findings in 2004. We received written comments on a draft report from the Department of Education. These comments are presented in appendix III. Education stated that there are insufficient data on the effectiveness of private education companies. Education also stated that it encourages others’ evaluation efforts. We also received comments from an expert on private education companies, the authors of the MDCPS study that we assessed, the District of Columbia Board of Education, the District of Columbia Public Charter School Board, as well as Edison Schools, Mosaica Education, and Chancellor Beacon Academies. These comments were also incorporated where appropriate. We are sending a copy of this report to the Secretary of Education, the District of Columbia Board of Education, the District of Columbia Public Charter School Board, Edison Schools, Mosaica Education, and Chancellor Beacon Academies. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-7215. Other contacts and contributors to this report are listed in appendix IV. The objectives of our review were to (1) identify the characteristics of the for-profit educational management companies operating in the District and determine the extent to which District schools managed by these companies have used their programs and (2) determine what is known about the effectiveness of these programs, as measured primarily by student achievement. We conducted our work between January and September 2002, in accordance with generally accepted government auditing standards. To identify the characteristics of the programs offered by for-profit companies operating in the District, and determine the extent to which District public schools managed by them have used their programs, we interviewed company officials, representatives of the 10 schools, as well as officials of the District’s chartering authorities. We collected information on the companies from their Web sites and obtained technical comments from the companies on the descriptions of their programs. We also contacted education experts and advocates to obtain both their recommendations on research regarding the three for-profit companies and information on any research they might have conducted on the companies. We also acquired information on the companies by reviewing relevant research summaries. We also observed an on-site review of one school’s program conducted for District oversight authorities. To determine what is known about the effectiveness of these programs, we collected, reviewed, and analyzed information from available published and unpublished research on the effect on student achievement, parental satisfaction, parental involvement, and school climate of the three companies managing schools in the District. We also spoke with RAND officials about the design and methods of their current evaluation of Edison Schools. To identify relevant research, we followed three procedures: (1) interviewed experts to find out what studies were completed or in the process of being completed on the effectiveness of company programs; (2) conducted library and Internet searches; and (3) reviewed bibliographies of studies that focused on the effectiveness of company programs. We reviewed studies concerning the three companies operating in the District that met the following criteria: included comparison groups and measurement over time, and focused on academic achievement, parental satisfaction, parental involvement, or school climate. Our final list of studies for review consisted of five studies, as listed in appendix II. We did not identify any studies that evaluated the effect of these three programs in District schools. Two GAO social scientists examined each study to assess the adequacy of the samples and measures employed, the reasonableness and rigor of the statistical techniques used to analyze them, and the validity of the results and conclusions that were drawn from the analyses. For selected studies, we contacted the researchers directly when we had questions about their studies. In order to identify research that explicitly addresses the effect on student achievement, parental satisfaction, parental involvement, or school climate of the three companies managing schools in the District, we interviewed experts to determine what studies were completed or in the process of being completed, conducted library and Internet searches, and reviewed bibliographies of studies that focused on the effect of these companies’ programs on student achievement. Although five studies met our criteria for review (inclusion of comparison groups, measurement over time, and focus on academic achievement, parental satisfaction, parental involvement, or school climate), we cannot draw conclusions, due to methodological weaknesses, from the four studies listed below.Conclusions from A Longitudinal Study of Achievement Outcomes in a Privatized Public School: A Growth Curve Analysis were presented in the text. Miron, Gary and Brooks Applegate. An Evaluation of Student Achievement in Edison Schools Opened in 1995 and 1996. Kalamazoo, Michigan: The Evaluation Center, Western Michigan University, December 2000. Miron and Applegate analyzed both individual and aggregate level data and compared improvements in the test scores of 10 Edison schools with those of comparison schools, districts, states, and national norms, where applicable. However, significant weaknesses prevented conclusive statements on the effects of Edison schools. These weaknesses included limitations in the available data, such as incompleteness and inconsistency, high attrition rates, and the lack of corresponding adjustments for attrition. Horn, Jerry and Gary Miron. An Evaluation of the Michigan Charter School Initiative: Performance, Accountability, and Impact. Kalamazoo, Michigan: The Evaluation Center, Western Michigan University, July 2000. Horn and Miron examined the percentage of students earning a passing grade on achievement tests in individual charter schools in Michigan in comparison with the percentage passing in the districts where these schools were located. The analysis included schools managed by Edison, Mosaica, and Beacon. Weaknesses included inadequate controls for differences between the students in charter schools and their host districts, no consideration of attrition rates, and the likelihood that analyses were often based on a small number of students. American Federation of Teachers. Trends in Student Achievement for Edison Schools, Inc.: The Emerging Track Record. Washington, D.C.: October 2000. Researchers examined school and grade-level achievement data from 40 Edison schools in eight states and compared it to data gathered from school districts and other schools. Weaknesses included insufficient information about the methodology employed by the states, including construction of comparison groups and matching techniques, and a lack of analysis of attrition rates. Gomez. Ph.D., Joseph and Sally Shay, Ph.D. Evaluation of the Edison Project School. Final Report, 1999-00 (portions related to parental satisfaction and involvement, and school climate). Office of Evaluation and Research, Miami-Dade County Public Schools (MDCPS), April 2001. Gomez and Shay examined responses from surveys MDCPS had administered to parents and teachers from both the Edison school and the control group. However, the outcomes related to parental satisfaction and involvement were measured with single-item survey questions that do not seem to capture the full context of the concepts. School climate was measured with a single-item question on a teacher survey and with school archival data. Shay and Gomez did not report whether any differences are statistically significant, in part because they acknowledged it would be inappropriate to conduct tests of significance on single-item questions. Therefore, there is no evidence to determine whether Edison school parents were more satisfied or involved than those in the control group, or whether the Edison school improved school climate. We are aware of other studies and reports that address the effect of Chancellor Beacon Academies, Mosaica Education, and Edison Schools on academic achievement, parental satisfaction, parental involvement, or school climate; however, the following are examples that did not meet the criteria for inclusion in our review. District of Columbia Public Charter School Board. School Performance Reports. Washington, D.C.: August 2001. Department of Research, Evaluation, and Assessment, Minneapolis Public Schools. Edison/PPL School Information Report 2000-2001. Minneapolis, Minnesota: 2001. Department of Administration, Counseling, Educational and School Psychology, Wichita State University. An Independent Program Evaluation for the Dodge-Edison Partnership School: First Year Interim Report. Wichita, Kansas: 1996. Missouri Department of Elementary and Secondary Education. Charter School Performance Study: Kansas City Charter Schools. Jefferson City, Missouri: 2001. Company-provided information such as annual reports and school performance reports. Other sources of general information included school district websites and other educational services, such as Standard and Poor’s School Evaluation Services and the National Association of Charter School Authorizers’ Educational Service Provider Information Clearinghouse. In addition to those named above, Rebecca Ackley and N. Kim Scotten made key contributions to this report. Jay Smale, Michele Fejfar, Kevin Jackson, Sara Ann Moessbauer, and Shana Wallace provided important methodological contributions to the review of research. Patrick Dibattista and Jim Rebbe also provided key technical assistance. School Vouchers: Characteristics of Privately Funded Programs. GAO-02- 752. Washington, D.C.: September 26, 2002. School Vouchers: Publicly Funded Programs in Cleveland and Milwaukee. GAO-01-914. Washington, D.C.: August 31, 2001. Charter Schools: Limited Access to Facility Financing. GAO/HEHS-00- 163. Washington, D.C.: September 12, 2000) Charter Schools: Federal Funding Available but Barriers Exist. HEHS-98- 84. Washington, D.C.: April 30, 1998. Charter Schools: Recent Experiences in Accessing Federal Funds. T-HEHS-98-129. Washington, D.C.: March 31, 1998. Charter Schools: Issues Affecting Access to Federal Funds. T-HEHS-97- 216. Washington, D.C.: September 16, 1997. Private Management of Public Schools: Early Experiences in Four School Districts. GAO/HEHS-96-3. Washington, D.C.: April 19, 1996. Charter Schools: New Model for Public Schools Provides Opportunities and Challenges. GAO/HEHS-95-42. Washington, D.C.: January 18, 1995. School-Linked Human Services: A Comprehensive Strategy for Aiding Students At Risk of School Failure. GAO/HRD-94-21. Washington, D.C.: December 30, 1993. | In recent years, local school districts and traditional public schools have taken various initiatives to improve failing schools. School districts and charter schools are increasingly contracting with private, for-profit companies to provide a range of education and management services to schools. In the District of Columbia, some public schools contract with three such companies: Edison Schools, Mosaica Education, and Chancellor Beacon Academies. These three companies have programs that consist of both management services, such as personnel, and educational services, which they offer to schools across the nation; in the District, most of the schools managed by these companies have either adopted selected elements of their companies' programs or chosen other educational programs. Each company provides services such as curriculum, assessments, parental involvement opportunities, and student and family support. Little is known about the effectiveness of these companies' programs on student achievement, parental satisfaction, parental involvement, or school climate because few rigorous studies have been conducted. Although the companies publish year-to-year comparisons of standardized test scores to indicate that students in schools they manage are making academic gains, they do not present data on comparable students who are not in their programs, a necessary component of a program effectiveness study. |
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RTC’s sales centers planned and carried out land sales initiatives. Asset marketing specialists at the National Sales Center and in regional sales centers developed disposition plans, identified the assets to be offered for sale in the initiatives, and obtained approval from RTC management to carry out the sales initiatives. Initiatives offering assets with a combined book value in excess of $250 million required RTC headquarters approval. Field offices were permitted to approve their own sales initiatives when the book value of the assets being offered totaled $250 million or less. In December 1993, RTC issued its business plan. In developing the plan, RTC used a standard methodology to comparatively evaluate the net recoveries from similar asset types sold through different disposition methods. Similar expense data, but not all expense data, were gathered for relevant transactions and, according to RTC, standard methodologies were used to evaluate all types of equity partnerships, large sealed bids/portfolio sales, and auctions, respectively. However, at the time these evaluations were done, the most significant land sales initiatives using alternative disposition methods, such as the Multiple Investor Fund and equity partnership structures, had not yet closed. Therefore, land was not included in the business plan analysis as a separate asset type. In 1993, RTC decided to test the equity partnership structure for land (Land Fund I). It then became more important for RTC to assess relative recoveries of distinct disposition methods. Also, in December 1993, the RTC Completion Act of 1993 established various requirements for the disposition of real property, including land and nonperforming loans secured by real estate. The act required that before such assets are offered in a bulk transaction, RTC must determine in writing that a bulk transfer would maximize the net recovery to RTC while providing an opportunity for broad participation by qualified bidders, including minority- and women-owned businesses. The required written justifications are to be included in the case submitted to RTC management to obtain approval for each land sales initiative. We reviewed RTC’s land disposition activities to determine how RTC was dealing with its land assets inventory. Our objectives were to determine whether RTC had (1) developed and implemented a strategy for disposing of its land assets and (2) assessed the results of its land sales initiatives to identify the most cost-effective disposition methods and best practices. To accomplish our first objective, we reviewed the November 1991 Land Task Force strategy paper and RTC’s directive implementing the land disposition strategy. We interviewed the head of the task force to discuss the (1) basis for RTC’s strategy, (2) results of the land inventory evaluations done by the task force, and (3) land sales initiatives RTC planned to implement in 1993. We also interviewed RTC headquarters officials in Washington, D.C.; and contacted field office officials in Atlanta; Dallas; Denver; Kansas City; Newport Beach, CA; and Valley Forge, PA. We obtained information on the implementation of RTC’s land disposition policy and related policies and procedures, inventories of land and loans secured by land, land sales initiatives and their results, and land sales initiatives in the planning stage. To accomplish our second objective, we reviewed 6 of the 13 land sales initiatives RTC’s National Sales Center planned to implement in 1993. These initiatives were judgmentally selected to represent a cross-section of the types of land sales strategies used by RTC, the ways RTC pooled assets for land sales initiatives, and size of initiatives in terms of number of assets offered for sale. The selected initiatives included five different sales strategies and five different ways to pool the assets. The size of the initiatives ranged from 35 to 410 assets. (App. I lists the 1993 National Sales Center initiatives and identifies those we reviewed.) We also reviewed an auction—the Pride of Texas—planned by the Dallas field office. We selected this initiative because it provided an example of a field office initiative involving land assets located in a local area with national advertising. For each of the seven land sales initiatives we selected for review, we interviewed the RTC asset marketing specialists in Washington, D.C., and one in Dallas who planned and executed the selected initiatives. These individuals provided documents relating to each initiative, including case approvals and listings of assets reserved for the initiatives. In these interviews, we also discussed the availability and sources of sales expense data for the initiatives we reviewed and obtained copies of all expense data that these asset marketing specialists had in their files. We focused on direct costs associated with the initiatives and not on other costs incurred by RTC, such as indirect overhead and asset management and disposition fees, because RTC would have incurred these costs even if the bulk sales had not been implemented. The costs we attempted to determine are listed in appendix II. We also attempted to obtain cost data that RTC could not provide from the contractors it had hired to carry out the initiatives we reviewed. We contacted 11 RTC contractors providing financial advisory, due diligence, and auctioneer services for the selected land sales initiatives to get information about the services they provided and the fees they billed to RTC for these services. We also contacted RTC’s Office of Inspector General to discuss work done on contractor billings for services provided on two of the initiatives we reviewed. Finally, we interviewed RTC headquarters officials from the National Sales Center, Office of Contract Operations, Management Information Division, and Department of Corporate Finance, as well as field office officials in Dallas, to determine whether the results of individual land sale initiatives were evaluated. We also reviewed reports on the results of 1992, 1993, and 1994 program compliance reviews to determine whether reviewing officials were assessing compliance with the land sales initiative policy directive. On February 6, 1995, we met with RTC’s Vice President for Asset Marketing, RTC officials representing the National Sales Center, the Office of Contracts, and the Chief Financial Officer to discuss a draft of this report. Their comments were considered and have been incorporated into the report where appropriate. On March 3, 1995, RTC provided written comments on a draft of this report, which are evaluated in the agency comments section and elsewhere in the report where appropriate. RTC’s written comments are reprinted in appendix IV. We did our work between January 1993 and December 1994 in accordance with generally accepted government auditing standards. Until the summer of 1991, RTC did not place a high priority on the disposition of land assets. Instead, priority was given to other asset categories that could be disposed of quickly, such as securities and residential mortgages—of which RTC had a large inventory—and commercial and residential real estate that had greater holding costs. The experience RTC gained through the disposition of other types of hard-to-sell assets, such as nonperforming commercial real estate loans, paved the way for structuring of land sales. Recognizing the challenge posed by land assets, RTC formed a land task force in the summer of 1991 to analyze its land inventory and develop a strategy for disposing of these assets. The task force estimated that, continuing at RTC’s then average annual rate of land sales, it would take RTC over 16 years to dispose of its remaining land assets. Initially, land was offered on a sealed bid or auction basis, and later in various forms of equity partnerships. RTC had not yet tested the market for equity partnerships when the Land Task Force issued its strategy paper. In its November 1991 strategy paper, the task force recommended that RTC use specific types of sales methods to dispose of land assets and select assets for initiatives that were similar in size, type, and location to respond to investor preferences. The specific sales methods recommended by the task force included (1) auctions for land assets with book values under $1 million, (2) local promotional campaigns for land assets with book values ranging from $1 million to $5 million, (3) sealed bid offerings for land assets with book values over $5 million, and (4) solicited proposals from qualified investors for portfolios of large land assets with an aggregate book value in excess of $100 million. In May 1992, RTC issued its land sales directive, Circular 10300.23 entitled Land Sales Strategies and Programs. This directive incorporated the task force’s recommendations into RTC’s guidelines for establishing and implementing land sales strategies. In implementing the task force’s recommendation to solicit proposals from investors, the directive specified two possible initiatives: (1) multiple investor funds for pools of land assets ranging from $1 billion to $2 billion in total book value and (2) competitive solicitations of qualified individual investors for large portfolios of land assets with an aggregate book value of less than $1 billion. The directive required RTC field offices to identify available land assets and develop plans for their disposition. These plans were to include (1) an analysis of available land assets, (2) a list of the land sale initiatives planned or in process and their sales goals, and (3) a separate marketing plan for each individual land asset with a book value of $5 million or more. The directive emphasized the importance of ensuring that land assets be carefully evaluated before being included in a specific sales initiative to ensure that the proper sales method is selected. In choosing a sales method for an initiative, the offices were to select the one that was most appropriate for the types of land assets to be offered for sale. The directive also required that the sales method selected satisfy RTC’s mandate to achieve the highest net recovery on the sale of assets while avoiding disruptions in local real estate markets. Finally, the directive required the land task force to (1) review field office initiative plans for consistency and compliance with recommended land policies and sales methods and (2) evaluate the results of land sales initiatives at the completion of each initiative and identify which sales methods are most effective. Using the various sales methods set forth in the land sales strategy directive, RTC disposed of about $16 billion (book value) in land and loans secured by land during 1993 and the first half of 1994. RTC figures showed that it had about $4.6 billion (book value) in land and nonperforming loans secured by land remaining in its asset inventory as of April 30, 1994. By the end of February 1995, RTC indicated that it had reduced its inventory of these types of assets to about $850 million. RTC has until December 31, 1995, to complete any land sales initiatives it undertakes. The RTC Completion Act of 1993 set this date for RTC to cease its operations. Any assets remaining in RTC’s inventory at that time will be transferred to the Federal Deposit Insurance Corporation (FDIC) for disposition. As part of the planning process for transitioning to FDIC, RTC is to identify its best practices, which should be considered for use by FDIC. RTC believes that the recovery analysis it is doing on the various disposition methods it uses will help it accomplish this task. In addition, RTC believes this analysis should help FDIC as it considers alternate disposition methods for its own inventory of land and other assets and for similar assets it inherits from RTC in December 1995. RTC policy required the results of land sales initiatives to be evaluated. However, RTC did not (1) establish a standard methodology for making the required evaluations, (2) perform the evaluations, or (3) take adequate steps to ensure that these evaluations were done. Also, RTC did not develop a formal procedure to capture the expense data needed to calculate the net recoveries on the sale of land assets. As a result, RTC could not assess the relative cost effectiveness of the various sales methods it used. Relative cost effectiveness was a key component to be used in the required evaluations since they were meant to identify the most effective methods. RTC also did not have the data needed to analyze expense variations and thus could not use this information to better manage future land sales initiatives. In its May 1992 directive on land sales strategies, RTC underscored the importance of sales initiative evaluations in satisfying its mandate to maximize net recoveries on the sale of assets under its control. It required that the results of land sales initiatives be evaluated at the completion of each initiative to identify the most effective sales methods. Nevertheless, a standard methodology to evaluate initiative results was not developed by either the land task force, which was to do the required evaluations, or other units within RTC. A standard methodology is necessary to ensure that RTC collects and considers similar data for each initiative to consistently assess the results of the initiatives to identify the most cost-effective sales techniques and best practices. Furthermore, no evaluations were done by RTC staff to comply with the land sales directive requirement. RTC normally uses its program compliance reviews to evaluate the various RTC offices’ compliance with RTC policies and procedural requirements in executing the Corporation’s various business functions. One of the purposes of the program compliance review process is to identify procedural deficiencies that hamper or prevent the implementation of policy requirement. However, our review of the program compliance reports showed that these reviews, which have been done at least annually since RTC’s inception, were not used to determine whether the land sales initiative evaluation requirement was being implemented throughout RTC. Expense data are needed, by definition, to compute net recoveries from the land sales initiatives and evaluate the results of these initiatives compared to other disposition methods. While RTC management acknowledged the importance of evaluating sales initiative results, they did not establish adequate policies and procedures to ensure that all essential actual expense data needed to make the net recovery calculations were collected. As a result, RTC did not compute the net recoveries for the land sales initiatives, identify the most cost-effective initiatives and best practices, refine its land disposition strategies, or analyze expense variations to better manage future land sales initiatives. Because RTC procedures did not require them to do so, asset marketing specialists generally did not monitor total sales initiative expenses or use the land sales initiative budgets to control costs and identify costly practices. Also, RTC’s systems could not generate expense reports on the individual land sales initiatives. RTC’s Financial Management System (FMS), except for auctions, lacked codes needed to sort expense data by sales initiative. RTC expanded the list of FMS codes in 1994; however, codes were not set up for all sales initiatives planned for 1994 and 1995. The lack of (1) FMS codes and (2) formal compilation of actual sales initiative expenses prevented RTC and us from getting data by sales initiative to evaluate and compare the results between and among sales initiatives. Two of the five asset marketing specialists who managed the National Sales Center initiatives we reviewed provided partial expense data obtained from a portfolio sales adviser and other contractors hired to help carry out the initiatives. However, the three other specialists were not able to provide similar data. The National Sales Center maintained a system with some expense data, including contracted financial sales advisory and due diligence services and some marketing expenses. However, this system did not capture data for other expenses, such as legal services and advertising. Because RTC did not collect complete data for all the expenses incurred to implement individual land sales initiatives, we attempted to obtain the missing data from other sources for the land sales initiatives we reviewed. We identified, primarily from contractor records, almost $49 million in expenses incurred on the seven land sales initiatives we reviewed. However, we were unable to locate complete data for all of the expenses for each of the initiatives. Mainly, we located data on contracting fees incurred to carry out the initiatives as well as certain other sales initiative expenses incurred for legal services, advertising, and the facilities used to conduct the sale. We included all amounts invoiced by RTC’s contractors that we located. Some of the due diligence fees, totaling millions of dollars, for several initiatives were being disputed by RTC at the time of our review; and we were not certain how the fees dispute would be resolved. For the East Coast Land Sale, we were unable to break out invoiced expenses for due diligence services between that initiative and other initiatives commingled in the billing. For three of the seven initiatives, data we located lacked the detail needed to identify amounts for several expense categories, such as marketing brochures, asset information packages, the due diligence library, and travel, due to commingling of expenses. We identified expense data for most of the expense categories for five of the seven land sale initiatives we reviewed. For these five initiatives, there were large variations in the amounts spent within the various expense categories as well as in the total expenses RTC incurred. Some of the variation within the expense categories and among sales initiatives can be attributed to differences in the numbers, locations, and quality of assets included in the initiatives. However, because RTC did not do comparative analyses, explicit reasons for most of the variations were not determined. In September 1993, we reported on RTC’s lack of adequate evaluation of sales program results and its failure to collect essential cost data needed to measure program effectiveness. We said that if RTC had accurate information on asset characteristics, revenues, expenses, holding periods, gross and net proceeds, and sales methods by asset type, it could more effectively manage its disposition program and evaluate the results of its various sales methods. We concluded that data limitations impaired RTC’s analysis of the sales methods it used and recommended that RTC improve its methods for collecting and summarizing asset sales and financial data to maximize recoveries on its hard-to-sell assets. We also reported, in December 1993, that there were substantial variations in fees paid for similar loan servicing services. We concluded that without information on all the costs under its loan servicing contracts, RTC could not effectively monitor the fees charged by contractors or establish cost-effective fee structures. We recommended that RTC routinely collect the information needed to monitor loan servicing fees and expenses and use this information to develop cost-effective compensation structures in future contracts. RTC has implemented the recommendations we made in that report. It is monitoring its loan servicing fees and expenses and using this information in awarding new contracts. On June 28, 1994, we briefed RTC management on the results of our work on land sales initiatives. In response to this briefing and our September 1993 data limitations report recommendation that RTC improve its methods for collecting and summarizing asset sales and financial data, RTC took actions to address the concerns we raised. RTC acknowledged that although information regarding the amount of gross sales proceeds from past multiasset sales transactions was readily available, the amount of corresponding sales expenses can only be determined after substantial research. It also acknowledged that documentation of estimated and actual sales expenses for each multiasset sale would be useful in determining the effectiveness of different sales methods and for monitoring sales expense data. On August 15, 1994, RTC issued a directive, Circular 10300.39 entitled Multi-Asset Sales Transactions Budgets, to establish procedures for tracking multiasset sales expenses. This directive applies to all multiasset sales initiatives, regardless of type, developed by RTC or any of its contractors for the disposition of loans, real estate, or other assets. The procedures in the new directive, which became effective for all relevant sales cases approved after July 31, 1994, require (1) a sales budget to be prepared for each multiasset sales initiative that must be submitted with the case memorandum requesting authority to proceed with the initiative and (2) actual sales expenses to be compiled and entered onto a copy of the original budget no later than 90 days after the sale closing (transfer of title). To ensure consistency, a standard multiasset sales transaction budget format (see app. III) was developed that must be used to record budget and expense information. The directive assigns responsibility for ensuring that the sales budget is completed and updated to the individual responsible for managing the initiative. This individual is to coordinate with legal, contracting, and other parties as needed to obtain estimated and final sales-related expense data. RTC has developed a strategy for disposing of its remaining land assets, and during 1993 it implemented a variety of land sales initiatives to dispose of these assets. Although RTC required each land sales initiative to be evaluated, it did not develop a standard methodology for these evaluations, nor were the required evaluations done. Consequently, RTC could not assess the relative cost effectiveness of the various land sales methods it used. Furthermore, RTC did not assess the implementation of the evaluation requirement through its program compliance reviews to ensure that policies and procedural requirements were being executed properly and consistently. Had RTC used these reviews, it likely would have recognized that there were procedural deficiencies that were preventing the implementation of the land sales initiative evaluation requirement. Until August 1994, RTC did not have adequate policies and procedures to collect the essential expense data needed to compute the net recoveries from individual land sales initiatives. As a result, RTC could not identify the most cost-effective initiatives, refine its land disposition strategies based on results, or analyze expense variations to better manage future land sales initiatives. We believe it is important that RTC evaluate its land sales initiatives because they would provide valuable best practices information that would be of interest to FDIC as it decides which, if any, RTC asset disposition strategies it may want to adopt as RTC’s operations transition into FDIC. In August 1994, RTC issued procedures requiring sales budgets to be prepared and data to be collected on actual sales expenses. These procedures, if properly implemented, should provide the data RTC needs to evaluate the results of land sales initiatives, including those focused specifically on land and nonperforming loans secured by land. The original sales budget should enable RTC to better determine the appropriate delegated authority approval level for the sales initiatives. The actual sales expense data, along with other relevant information, should enable RTC to evaluate the effectiveness of different sales initiatives and monitor sales-related expenses to identify the most effective marketing and sales techniques. However, RTC still needs to develop a standard evaluation methodology to consistently assess the results of land sales initiatives at the completion of each land sales initiative to identify the most cost-effective sales techniques and best practices. We recommend that RTC’s Deputy and Acting Chief Executive Officer direct the Vice President of Asset Sales and Management to develop an appropriate standard methodology for evaluating the results of land sales initiatives, and ensure that required evaluations are done at the completion of each land sales initiative to identify the best sales methods, most effective marketing techniques, and promote their use on future land sale initiatives. On February 6, 1995, we met with RTC’s Vice President for Asset Marketing, RTC officials representing the National Sales Center, the Office of Contracts, and the Chief Financial Officer to discuss a draft of this report. In summary, they said that they generally concurred with the findings and conclusions as presented in the report. They offered various suggestions to clarify the discussion of their use of sales initiative budgets and their inability to compile all the actual expense data needed to do the required evaluations of individual land sales initiatives. Their comments were considered and have been incorporated into the report where appropriate. On March 3, 1995, RTC provided written comments (see app. IV) on the draft of this report. In this response, RTC agreed with our recommendations, described the actions being taken to implement them, and offered some general comments on RTC’s land disposition methods. RTC said that it has implemented (1) a standard methodology, which is being updated, for evaluating the results of all major sales initiatives and (2) a system in which the results of sales are being captured for a quarterly formal comparative recovery rate analysis report. If the sales data are not submitted after the sale, RTC said a follow-up request is sent to the staff conducting the sale. In addition, RTC said that it will evaluate enhancing its internal control review process to test for compliance with the evaluation requirement. If effectively implemented, we believe that the actions taken and planned by RTC should address the issues discussed in this report. In its general comments, RTC said that while the actual results of equity partnership structures will not be known with accuracy for years, its estimates made after transaction closings suggest that equity partnerships generally will exceed recoveries from other disposition methods. We are not in a position to comment on whether, in the long term, using equity partnerships will maximize the recoveries from asset sales. Because RTC was created as a mixed-ownership government corporation, it is not required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs, the House Committee on Government Operations, and the House and Senate Committees on Appropriations. However, we would appreciate receiving such a statement within 60 days of the date of this letter to assist in our follow-up actions and to enable us to keep the appropriate congressional committees informed of RTC activities. We are sending copies of this report to interested congressional members and committees and the Chairmen of the Thrift Depositor Protection Oversight Board and the Federal Deposit Insurance Corporation. We will also make copies available to others upon request. Major contributors to this report are listed in appendix V. If you or your staff have any questions concerning this report, please call me on (202) 736-0479. Richard Y. Horiuchi Peggy A. Stott 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. | GAO reviewed the Resolution Trust Corporation's (RTC) land disposition activities, focusing on whether RTC: (1) developed and implemented a strategy to dispose of its land assets; and (2) assessed the results of its land sales initiatives to identify the most cost-effective disposition methods and best practices. GAO found that RTC: (1) adopted a land disposition strategy in May 1992 and formed a land task force to analyze its land inventory; (2) disposed of about $16 billion in land and loans between January 1993 and June 1994, although it had about $850 million in these assets remaining unsold as of February 1995; (3) was unable to identify the most effective land disposition methods because it failed to develop a formal procedure to collect all the actual expense data related to each land sales initiative or establish a methodology for evaluating the results of each initiative; and (4) issued a directive requiring that the expenses for each multiasset sales initiative be documented, which should allow it to identify the most effective marketing and sales techniques and best practices. |
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This section describes the factors affecting recent LNG activities in the United States, the liquefaction process, DOE’s responsibilities for authorizing export applications, FERC’s responsibilities for authorizing export facilities, and positions of those supporting or opposing the export of LNG. According to the Congressional Research Service, in the early 2000s, natural gas production in the United States was declining as energy demand was increasing and, as recently as the mid-to-late 2000s the United States was projected to be a growing natural gas importer. In addition to four onshore import terminals that were already operational, natural gas companies built five LNG onshore import facilities in the latter half of the 2000s to meet the expected need for natural gas imports. However, technology enhancements improved the extraction of natural gas from shale formations and resulted in a dramatic increase in domestic natural gas production. These technology enhancements allow companies to extract natural gas from shale formations that were previously considered to be inaccessible because traditional techniques did not yield sufficient amounts for economically viable production. According to Energy Information Administration (EIA) data, between 2007 and 2013, domestic natural gas withdrawals increased by 22 percent, driven primarily by increased withdrawals from shale formations. According to EIA, increases in natural gas supplies generally cause prices to drop. Specifically, between 2007 and 2013, the price of natural gas in the United States decreased by nearly 50 percent. As the price of natural gas in the United States declined, prices in Europe and Asia remained considerably higher. In July 2014, FERC estimated that prices of LNG imported to Europe and Asia during August of 2014 would be about 100 and 250 percent higher than prices in the United States, respectively. These price differences have motivated U.S companies to apply to export natural gas. The majority of U.S. trade in natural gas is by pipeline with Canada and Mexico; however, over long distances separated by water, natural gas is generally converted to LNG and transported by specialized tanker ship. To convert natural gas to LNG, companies pretreat the natural gas to remove components that would freeze during the liquefaction process and contaminate the LNG.through a complex system called a liquefaction train that cools the natural gas to -260 degrees Fahrenheit, converting it to a liquid state. This process reduces the volume of the gas by 600 times. Once liquefied, the After the gas is pretreated, it is processed natural gas is stored in large tanks until it is offloaded to a ship for transport. Once the ship reaches its destination, it is offloaded to tanks for storage or converted to natural gas for distribution by pipeline.illustrates some of the common components of an LNG export facility. Under Section 3 of the NGA, the import or export of LNG and the construction or expansion of LNG facilities requires authorization from DOE. In 1984, DOE delegated the responsibility to approve or deny applications for LNG facilities to FERC. Under Section 3, an authorization is to be granted unless DOE finds that approving the export or import is inconsistent with the public interest. According to DOE, Section 3(a) of the NGA creates a rebuttable presumption that a proposed export of natural gas is in the public interest—that is, it places the burden on those opposing an application to demonstrate that an export is inconsistent with the public interest. The NGA also authorizes DOE to attach terms and conditions necessary to protect the public interest. DOE evaluates public interest under Section 3, and can conduct studies or other reviews to support its public interest determination. In the Energy Policy Act of 1992, Congress amended the NGA to require DOE to use a different standard for the review of applications for export to countries with FTAs with the United States (FTA countries). Specifically, under Section 3(c) of the NGA, DOE must treat applications to export LNG to FTA countries as consistent with the public interest, and DOE is to approve these applications without modification or delay. These FTA applications therefore do not require the same public interest review as non-FTA applications. DOE started to receive applications to export LNG in 2010 and, since then, it has approved 37 of 42 applications to export LNG to FTA countries. During this same period, DOE approved 9 (3 final and 6 conditional) of 35 applications to export LNG to non-FTA countries. Most major importers of LNG are non-FTA countries such as Japan and India, among others. As previously mentioned, this report discusses DOE’s process to review applications to export to non-FTA countries. In keeping with its obligation to authorize LNG facility siting and construction under the NGA, FERC reviews applications to construct and operate LNG export facilities. FERC’s review is considered a federal action and subject to the National Environmental Policy Act (NEPA). NEPA requires federal agencies to assess the projected effects of major federal actions that significantly affect the environment. Prior to the NEPA review, the law requires applicants to communicate with FERC for a minimum of 6 months—known as pre-filing—before submitting an application. FERC acts as the lead agency for the environmental review required by NEPA, prepares the NEPA environmental documentation, and coordinates and sets the schedule for all federal authorizations. The outcome of this review is an environmental document, also called the NEPA document, which provides the commissioners with staff’s assessment of the environmental impacts from facility construction and operation. DOE and FERC consider comments from the public during the application review process, and these comments reflect a range of perspectives on the potential benefits or harm from exports. Proponents maintain that LNG exports are consistent with U.S. free trade policies and will provide an economic boon for the United States, resulting in increased employment and an improved trade balance among other things. They assert that the increased availability of natural gas resources will prevent a significant increase in natural gas prices. Opponents have expressed numerous environmental and economic concerns about LNG exports. For example, opponents have expressed concern that exports will increase hydraulic fracturing and its associated environmental effects, as well as increase greenhouse gas emissions from the production and consumption of natural gas.that exports will increase domestic natural gas prices, hurting the public and the growing industrial and manufacturing sectors that are sensitive to natural gas prices. Opponents have also stated that the primary beneficiaries of LNG exports will be a small segment of society involved in natural gas development and trade, and that most segments of society Other opponents have expressed concern will lose economically. Evaluating whether exports of LNG to non-FTA countries are consistent with the public interest is beyond the scope of this report. Since 2010, DOE has granted final approval to 3 applications and conditional approval to 6 others. DOE considers a range of factors to determine whether approving an export application is in the public interest. As of mid-September 2014, DOE has granted 3 final approvals for applications to export LNG, including the Sabine Pass application in 2012 and the Cameron LNG and Carib Energy applications in September 2014. Sabine Pass is the only LNG export facility currently under construction in the United States and is expected to begin operations in late 2015. In August 2011, after DOE conditionally approved exports from Sabine Pass, DOE commissioned a study of the cumulative effects of additional LNG exports on the economy and the public interest.approve any conditional applications during the 16-month period of the DOE did not study. The study was completed in December 2012. Since then, DOE has conditionally approved 7 applications, including the Cameron LNG application that it granted final approval in September 2014 (See fig. 2). DOE also approved the Carib Energy application in September 2014. DOE’s export approvals, as of late August 2014, amount to 10.56 billion cubic feet of natural gas per day in the form of LNG; for comparison, Qatar, the world’s largest exporter of LNG, exported about 10 billion cubic feet per day in 2012. According to DOE, when determining whether approval of an application is in the public interest, DOE focuses on (1) the domestic need for natural gas, (2) whether the proposed export threatens the security of domestic natural gas supplies, and (3) whether the arrangement is consistent with DOE’s policy of promoting market competition along with other factors bearing on the public interest, such as environmental concerns. In passing the NGA, Congress did not define “public interest;” however, in 1984, DOE developed policy guidelines establishing criteria that the agency uses to evaluate applications for natural gas imports. The guidelines stipulate that, among other things, the market—not the government—should determine the price and other contract terms of imported natural gas. In 1999, DOE began applying these guidelines to natural gas exports. DOE’s review of export applications is not a standardized process, according to agency officials; rather, it is a case-by-case deliberation, where each application is considered separately from others. DOE’s review process begins when an applicant submits documentation to DOE requesting permission to export LNG. DOE examines applications one at a time, and it issues a notice of application in the Federal Register to invite persons interested in the application to comment, protest, or Applicants are then given an opportunity to respond to intervene.comments. DOE’s internal review includes an examination of the application and analysis of public interest using public comments and applicant responses, the criteria outlined in its policy guidelines, the NGA, DOE’s study of the effects of additional LNG exports, and past DOE authorizations. As discussed above, the NGA authorizes DOE to attach terms and conditions necessary to protect the public interest. To further inform its public interest review, DOE commissioned the study of the potential effects of additional exports on the economy. Since the study was released in December 2012, DOE has used it to support its public interest review for each of its application approval documents, including referencing the study’s conclusion that LNG exports would have a net positive effect on the economy. After considering the evidence, DOE issues an order denying the application or granting the application on condition of a satisfactory completion of the NEPA review by FERC. DOE includes the reasoning behind its decision in each order. DOE may also modify the request in an order, such as by limiting the approved export amount or duration. Once DOE conditionally approves an application, it does not grant a final approval until it has reviewed FERC’s NEPA document and reconsidered its public interest determination in light of relevant environmental information. Under NEPA, DOE must give appropriate consideration to the environmental effects of its decisions; FERC’s NEPA document provides the basis for this consideration. 79 Fed. Reg. 32261 (June 4, 2014). The change would also supersede the precedence order. According to the DOE notice, DOE could still choose to implement the policy of issuing conditional orders at a later date. According to DOE officials, this change would allow them to use agency resources more efficiently because they would conduct a single review of each application instead of separate reviews for conditional and final approvals. In addition, the proposal would allow projects that are more commercially advanced to be reviewed by DOE once FERC has issued a NEPA document. Since 2010, FERC approved 3 facility applications, including 2 in 2014, and is currently reviewing 14 applications. FERC’s reviews of LNG export facility applications are a multiyear analysis of the potential environmental and safety effects of the facility that involves other federal, state, and local agencies. FERC approved applications to construct and operate the Sabine Pass LNG export facility in April 2012, the Cameron facility in June 2014, and the Freeport facility in July 2014. As of late August 2014, FERC was reviewing 14 applications (See fig. 3). FERC has issued three final NEPA documents in 2014, including for the Cameron and Freeport facilities, and expects to complete one more by the end of 2014. FERC officials said that they could not discuss when the Commission would act on these facility applications. As shown above, FERC’s review of applications to construct LNG export facilities can take 2 to 3 years or more.reviews are lengthy because of the complexity of the facilities and number of permits and reviews required by federal and state law. For example, applicants must model the effects of LNG spills from pipes and storage tanks on areas around the facility under a variety of scenarios. One of the applicants we spoke with said that the number of variables involved in modeling a single scenario could require up to a week of computer processing. FERC’s review process is technically complex and includes the following three phases. Pre-filing. According to FERC officials, the pre-filing phase is intended to allow applicants to communicate freely with FERC staff and stakeholders to identify and resolve issues before the applicant formally files an application with FERC. Under Commission regulations issued pursuant to the Energy Policy Act of 2005, applicants are required to pre-file with FERC a minimum of 6 months before formally filing. The pre-filing phase can vary significantly depending on project specifics; the Freeport and Lake Charles applications were in the pre-filing phase for over 19 months, while the Cameron application was in the pre-filing phase for about 7 months. FERC officials said that the duration of each phase can vary depending on the site specific characteristics of the proposed facility and responsiveness of the applicant to requests for information from FERC. The pre-filing period also involves public outreach by the applicant and FERC, and FERC allows public comments during this period. An applicant completes the pre-filing period when it has submitted the required documentation to FERC and formally filed. This documentation includes a series of 13 resource reports that consist of, among other things, detailed information on project engineering and design, air and water quality, and fish and wildlife, as well as a description of the anticipated environmental effects of the project and proposed mitigation measures. One applicant told us that the resource reports it submitted to FERC consisted of over 12,000 pages. Application review. The application review phase includes FERC’s review of the application and development of the environmental document required by NEPA. FERC officials told us that they start the review phase after an applicant has successfully completed the pre-filing process and submits an application. FERC reviews, among other things, facility engineering plans and safety systems identified by the applicant; environmental effects from the construction and operation of the facility; and, potential alternatives to the proposed project. FERC develops a NEPA document with input from relevant agencies that elect to participate, called cooperating agencies, as well as other stakeholders. FERC officials told us that, depending on the location of the proposed facility and amount of construction, FERC prepares either an environmental impact statement (EIS) or environmental assessment (EA). FERC will prepare an EA if it believes the review will find no significant impact on the environment from the project. For example, FERC prepared an EA for the Sabine Pass facility because the proposed facility was within the footprint of an existing LNG import facility and previously the subject of an EIS. FERC officials told us that the agency generally prepares an EIS for proposed facilities that would extend beyond the footprint of an existing import facility. After an EIS or EA is drafted, FERC solicits comments from federal agencies and the public on the document.those into a final EIS or EA, as necessary. The final EIS or EA will recommend any environmental and safety mitigation measures to be FERC reviews agency and public comments and integrates completed during various stages of the project. FERC staff submits the final NEPA document and other staff analyses to FERC commissioners for consideration. FERC commissioners consider the entire record of the proceeding, including the NEPA document, to determine whether to approve a project. Post-authorization. The post-authorization phase includes FERC oversight of plant construction and operations. After FERC approves a project but before an applicant can start construction, the applicant must develop a plan describing how it will meet any conditions and mitigation measures identified in FERC’s approval. FERC oversees construction and ensures that these conditions are met. The Coast Guard and DOT also oversee construction to ensure compliance with their respective regulations. FERC conducts compliance and site inspections during construction at least every 8 weeks. Following construction, the applicant must receive written authorizations from the Commission to begin operations at the facility. Once the facility is operational, FERC conducts annual inspections and requires semiannual status reports from the facility operator. As the lead agency responsible for the environmental and safety review of LNG export facilities under NEPA, FERC works with federal, state, and local agencies to develop the NEPA document. In some cases, such as with the Corps and DOE, agencies will adopt and use the NEPA document in issuing their respective permits related to the export facility. In addition, FERC regulations require applicants to consult with the appropriate federal, state, and local agencies to ensure that all environmental effects are identified.obtains the appropriate federal permits or consultations with these agencies. Major federal participants in FERC’s LNG facility review include the following: FERC ensures that the applicant Coast Guard. The Coast Guard requires applicants to assess the effects of a new facility on a bordering waterway. The applicant provides the assessment to the Coast Guard for validation and review before filing its FERC application, and the Coast Guard advises FERC on the suitability of the waterway for the LNG marine traffic associated with the facility. The Coast Guard and DOT also assist FERC’s review of safety and security of the facility. PHMSA. PHMSA is an agency within DOT responsible for establishing national policy relating to pipeline safety and hazardous material transportation, including the authority to establish and enforce safety standards for onshore LNG facilities. To assist FERC’s assessment of whether a facility would affect public safety, FERC regulations require applicants to show that their facility design would comply with PHMSA regulations for hazardous liquids vapor dispersion and fires. Applicants submit models of vapor dispersion to FERC, and FERC consults with PHMSA to ensure that the models comply with PHMSA regulations. The Corps. Under section 404 of the Clean Water Act, operations that discharge dredged or fill material into U.S. waters are required to obtain a permit from the Corps. Discharges under this permit must have a state certification to ensure the discharge meets water quality standards. In addition, under section 10 of the Rivers and Harbors Act of 1899, the Corps has regulatory authority to oversee construction activities within the navigable waters of the United States, and applicants may be required to obtain a permit from the Corps. Environmental Protection Agency (EPA). Applicants may be required under the Clean Air Act (CAA) to receive air permits for the construction and operation of LNG facilities. State environmental agencies generally issue these permits, but EPA can issue the permits if a state is not authorized to issue permits, or under other limited circumstances. EPA also comments on the FERC draft and final EIS, as required by the CAA. Applicants may also be required by law to consult with these and other federal agencies, such as the National Oceanic and Atmospheric Administration and the Fish and Wildlife Service, to ensure their applications comply with federal laws such as the Endangered Species Act, the Migratory Bird Treaty Act, the Magnuson-Stevens Fishery Conservation and Management Act, and the Fish and Wildlife Coordination Act. In addition to federal permits and consultations, applicants may also be required to obtain other permits under state and local law. Because of the wide variety of projects, locations, and state and local laws, permitting requirements vary by project. The applicant is responsible for identifying the necessary permits and consultations and reporting these to FERC as part of the pre-filing process. In addition to issuing most air permits and water quality certifications, states and local agencies have other permitting and consultation responsibilities, such as to consult with applicants to ensure compliance with the Coastal Zone Management Act and the National Historic Preservation Act. We provided a draft of this product to FERC and the DOE for their review and comment. DOE and FERC provided technical comments, which we incorporated throughout the report as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 5 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Chairman of FERC, the Secretary of Energy, 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 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. Key contributors to this report are listed in appendix II. For the purposes of this report, GAO developed table 1 below to allow us to use a single name to refer to related applications to the Federal Energy Regulatory Commission (FERC) and the Department of Energy (DOE). Table 1 lists (1) the names of applicants that submitted requests to FERC to construct liquefied natural gas (LNG) export facilities, (2) the names of applicants that submitted requests to DOE to export LNG from those facilities, and (3) the name GAO used to refer to these applications. In some cases, multiple companies filed jointly for one application. In addition to the individual named above, Christine Kehr (Assistant Director), Cheryl Harris, and David Messman made key contributions to this report. Important contributions were also made by Mark Braza, Michael Kendix, Alison O’Neill, Dan Royer, and Barbara Timmerman. | Technological advances in hydraulic fracturing and horizontal drilling have resulted in a dramatic increase in the amount of natural gas that can be produced domestically. DOE is responsible for reviewing applications to export LNG—natural gas cooled to a liquid state for transport—and, under the Natural Gas Act, must approve an application unless it finds that approval is not consistent with the public interest. Since 2010, DOE has received 35 applications to export LNG that must address the public interest question. In addition, under NEPA, FERC is required to assess how LNG export facilities may affect the environment and is responsible for granting approval to build and operate export facilities. Since 2010, FERC has received 17 applications to construct export facilities. GAO was asked to report on the federal process for reviewing applications to export LNG. This report describes (1) the status of applications to export LNG and DOE's process to review them and (2) the status of applications to build LNG export facilities and FERC's process to review them. GAO reviewed laws, regulations, and guidance; examined export approvals; visited LNG facilities; and interviewed federal and state agency officials and industry representatives, including LNG export permit applicants. GAO is not making any recommendations in this report. Since 2010, of 35 applications it has received that require a public interest review, the Department of Energy (DOE) has approved 3 applications to export liquefied natural gas (LNG) and 6 applications are conditionally approved with final approval contingent on the Federal Energy Regulatory Commission's (FERC) issuance of a satisfactory environmental review of the export facility. DOE considers a range of factors to determine whether each application is in the public interest. After the first application was conditionally approved in 2011, DOE commissioned a study to help it determine whether additional LNG exports were in the public interest. Since the 16-month study was published in December 2012, DOE issued 7 conditional approvals (one of which became final) and 1 other final approval (see fig. below). In August 2014, DOE suspended its practice of issuing conditional approvals; instead, DOE will review applications after FERC completes its environmental review. DOE LNG Export Application Status Since 2010, FERC has approved 3 LNG export facilities for construction and operation, including 2 facilities in 2014, and is reviewing 14 applications (see fig. below). FERC's review process is, among other things, designed to fulfill its responsibilities under the National Environmental Policy Act (NEPA). Before submitting an application to FERC, applicants must enter an initial stage called pre-filing to identify and resolve potential issues during the earliest stages of a project. Of the 14 applications, 5 are in the pre-filing stage at FERC and not shown in the figure below. FERC conducts an environmental and safety review with input from other federal, state and local agencies. FERC LNG Export Facility Application Status |
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The majority of Americans receive their health coverage through the private health insurance market. In 2004, as many as 177 million enrollees and dependents—up to 84 percent—of the nearly 210 million individuals under age 65 with health insurance coverage received coverage through the private health insurance market. Since 2004, insurance carriers selling coverage in this market have added HSA-eligible plans to their portfolio of insurance products. Private health plans are offered in two primary markets—the group and the individual markets. The group market includes health plans offered by employers to employees, either by purchasing the coverage from an insurance carrier or by funding their own health plans, and health plans offered by other groups, such as professional associations. About 159 million individuals and their dependents under age 65 received health coverage through the group market in 2004. The individual market includes health plans sold by insurance carriers to individuals who do not receive coverage through an employer or other group. In this market, health insurance brokers may link individuals with an insurance carrier, and the enrollee pays a premium for coverage. About 17 million individuals and their dependents under age 65 received health coverage through the individual market in 2004. Most employers subsidize a share of employees’ health coverage purchased in the group market, whereas individuals purchasing coverage in the individual market typically pay the full cost. HSA-eligible plans constitute a small but growing share of the private health insurance market. As we noted in our April 2006 report, the number of enrollees and dependents covered by an HSA-eligible plan increased from about 438,000 in September 2004 to about 1 million in March 2005 and to about 3 million in January 2006. In 2004 and 2005, more than half of these enrollees and dependents were covered by an HSA-eligible plan purchased in the individual insurance market, rather than obtained from an employer. HSA-eligible plans are required to meet certain statutory criteria. The plans must have a minimum deductible amount of $1,050 for single coverage and $2,100 for family coverage in 2006 and a maximum limit on enrollee out-of-pocket spending of $5,250 for single coverage and $10,500 for family coverage in 2006. Most HSA-eligible plan enrollees are covered by plans that operate similarly to traditional plans. HSA-eligible plan enrollees pay premiums to access covered services. As with traditional plans, rates negotiated by insurance carriers provide incentives for HSA- eligible plan enrollees to access in-network care. However, HSA-eligible plan enrollees are subject to higher-than-average deductibles. Preventive care services may be exempted from the deductible requirement, but coverage of most other services, including prescription drugs, is subject to the deductible. After meeting the deductible, the HSA-eligible plan pays for most of the cost of covered services until the enrollee meets the out-of- pocket spending limit, at which point the plan pays 100 percent of the cost of covered services. Insurance carriers offer HSA-eligible plans to both employers in the group market and individuals in the individual market. An HSA is a tax-advantaged savings account established for paying qualified medical expenses. Individuals are eligible to open an HSA if they are enrolled in an HSA-eligible plan and have no other health coverage, with limited exceptions. However, HSA-eligible plan enrollees are not required to open or contribute to an HSA and can use non-HSA funds to pay for medical expenses. HSA-eligible plan enrollees who choose to pay for medical expenses from their HSA may access their account funds by check, by debit card, or by authorizing the insurance carriers to allow the providers to directly debit their account funds. HSAs are owned by the account holder, and the accounts are portable—individuals may keep their accounts if they switch jobs or enroll in a non-HSA-eligible health plan. Both employers and individuals may contribute to HSAs, and individuals may claim a deduction on their federal income taxes for their HSA contributions regardless of whether they itemize deductions or claim the standard deduction. HSA balances can earn interest; roll over from year to year; and be invested in a variety of financial instruments, such as mutual funds. HSA balances may also accumulate subject only to annual limits on contributions. In 2006, contributions were limited to 100 percent of the deductible, but not more than $2,700 for single coverage or $5,450 for family coverage. Contributions, earned interest, and withdrawals for qualified medical expenses are not federally taxed. Withdrawals for nonqualified expenses are subject to income tax and, if made before age 65, a tax penalty. A financial institution, such as a bank or insurance company, typically administers the account. Table 1 describes the key features of HSA-eligible plans and HSAs. HSA-eligible plans typically provide, to some extent, information on the cost of health care services and the quality of health care providers. This information may help enrollees to become more actively engaged in making health care purchasing decisions. Experts suggest that in order to assess the price competitiveness of different providers or the cost of different treatment options, enrollees need reliable, specific information about the cost of services. Experts also suggest that in order to make informed provider choices, enrollees need data on key quality measures to assess the quality of different providers. These quality measures may include the volume of procedures performed, the outcomes of those procedures, and certain process indicators demonstrating whether providers followed certain recommended treatment guidelines. Insurance carriers offering HSA-eligible plans may also provide online access to health accounts for enrollees to manage their health care spending. These tools may be provided by health insurance carriers to all health insurance plan enrollees, but are likely to be more important to enrollees of HSA-eligible plans and other CDHPs, who have a greater financial incentive to make informed decisions about the quality and costs of health care providers and services. However, insurance carriers have faced challenges in obtaining or presenting quality and cost data. As we noted in our April 2006 report, the decision-support tools provided with CDHPs were limited and did not provide sufficient information to allow enrollees to fully assess cost and quality trade-offs of health care purchasing decisions. The financial features—premiums, deductibles, and out-of-pocket spending limits—of HSA-eligible plans differed from those of traditional plans in 2005, but both plan types covered similar health care services. HSA-eligible plans had lower premiums, higher deductibles, and higher out-of-pocket spending limits than traditional plans in 2005. The HSA- eligible plans we reviewed covered the same broad categories of services as traditional plans and used similar provider networks in 2005. Our illustration of enrollees’ potential health care costs for the three employers’ health plans we reviewed showed that HSA-eligible plan enrollees would incur higher annual costs than PPO plan enrollees for extensive use of health care, but would incur lower annual costs than PPO plan enrollees for low to moderate use of health care. In the group market, HSA-eligible plans had lower premiums, higher deductibles, and higher out-of-pocket spending limits than traditional plans in 2005. Similarly, in the individual market, HSA-eligible plans had lower premiums and higher deductibles than traditional plans in 2005. In the group market, HSA-eligible plans had lower premiums, higher deductibles, and higher out-of-pocket spending limits than traditional plans in 2005. Premiums for HSA-eligible plans were lower than those for traditional plans in 2005. According to a national employer health benefits survey, monthly premiums for HSA-eligible plans averaged $225 for single coverage and $659 for family coverage in 2005. These HSA-eligible plan premiums were, on average, 35 percent less than surveyed employers’ traditional plan premiums for single coverage and 29 percent less than surveyed employers’ traditional plan premiums for family coverage. On average, surveyed employers paid about the same share of the premiums for their HSA-eligible plans as for their traditional plans. Monthly premiums for the HSA-eligible plans offered by the three employers we reviewed ranged from $231 to $319 for single coverage and from $612 to $995 for family coverage in 2005. These HSA-eligible plan premiums were 13 to 27 percent less than the employers’ traditional plan premiums for single coverage and 18 to 23 percent less for family coverage. In contrast to data from the national employer health benefits survey, data from the three employers we reviewed showed that the employers paid a greater share of the premium for their HSA-eligible plan enrollees than for their traditional plan enrollees. HSA-eligible plan deductibles were higher than traditional plan deductibles in 2005. For example, one national employer health benefits survey reported that annual deductibles for HSA-eligible plans averaged $1,901 for single coverage and $4,070 for family coverage in 2005—nearly six times greater than those of surveyed employers’ traditional plans. Another national employer health benefits survey reported that the median annual deductible for HSA-eligible plans offered by large employers was $1,200 for single coverage in 2005, four times greater than those of surveyed employers’ traditional plans. Annual deductibles for the HSA- eligible plans offered by the three employers we reviewed ranged from $1,250 to $3,000 for single coverage and from $2,500 to $6,000 for family coverage in 2005. In contrast, deductibles for two of the three employers’ traditional plans were zero and for the other employer were $350 for single coverage and $700 for family coverage. Out-of-pocket spending limits for HSA-eligible plans were higher than those of traditional plans in 2005. According to a national employer health benefits survey, the median annual out-of-pocket spending limit for HSA-eligible plans offered by large employers was $3,500 for single coverage in 2005, which was higher than the median out-of-pocket spending limit of $1,960 reported for traditional plans. Out-of-pocket spending limits for HSA-eligible plans offered by the three employers we reviewed ranged from $3,750 to $5,000 for single coverage and from $7,500 to $10,000 for family coverage in 2005, in contrast to the limits among the employers’ traditional plans of $1,000 to $2,350 for single coverage and $2,000 to $4,700 for family coverage. Table 2 summarizes the financial features of HSA-eligible and traditional plans offered by employers in 2005. Premiums and deductibles for HSA-eligible plans sold in the individual market by eHealthInsurance followed a pattern similar to that of plans sold in the group market, with lower premiums and higher deductibles than traditional plans. According to eHealthInsurance, the average monthly premiums for HSA-eligible plans were $111 for single coverage and $277 for family coverage in 2005. Premiums for traditional health plans were, on average, 24 percent more for single coverage and 31 percent more for family coverage. The average annual deductible for an HSA-eligible plan was $3,190 for single coverage and $5,213 for family coverage in 2005, compared with deductibles for traditional plans of $1,597 for single coverage and $2,025 for family coverage. (See table 3.) HSA-eligible plans offered in 2005 by the three employers we reviewed covered health care services similar to those covered by the traditional plans offered by the same employers. The HSA-eligible and traditional plans offered by the same employer covered the same broad categories of services, such as preventive, diagnostic, maternity, surgical, outpatient, and emergency care, and typically covered the same services within these categories. While each HSA-eligible plan defined preventive services differently, each plan covered, and paid 100 percent of the cost of, certain core services, including annual physical exams, routine immunizations for children, routine mammograms, routine Pap tests, and well-child care. These services were generally also covered by the traditional plans offered by the employers. The provider networks used by HSA-eligible plans and traditional plans were similar. Two of the three employers we reviewed used the same insurance carrier and the same provider network for the HSA-eligible plan and the traditional plan it offered to its employees in 2005. One employer used different insurance carriers for its HSA-eligible and traditional plan in 2005, and in this case, the HSA-eligible plan network was broader than the traditional plan network. Other evidence suggests that the provider networks used by CDHPs and traditional plans are similar. For instance, industry experts told us that insurance carriers that offer both CDHPs and traditional plans typically use the same provider networks for both products. Insurance carriers we spoke with told us that they used the same provider network for their CDHP and traditional plan products. Additionally, as we noted in our November 2005 report, the provider networks used throughout the country by a national CDHP in the Federal Employees Health Benefits Program (FEHBP) were the same or comparable to those used by the program’s traditional plans. Our illustration of enrollees’ potential health care costs—including premiums, deductibles, and other out-of-pocket costs for covered services—for the three employers’ 2005 health plans we reviewed showed that HSA-eligible plan enrollees would incur higher annual costs than PPO plan enrollees for extensive use of health care, but would incur lower annual costs than PPO plan enrollees for low to moderate use of health care. For example, we estimated that in the event of an illness or injury resulting in a hospitalization costing $20,000, the total costs incurred by the three employers’ HSA-eligible plan enrollees would be 47 to 83 percent higher than those faced by the employers’ PPO plan enrollees. Specifically, the total costs of health coverage paid by HSA-eligible plan enrollees would range from $3,710 to $5,111, while the costs paid by PPO plan enrollees would range from $2,136 to $3,472. In contrast, we estimated that the total costs paid by HSA-eligible plan enrollees who used low to moderate amounts of health care, visiting the doctor for illnesses or injuries six times in one year, would be 48 to 58 percent lower than the costs paid by the PPO plan enrollees. Specifically, the total annual costs of health coverage for HSA-eligible plan enrollees would range from $440 to $679, compared with $1,056 to $1,317 for PPO plan enrollees. HSA-eligible plan enrollees generally had higher incomes than comparison groups, but age differences varied depending on the data reviewed. Fifty- one percent of tax filers reporting HSA contributions had an adjusted gross income of $75,000 or more, compared with 18 percent for all tax filers under age 65 in 2004. Two of the three employers we reviewed and eHealthInsurance reported that HSA-eligible plan enrollees had higher incomes than did traditional plan enrollees in 2005. Regarding age differences, data from IRS for tax filers and from eHealthInsurance for individual market enrollees indicate that the average age of HSA-eligible plan enrollees was higher than that of individuals from comparison groups. In contrast, data from several employer groups indicate that the average age of HSA-eligible plan enrollees was lower than that of comparison groups of enrollees. HSA-eligible plan enrollees had higher incomes than comparison groups. The average, or mean, adjusted gross income of the estimated 108,000 tax filers reporting HSA contributions in 2004 was about $133,000, compared with $51,000 for all tax filers under age 65, according to IRS data. Similarly, the median adjusted gross income for these tax filers was about $76,000, compared with $30,000 for all tax filers under age 65. Moreover, 51 percent of tax filers reporting HSA contributions had an adjusted gross income of $75,000 or more, compared with 18 percent of all tax filers under age 65. (See fig. 1.) We also found similar income differences between HSA-eligible plan and traditional plan enrollees when we examined other data sources from the group and individual markets. As we previously reported, among FEHBP enrollees actively employed by the federal government, 43 percent of HSA- eligible plan enrollees earned federal incomes of $75,000 or more, compared with 23 percent for all enrollees in 2005. Actively employed HSA-eligible plan enrollees also had higher incomes than traditional plan enrollees in 2005 for two of the three employers we reviewed. One employer reported that the average salary of its HSA-eligible plan enrollees was $75,000, compared with $61,000 for its traditional plan enrollees, and the second employer reported that the average salary of its HSA-eligible plan enrollees was $91,000, compared with $81,000 for its traditional plan enrollees. The third employer reported that about the same share (4 percent) of its actively employed HSA-eligible plan and traditional plan enrollees had incomes of $75,000 or more in 2005. In the individual market, eHealthInsurance reported that 35 percent of its HSA- eligible plan enrollees had incomes of $75,000 or more, compared with 21 percent of its traditional plan enrollees in 2005. The data sources we examined did not conclusively indicate whether HSA- eligible plan enrollees were older or younger than comparison groups. IRS data indicate that the average age of tax filers reporting HSA contributions was about 9 years higher than that of all tax filers under age 65 in 2004. Similarly, eHealthInsurance reported that the average age of its individual market HSA-eligible plan enrollees was 5 years higher than that of its individual market traditional plan enrollees in 2005. In contrast, several data sources from the group market in 2005 suggest that the average age of HSA-eligible plan enrollees was lower than that of the traditional plan enrollees or the average of all enrollees. As we previously reported, the average age of FEHBP’s HSA-eligible plan enrollees, excluding retirees, was about 3 years lower than that of all FEHBP enrollees. The three employers we reviewed reported that the average age of HSA-eligible plan enrollees, excluding retirees, was 2 to 6 years lower than that of their traditional plan enrollees. (See table 4.) Just over half of HSA-eligible plan enrollees, and most employers, contributed to HSAs, and account holders used their HSA funds to pay for current medical care and to accumulate savings. About 55 percent of HSA- eligible plan enrollees reported HSA contributions in 2004. On average, tax filers claimed a deduction of about $2,100 for their HSA contributions in 2004, and the average amount increased with income. Most employers offering HSA-eligible plans contributed to their employees’ HSAs, and the average employer HSA contribution was about $1,064 in 2004. HSA account holders used their funds to pay for medical care and to accumulate savings. About 45 percent of those reporting 2004 HSA contributions also reported withdrawing funds in 2004, and 90 percent of these funds were withdrawn for qualified medical expenses. The remaining 55 percent of those reporting HSA contributions in 2004 reported that they did not withdraw any funds from their HSA in 2004. Not all HSA-eligible plan enrollees opened and contributed to an HSA. According to our analysis of publicly available survey data and data obtained from IRS, about 55 percent of HSA-eligible plan enrollees reported HSA contributions in 2004. Industry experts we spoke with also estimated that the share of all HSA-eligible plan enrollees that had opened and contributed to an HSA was about 50 percent to 60 percent. Similarly, one insurance carrier representative reported that about 60 percent of its HSA-eligible plan enrollees who obtained coverage through an employer opened and contributed to an HSA. HSA-eligible plan enrollees from the employers we reviewed were more likely to contribute to an HSA when their employer also offered account contributions. Specifically, two employers we reviewed contributed to employees’ HSAs and reported that 64 percent and 90 percent of employees enrolled in HSA-eligible plans contributed to an HSA in 2005. In contrast, the third employer did not contribute to its employees’ HSAs and reported that 38 percent of its employees who were enrolled in HSA- eligible plans contributed to an HSA in 2005. Tax filers claimed an average deduction of about $2,100 for HSA contributions in 2004, and the average amount increased with income. (See fig. 2.) The three employers we reviewed reported that employees enrolled in HSA-eligible plans contributed, on average, $826, $1,284, and $1,544 to their HSAs in 2005. About two-thirds of employers offering HSA-eligible plans contributed to their employees’ HSAs. According to a national employer health benefits survey, about two-thirds of employers offering HSA-eligible plans— covering approximately 65 percent of workers in these plans—contributed to HSAs for either single or family coverage in 2005. Similarly, another national employer health benefits survey reported that 62 percent of large employers offering HSA-eligible plans contributed to their employees’ HSAs in 2005. The amounts contributed by employers to employees’ HSAs varied. In 2004, the average employer HSA contribution reported to IRS was about $1,064. Two national employer health benefits surveys reported that employers contributed different amounts to their employees’ HSAs. Specifically, one national employer health benefits survey reported that the average annual employer contribution to HSAs in 2005 was $553 for single coverage and $1,185 for family coverage. Another survey reported that among large employers that contribute to employees’ HSAs, the median employer contribution was $100 for single coverage. Two of the three employers we reviewed contributed to their employees’ HSAs in 2005. The employers’ contribution amounts varied from $100 to $1,400 for single coverage and from $200 to $2,300 for family coverage in 2005. One employer offered fixed HSA contribution amounts to employees, and the other employer offered varying contribution amounts, which were linked to employees’ participation in wellness programs. (See annual employer contribution to HSA in table 2.) Our review of available data showed that HSA account holders used HSA funds to pay for current medical care and to accumulate savings. Data from IRS indicate that about 45 percent of those reporting 2004 HSA contributions—made by themselves, others on their behalf, or their employers—also reported withdrawing funds from their HSA, and the average annual amount withdrawn by these tax filers was about $1,910. Our analysis of data from IRS also indicates that about 90 percent of these withdrawn funds were used to pay for qualified medical expenses. Additionally, IRS data show that about 40 percent of all funds contributed to HSAs in 2004 were withdrawn from the accounts by the end of the year. In addition to using HSAs to pay for medical and other expenses, account holders appeared to use their HSA as a savings vehicle. About 55 percent of those reporting HSA contributions to IRS in 2004 did not withdraw any funds from their account in 2004. We could not determine whether HSA- eligible plan enrollees accumulated balances because they did not need to use their account (that is, they paid for care from out-of-pocket sources or did not need health care during the year) or because they reduced their health care spending as a result of financial incentives associated with the HSA-eligible plan and HSA. However, many focus group participants reported using their HSA as a tax-advantaged savings vehicle, accumulating HSA funds for future use. For example, one focus group participant reported paying out of pocket for a costly surgery in order to save HSA funds for future use. Participants in our focus groups who were enrolled in HSA-eligible plans generally reported positive experiences, but most would not recommend these plans to all consumers. Participants generally understood the key attributes of their plan, such as low premiums, high deductibles, and the mechanics of using the HSA, but were confused about certain other features. Few participants researched the cost of hospital or physician services before obtaining care, although many participants researched the cost of prescription drugs. Most participants reported satisfaction with their HSA-eligible plan and account, but said they would not recommend these plans to everyone. Participants said they would recommend HSA- eligible plans to healthy consumers, but not to people who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible. Many participants in our focus groups were able to describe key attributes of HSA-eligible plans, including low premiums, high deductibles, and how to pay for services using the HSA. Participants understood that employers and employees can contribute to an HSA and were aware of the maximum contribution limits. Participants also understood the ability to accumulate savings over time and that their HSA was portable if they left their company. Participants expressed confusion about certain other features of HSA- eligible plans and accounts. Regarding their HSA-eligible plan, many participants understood that certain preventive visits were covered free of charge, but cited problems distinguishing between preventive services and other services provided during a preventive visit to a physician. In particular, participants noted that certain laboratory tests associated with a preventive visit were not considered a preventive service and thus were not paid for by the plan. Participants of one focus group also reported that they did not always know whether services were provided by an in- or out- of-network provider, particularly in emergency situations. For example, one participant had to pay $1,800 for transporting his wife 10 miles in an ambulance because the ambulance that was dispatched was not an in- network provider. Regarding their HSAs, many participants were unsure what medical expenses qualified for payment using their HSA. Some participants said that they were initially unaware of, or confused about, how having an HSA limited their use of flexible spending arrangement (FSA) funds to certain medical expenses. Participants from one employer said that they were initially unaware of a monthly $3 administrative bank fee for maintaining the HSA and felt that it diminished any potential savings from interest earned on their HSA balance. Few focus group participants enrolled in HSA-eligible plans researched the cost of services before obtaining care, although many researched the cost of prescription drugs. A few participants reported asking physicians about the cost of services, but others expressed discomfort with asking physicians about cost. For example, one participant said, “Americans don’t negotiate. It’s not polite to question the value of work.” Participants noted that physicians did not always know the cost of the services and that this information was generally handled through a billing office. Participants of one focus group also reported not initially understanding the extent to which they needed to manage and take responsibility for their health care as consumers, including by asking questions about the cost of services and medications. Participants reported that only limited information was available regarding key quality measures for hospitals and physicians, such as the volume of procedures performed and the outcomes of those procedures. Many participants relied on referrals from family, friends, or health care providers for recommendations on providers. Some participants continued going to physicians with whom they already had an established relationship. Most participants did research general information on health care issues, such as on health conditions or treatment options. Most participants, who had voluntarily elected to enroll in the HSA-eligible plan as one of several choices offered by their employer, reported that they were generally satisfied with their health plan. Many participants cited the ability to accumulate savings, the tax advantages of having an HSA, and the ability to use an HSA debit card or online accounts as positive aspects of HSAs. Participants reported few problems obtaining care, and many used their health plan to obtain preventive services, visit an emergency room or urgent care clinic, or fill prescriptions. When given a choice of health plan options, many focus group participants reported that they reenrolled in an HSA-eligible plan for the following year. Despite their general satisfaction with HSAs and HSA-eligible plans, some participants did not like certain aspects of their plan or account. Some participants said that they would prefer the ability to contribute more to the HSA to accumulate savings, while others noted that deductibles for HSA-eligible plans were too high and they would be willing to pay higher premiums for plans with lower deductibles. Participants also reported that the cost of prescription drugs was high under HSA-eligible plans. Under two employers’ HSA-eligible plans, participants had to pay 100 percent of the plan’s negotiated price for prescription drugs until meeting the deductible. In using the HSA, some participants said they encountered problems paying for services, such as billing errors for physician visits, and that the physician offices did not understand how to accept payment for services with an HSA debit card. Most participants said they would recommend HSA-eligible plans to healthy consumers. Some participants said they enrolled in the HSA- eligible plan specifically because they did not anticipate getting sick, and many said they considered themselves and their families as being fairly healthy. However, participants would not recommend these plans to people who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible. Participants enrolled in traditional plans from all three employers reported that they received and reviewed information about their health care options, including HSA-eligible plans. Most participants easily understood the features of their traditional plan, including copayments, deductibles, and the differences between in- and out-of-network providers, and one group of participants characterized the information on HSA-eligible plans as confusing and complicated. Participants reported that they did not elect to enroll in an HSA-eligible plan because their costs under a traditional plan would be lower and they were concerned about meeting the high deductible for potentially high medical expenses. Most participants said they were satisfied with their traditional plan, citing steady monthly premiums, no unexpected costs or coverage limitations, no need to manage one’s own health care, or an overall sense of comfort with traditional plans. If given a choice, most of the participants enrolled in traditional plans would reenroll in these plans. One group of participants, whose employer was planning to offer only CDHP options in the future, suggested they would consider seeking employment elsewhere if forced into a CDHP. Some participants said they might have considered enrolling in an HSA-eligible plan if they had been younger and healthier. As more individuals face the choice of enrolling in HSA-eligible plans or other CDHPs, they will likely weigh the savings potential and financial risks associated with these plans in relation to their own health care needs and financial circumstances. We found that enrollees who use little health care could incur lower costs under HSA-eligible plans than under traditional plans, while those who use more extensive health care services could incur higher costs under HSA-eligible plans. Thus, when individuals are given a choice between HSA-eligible and traditional plans—as in the individual market and with employers offering multiple health plans— HSA-eligible plans may attract healthier individuals who use less health care or, as we found, higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings. While patterns evident during the first few years of HSA-eligible plan enrollment may not predict future trends and enrollment will depend on the particular choices available, it will be important to monitor enrollment trends and assess their implications for the cost of health care coverage for all HSA- eligible and traditional plan enrollees. Contrary to the hopes of CDHP proponents, few of the HSA-eligible plan enrollees who participated in our focus groups researched cost before obtaining health care services. According to proponents, an increase in such health care consumerism is central to cost reductions that may occur under the plans. Any increase in consumerism that may be exhibited by CDHP enrollees will likely require time, education, and improved decision- support tools that provide enrollees with more information about the cost and quality of health care providers and services. Finally, while HSA-eligible plan enrollees we spoke with were generally satisfied with their plan, it is notable that these enrollees each had a choice of health plans and voluntarily selected the HSA-eligible plan. Their caution that HSA-eligible plans may not be appropriate for everyone and the views of traditional plan enrollees who opted not to elect an HSA- eligible plan suggest that satisfaction may be lower when employees are not given a choice or when employer contributions to premiums or accounts do not sufficiently offset the potentially greater costs faced by CDHP enrollees. We provided to IRS and eHealthInsurance portions of a draft of this report pertaining to the data each had provided us. We received technical comments from IRS and eHealthInsurance by email and incorporated these comments as appropriate. 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 others who are interested and make copies available to others who request them. 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 about this report, please contact me at (202) 512-7119 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. To respond to our study objectives regarding health savings accounts (HSAs) and HSA-eligible plans, we examined (1) the financial features, covered services, and enrollees’ annual costs of HSA-eligible plans in comparison with those of traditional plans; (2) the characteristics of HSA- eligible plan enrollees in comparison with those of other individuals and traditional plan enrollees; (3) the funding and use of HSAs; and (4) the experiences of enrollees with HSA-eligible plans. We reviewed all data for reasonableness and consistency and determined that the data were sufficiently reliable for our purposes. We performed our work from November 2004 through July 2006 in accordance with generally accepted government auditing standards. We relied on several sources to compare the financial features—that is, the premiums, deductibles, and out-of-pocket spending limits—of HSA- eligible plans with those of traditional plans. For the group market, we summarized data on financial features of HSA-eligible and traditional plans from two 2005 national employer health benefits surveys. In addition, we hired a contractor, Hewitt Associates LLC, to contact employers, conduct focus groups with their employees, and obtain information about the employers’ 2005 health plans. We judgmentally selected employers for review that (1) offered an HSA-eligible plan and a traditional plan in 2005, (2) had at least 500 enrollees in their HSA-eligible plan in 2005, and (3) allowed us to conduct focus groups with their employees. We selected three large employers in the public, utility, and insurance sectors that met these criteria, and we agreed not to identify these employers by name in this report. The three employers we reviewed offered HSA-eligible plans that were administered by different insurance carriers. We requested that each employer provide us with plan brochures and other documentation, including responses to a questionnaire describing its 2005 HSA-eligible and traditional plans. To examine the financial features of HSA-eligible and traditional plans in the individual market, we reviewed data for plans sold for 2005 by eHealthInsurance, a large, national broker of individual and small business health insurance that offers more than 5,600 plans for more than 140 health insurance carriers. Data reported from eHealthInsurance represent only the policies of individuals who purchased insurance in the individual market through the brokerage for 2005 and cannot be generalized to all enrollees. These data were based on a random sample of policies sold by eHealthInsurance as of December 31, 2005. To examine the covered services and provider networks of HSA-eligible and traditional plans, we reviewed the three employers’ plan brochures and spoke with employer and insurance carrier officials and industry experts. To illustrate the potential health care costs faced by HSA-eligible and traditional plan enrollees, we estimated the total annual costs to enrollees of the three employers’ HSA-eligible and preferred provider organization (PPO) plans in 2005. We considered the following annual costs associated with coverage under the plans: Premiums. HSA-eligible plans typically have lower premiums than PPO plans. We considered only enrollees’ share of the premiums. Deductibles. HSA-eligible plans typically have higher deductibles than PPO plans. We considered all costs for covered services that enrollees incurred before meeting their deductible. Out-of-pocket spending limits. HSA-eligible plans typically have higher out-of-pocket spending limits than PPO plans. The out-of-pocket spending limit includes deductibles and other payments, but does not include premiums. We considered all copayments and coinsurance enrollees incurred before meeting their out-of-pocket spending limit. We also considered the contributions employers made to employees’ HSAs. Most employers contribute to their employees’ HSAs. We assumed that when paying for their health care expenses, enrollees only used funds their employer contributed to their HSA in 2005 and paid for the rest out of pocket. When performing these calculations, we assumed that enrollees had single coverage and used in-network services. For the analysis of enrollees’ total health care costs related to extensive use of health care, we examined the potential costs incurred by enrollees for an illness or injury resulting in a hospitalization costing $20,000. For the analysis of costs related to low to moderate use of health care, we examined the potential costs incurred by enrollees for six doctor’s office visits, classified as for low to moderate problems, and assumed the negotiated rate for each visit was $80. We developed this assumption based on our analysis of one insurer’s negotiated rates for office visits for low to moderate problems in the regions the three employers’ plans were offered. We considered only the costs associated with medical care provided by a physician and did not consider any other costs that could be incurred by an enrollee, such as prescription drugs. We assumed that enrollees did not have HSA funds carried over from a prior year. If enrollees had used funds carried over from a prior year, their out-of-pocket costs could have been lower. We also did not consider the tax implications associated with enrollee spending for health care services; if HSA-eligible plan enrollees used tax-advantaged funds they or someone other than their employer contributed to their HSA, their costs could have been lower. To compare the characteristics of HSA-eligible and traditional plan enrollees, we compared demographic data provided by the Internal Revenue Service (IRS) on adjusted gross income and age for tax filers who reported HSA contributions on their 2004 tax returns with the corresponding data for all tax filers less than 65 years of age. IRS data were based on a random probability sample of 200,295 individual income tax returns for 2004 from the IRS Statistics of Income (SOI) individual tax return file, of which a small proportion reported an HSA contribution. The SOI file is a stratified probability sample of income tax returns filed with IRS, weighted to represent an estimated population of about 132 million tax returns. Of the 115 million tax filers less than 65 years of age in 2004, approximately 0.1 percent—an estimated 108,000 tax filers—reported an HSA contribution. To assess the relative precision of IRS’s data estimates, we reviewed the coefficients of variation for all estimates we used in our calculations. The coefficient of variation measures the magnitude of dispersion around the mean. In each instance, the coefficient of variation was less than 33 percent, indicating small to moderate variation. IRS data for tax filers reporting an HSA contribution are not generalizable to all HSA-eligible plan enrollees because the sample is not designed to capture individuals enrolled in a high-deductible health plan who did not have an associated HSA. IRS data depend on tax filing status (e.g., single, married filing jointly, married filing separately) and are not linked to plan size; a tax return reporting an HSA contribution therefore may include contributions to multiple HSAs that may represent single and family policies obtained in the group or individual market. With regard to specific data elements, adjusted gross income data may represent the income earned by other family members who may or may not be covered under the HSA-eligible plan, whereas age data represent the age of the primary taxpayer, who may or may not be enrolled in the HSA-eligible plan. For comparison purposes, we analyzed data for a sample of all tax filers under age 65, because individuals 65 years and older are generally enrolled in Medicare and are ineligible to contribute to an HSA. To supplement IRS data, we analyzed 2005 income and age data reported for HSA-eligible and traditional plan enrollees who purchased coverage in the group market, excluding retirees, through the three employers we reviewed as well as in the individual market through eHealthInsurance for enrollees under 65 years of age. To determine how HSAs are funded and how HSA account holders are using their funds, we gathered and analyzed SOI data from IRS, data from two national employer health benefits surveys, and data from the three employers we reviewed. To determine the share of enrollees that opened HSAs, we analyzed survey data on the number of HSA-eligible plan enrollees and IRS data on the number of tax returns reporting HSA contributions, and examined data provided by the three employers we reviewed regarding the share of HSA-eligible plan enrollees who contributed to HSAs through pretax payroll deductions. We also conducted interviews with industry experts regarding the share of enrollees that opened HSAs. To examine individuals’ HSA contributions, we analyzed IRS data on the average 2004 HSA tax deduction claimed by tax filers and reviewed 2005 data provided by the three employers regarding the contributions of employees enrolled in HSA-eligible plans. To examine employer HSA contributions, we analyzed IRS data on the average employer contribution among those who reported any HSA contribution on their 2004 tax return and summarized 2005 data reported by two national employer health benefits surveys and the three employers. To determine how HSAs are used, we analyzed IRS data on account withdrawals among those who reported HSA contributions made by themselves, others on their behalf, or their employers in 2004. We also obtained information regarding enrollee HSA funding and use through the focus groups with employees of the three employers we reviewed. To determine enrollees’ experiences with HSA-eligible plans, we used focus groups of HSA-eligible plan enrollees to obtain qualitative information on enrollee education, plan comprehension, experience with obtaining care, use of decision-support tools, and plan satisfaction in 2005. We contracted with Hewitt Associates LLC, a human resources consulting firm, to screen and select participants and to moderate these focus groups. For each of the three employers selected, focus groups were conducted with employees enrolled in an HSA-eligible plan or, for comparison purposes, in a traditional plan in 2005. Across the three employers, eight focus groups were conducted, comprising 47 employees enrolled in HSA- eligible plans and 28 employees enrolled in traditional plans. Each group consisted of 7 to 12 participants. In screening and selecting focus group participants, we requested that Hewitt Associates LLC attempt to balance the focus groups by demographic characteristics, including age, sex, and type of coverage (i.e., single or family), and with regard to employee job title or position. In order to ensure that the focus groups could describe the experiences of both users and nonusers of health care services, we requested that Hewitt Associates LLC include a mix of participants who used their health care plan to obtain medical care or prescription drugs and participants who did not. Finally, we requested that employees and their supervisors not be included in the same focus group to encourage participants to speak freely. Unless otherwise noted, the participant experiences we report reflect multiple focus groups. The results of the focus groups and the data obtained from the three employers may not be generalized to all HSA-eligible plan enrollees or employers because they represent only the experiences of the focus group participants and the benefit offerings of the three employers. In addition to the contact named above, Randy DiRosa, Assistant Director; N. Rotimi Adebonojo; Rashmi Agarwal; Martha R. W. Kelly; Roseanne Price; Pamela N. Roberto; and Patricia Roy made key contributions to this report. Consumer-Directed Health Plans: Small but Growing Enrollment Fueled by Rising Cost of Health Care Coverage. GAO-06-514. Washington, D.C.: April 28, 2006. Federal Employees Health Benefits Program: First-Year Experience with High-Deductible Health Plans and Health Savings Accounts. GAO-06-271. Washington, D.C.: January 31, 2006. Federal Employees Health Benefits Program: Early Experience with a Consumer-Directed Health Plan. GAO-06-143. Washington, D.C.: November 21, 2005. | Health savings accounts (HSA) and the high-deductible health insurance plans that are eligible to be coupled with them are a new type of consumer-directed health plan attracting interest among employers and consumers. Employers and plan enrollees may contribute to tax-advantaged HSAs, and enrollees can use the accounts to pay for health care expenses. Because HSAs and HSA-eligible plans are new, there is interest in the experiences of plan enrollees, as well as in comparing the plan features and enrollee characteristics with those of traditional plans, such as preferred provider organization (PPO) plans. GAO reviewed (1) the financial features of HSA-eligible plans in comparison with those of traditional plans, (2) the characteristics of HSA-eligible plan enrollees in comparison with those of traditional plan enrollees, (3) HSA funding and use, and (4) enrollees' experiences with HSA-eligible plans. GAO analyzed data regarding HSA-eligible and traditional plans and enrollees from national employer health benefits surveys, three selected employers, and a national broker of health insurance. GAO compared Internal Revenue Service (IRS) data for tax filers reporting HSA contributions with corresponding data for all tax filers under 65 years old. GAO also conducted focus groups with employees of the three employers. In 2005, HSA-eligible plans had different financial features than traditional plans--such as lower premiums and higher deductibles--but both plan types covered similar health care services, including preventive services, and used similar provider networks. For the three employers' health plans GAO reviewed to illustrate enrollees' potential health care costs, GAO estimated that HSA-eligible plan enrollees would incur higher annual costs than PPO plan enrollees for extensive use of health care, but would incur lower annual costs than PPO plan enrollees for low to moderate use of health care. HSA-eligible plan enrollees generally had higher incomes than comparison groups, but data on age differences were inconclusive. In 2004, 51 percent of tax filers reporting an HSA contribution had an adjusted gross income of $75,000 or more, compared with 18 percent of all tax filers under 65 years old. Two of the three employers GAO reviewed and a national broker of health insurance also reported that HSA-eligible plan enrollees had higher incomes than traditional plan enrollees in 2005. GAO's data sources did not conclusively indicate whether HSA-eligible plan enrollees were older or younger than individuals and enrollees in comparison groups. Just over half of all HSA-eligible plan enrollees and most employers contributed to HSAs, and account holders used their HSA funds to pay for current medical care and to accumulate savings. About 55 percent of HSA-eligible plan enrollees reported HSA contributions to IRS in 2004. Tax filers claimed an average deduction of about $2,100 for their HSA contributions in 2004, and the average amount increased with income. About two-thirds of employers offering HSA-eligible plans contributed to their employees' HSAs, and the average employer HSA contribution was about $1,064 in 2004. About 45 percent of tax filers reporting 2004 HSA contributions also reported that they withdrew funds in 2004, and 90 percent of these funds were withdrawn for qualified medical expenses. The other 55 percent of those reporting HSA contributions in 2004 did not withdraw any funds from their HSA in 2004. HSA-eligible plan enrollees who participated in GAO's focus groups generally reported positive experiences, but most would not recommend the plans to all consumers. Participants enrolled in the plans generally understood the key attributes of their plan. Few participants reported researching cost before obtaining health care services, although many researched the cost of prescription drugs. Most participants were satisfied with their HSA-eligible plan and would recommend these plans to healthy consumers, but not to those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible. GAO received technical comments from IRS and a national broker of health insurance and incorporated the comments as appropriate. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
The permanent national government of Iraq was established by a constitutional referendum in October 2005, followed by election of the first Council of Representatives (Parliament) in December 2005 and the selection of the first Prime Minister, Nuri Kamal al-Maliki, in May 2006. By mid-2006, the cabinet had been approved, and the government now has 34 ministries responsible for providing security and essential services including electricity, water, and education for the Iraqi people (see fig. 1). The size of the ministries varies considerably in terms of staff numbers and budget. As of May 2007, the U.S. government ministry capacity development programs target 12 key ministries—10 civilian ministries are the focus of State and USAID programs, while the Ministries of Defense and Interior are targeted by DOD programs. These ministries contain 65 percent of the workforce and are responsible for 74 percent of the current budget (see table 1). According to U.S., international, and Coalition Provisional Authority (CPA) assessments and officials, years of neglect, a highly centralized decision-making system under the former regime, and looting in 2003 decimated Iraq’s government ministries. To address this problem, multiple U.S. agencies have conducted capacity development efforts at individual Iraqi ministries since 2003. The implementation of U.S. efforts to help build the capacity of the Iraqi national government over the past 4 years has been characterized by (1) multiple U.S. agencies leading individual efforts without overarching direction from a lead entity or strategic approach that integrates their efforts with Iraqi government priorities and (2) shifting timeframes and priorities in response to deteriorating security and U.S. embassy reorganization. State, through the U.S. Embassy Baghdad’s Iraq Reconstruction Management Office (IRMO) began implementing a number of 1-year projects intended to jump start capacity development in 2006 at the 10 civilian ministries designated as key to enabling the Iraqi government to sustain its reconstruction and deliver essential services to the Iraqi people. It also targeted other national level organizations, including the Prime Minister’s office and anticorruption entities. USAID focused primarily on implementing a medium-term effort to improve the public administration capabilities of the Iraqi government. DOD conducted relatively intensive capacity development efforts at the ministries of Defense and Interior. However, the lack of a lead entity to provide direction and an overall plan contributed to the three agencies developing separate metrics to assess and track the capacity levels of ministry functions common to all ministries and blurred the distinction between the efforts of USAID and IRMO. Since January 2007, moreover, capacity development efforts have been subject to changes in focus, agency roles, and organization, with the U.S. embassy and MNF-I seeking immediate improvements in ministry performance and results in areas such as budget execution. No single agency is in charge of leading and providing overall direction for U.S. ministry capacity development efforts. As of May 2007, six U.S. agencies were implementing about 53 projects at individual ministries and other national Iraqi agencies. State, USAID, and DOD are leading the largest number of programs with funding allocations totaling about $169 million at individual ministries and other national Iraqi government agencies. As of May 1, 2007, about 384 U.S. military, government, and contractor staff from these 3 agencies were working with the ministries and were implementing or completing capacity development projects. State advisory teams led by the embassy’s senior consultants were assisting capacity development efforts at the 10 key civilian ministries— the Ministries of Oil, Electricity, Planning, Water, Health, Finance, Justice, Municipalities and Public Works, Agriculture, and Education. These teams, ranging in size from 20 positions for the Ministry of Oil and 18 each for the Ministries of Finance and Electricity to 3 for the Ministry of Agriculture, typically interact with the minister, deputy minister, or department director levels, according to State officials. State also leads efforts to strengthen the capacity of three national Iraqi anticorruption entities—the Commission for Public Integrity (CPI), the Board of Supreme Audit (BSA), and the government’s 29 ministerial Inspectors General. As of early May 2007, State, through IRMO and its successor organizations in the Baghdad embassy, had 23 capacity development projects worth over $50 million completed, contracted, or under way. These projects ranged from supplying and installing news media equipment in the prime minister’s press center to providing subject matter experts to mentor, train, and assist Iraqi staff in their areas of expertise in the Ministries of Water and Electricity. See Appendix II for the list of State-led capacity development projects. USAID conducts a number of ministry capacity development efforts, primarily through its 3-year contract with Management Systems International, Inc. (MSI). For example, MSI’s Arabic-speaking staff provide public administration training and other support to the Ministry of Planning’s National Center for Consultancy and Management Development (NCCMD) and other regional civil service training centers, using a “train the trainer” approach. MSI has additional advisors working with the Council of Minister’s Secretariat and six ministries, to create, among other things, capacity development plans that will guide the development of public administration skills within the ministries. In addition to these medium-term projects, MSI trainers have supported USAID and embassy efforts to achieve more immediate improvements in ministry budgeting and procurement performance. As of June 2007, MSI had 34 international staff providing training to Iraqi government staff, according to a USAID official. USAID reported that MSI was also working with the Ministry of Planning to develop a pilot self- assessment process for possible future use by other ministries to identify their own capacity development needs and priorities. By July 2007, USAID reported that 855 Iraqi national government employees, including staff from all 10 key civilian ministries and the Ministry of Interior (MOI), had attended MSI-sponsored courses at Iraqi government training centers. They had been instructed in, among other things, budgeting, procurement, leadership and communications, information management, and anticorruption policies. Officials from three other ministries, the Prime Minister’s Office and the Council of Ministers’ Secretariat were also attending MSI courses. USAID also has had a governance program contract with BearingPoint since 2003, which includes a project worth about $8 million to implement the system and train government staff on the use of an electronic ledger to record government payment and revenue transactions called the Financial Management Information System (FMIS). FMIS is intended to serve as the primary financial transaction system for the entire Iraqi government. According to USAID and BearingPoint officials, BearingPoint’s Iraq staff had trained approximately 500 Iraqi government employees, as of February 2007, on how to use FMIS. The coalition’s Multinational Security Transition Command-Iraq (MNSTC- I) is leading a substantial effort to develop the capacity of the two security ministries. As of March 2007, the U.S.-led coalition had assigned 215 military, civilian, and contracting personnel to the Ministry of Defense (MOD) and MOI to advise Iraqi staff about establishing plans and policies, budgeting, and managing personnel and logistics, among other things. According to MNSTC-I advisors, they work with their Iraqi counterparts on a daily basis to develop policies, plans, and procedures. For example, a senior advisor to the joint staff worked with MOD staff to develop the counterinsurgency strategy. He provided them with a planning template, reviewed their work, and suggested they add details such as the source of the threat, the risk level, and the forces required to counter threats. The advisors are embedded with MOD staff from a number of offices, including Plans and Policies and the Iraqi Joint Staff. According to the senior U.S. budget advisor at MOD, he and his team work directly with the budget director and his staff to prepare budget spreadsheets and ensure that the departments justify their funding requests. MNSTC-I advisors were also working with Iraqi officials at MOI at all levels in the ministry, although they are not embedded in the ministry to the same degree as MNSTC-I’s MOD advisors. Among other efforts, these advisors are helping MOI develop processes for vetting Iraqi security forces, including collecting and storing biometric data; establishing an identification card system; and establishing a personnel management database that will house inventory, payroll, human resource, financial, and budget data. Table 2 provides additional details on State, USAID, and DOD efforts. Two factors help explain the lack of overall direction and a lead agency for U.S. capacity-development efforts. First, from their inception in 2003, U.S. efforts evolved without a plan for capacity development or the designation of a lead entity. Instead, U.S. agencies individually provided assistance to four successive governments in response to immediate needs, according to former CPA officials and senior advisors. In 2003, for example, the first programs at the ministries were initiated by the CPA’s senior advisors, who ran the ministries using U.S. funds and made personnel and budgetary decisions. According to State and former CPA officials, each senior advisor operated their ministries without an overall plan or overarching guidance; efforts to create an overall plan in late 2003 were dropped after the United States decided to transfer control of the ministries to a sovereign Iraq by mid-2004. In May 2004, the President issued National Security Presidential Directive 36, which delineated State and DOD responsibilities for the U.S. effort in Iraq. The directive made State, through Embassy Baghdad, responsible for all U.S civilian activities in Iraq, but gave DOD’s Central Command (CENTCOM) responsibility for security and military operations. However, the directive indicated that, at an appropriate time, overall leadership for all U.S. efforts to support the organizing, training, and equipping of Iraqi security forces would be transferred to a security assistance organization under State’s authority. A second factor has been the delay in acting on recommendations from a 2005 State assessment of U.S. efforts in Iraq. That assessment reported that an integrated approach was essential for the success of U.S. efforts in Iraq. The assessment noted that programs had been implemented in an uncoordinated and sometimes overlapping fashion and that their efforts had been fragmented, duplicative, and disorganized. In addition, this implementation had taken place without a clear understanding of the programs’ objectives or their contribution to the larger goal of transferring responsibility for reconstruction to the Iraqi government, according to USAID officials. Embassy documents and officials also stressed that the success of the program required the Iraqi government to take ownership of the capacity development effort. The assessment recommended a unified effort among State, DOD, and USAID, with the latter ultimately providing overall coordination and leadership. In late 2005, the U.S. mission initiated the National Capacity Development Program to address these concerns. However, instead of placing one agency in charge, the program divided responsibilities for capacity development among State, DOD, and USAID, with IRMO providing coordination. In particular, responsibility for building the capacity of MOI and MOD was given to the Multinational Security Transition Command- Iraq (MNSTC-I), which had previously taken action to advise and strengthen the MOI and help rebuild the MOD from scratch after the coalition disbanded it in 2003. Figure 2 illustrates the evolution of U.S. efforts to develop the Iraqi government over four successive governments. Since early 2007, the U.S. mission has made efforts to improve coordination among State, USAID, and DOD, such as the creation of the Joint Task Force on Capacity Development, the increased emphasis on efforts to help stabilize Iraq in the New Way Forward Strategy, and the creation of a joint State-DOD-USAID procurement action program to help the Iraqi government better execute its budgets. Nonetheless, the lack of a lead entity to provide direction and an overall plan contributes to the following issues: The agencies have developed separate sets of metrics. State, USAID, and DOD participated in an effort in late 2005 to develop a common set of metrics to measure the capacity of 10 key civilian and the 2 security ministries. The agencies completed an initial draft assessment and, according to USAID officials, planned to conduct a comprehensive survey to regularly track progress. However, this effort was abandoned, according to State and USAID officials, and State and DOD developed their own metrics. In mid-2006, MNF-I began monthly assessments of the capacity of the security ministries to perform nine key functions, such as planning, logistics, and budgeting. IRMO completed a baseline assessment of the key civilian ministries in August 2006, using a new, more detailed ministry capacity assessment that gauges a similar list of nine core functions, including the ministries’ ability to plan, budget, and stem corruption. IRMO officials stated that they intended to update this assessment quarterly to gauge Iraqi progress in developing this capacity. However, State officials noted that questions about the usefulness of this assessment delayed efforts to update it prior to the IRMO’s termination in May 2007, and the embassy subsequently dropped plans to continue this effort in July 2007. The distinction between the efforts of USAID and IRMO became blurred. IRMO began implementing short-term efforts to jump start capacity development in 2006 using reallocated money from the fiscal year 2004 Iraq Relief and Reconstruction Fund (IRRF2) and the fiscal year 2006 emergency supplemental fund. In the meantime, USAID identified longer- term capacity development needs and beginning in 2007 helped the Iraqi ministries devise a strategic plan to meet their capacity development needs, according to a USAID official. Most of State’s short-term efforts did not begin until the end of October 2006, after USAID began its capacity development programs under its medium-term contract, because of delays in the formation of the Iraqi government and in receiving fiscal year 2006 funding. Moreover, USAID officials stated that they began implementing a number of short-term efforts earlier than originally planned to address more immediate shortfalls in the Iraqi government’s capacity to plan and execute ministry budgets. Since January 2007, the emphasis of U.S. capacity development efforts has shifted in response to continued security problems and the reorganization of the embassy’s reconstruction and assistance offices. The President’s January 2007 strategic review called upon the United States and the coalition to “refocus efforts to help the Iraqis build capacity in areas vital to the success of the government” during the 2007 surge of additional U.S. forces into Baghdad and Iraq. Moreover, according to embassy officials, the new commander of MNF-I placed greater emphasis on ways to help the Iraqi government immediately demonstrate that it can perform key functions to help stabilize Iraq and deliver essential services. Finally, the expiration of IRMO has diffused responsibility for conducting and overseeing the capacity development program. In early 2007, the U.S. mission refocused their capacity development efforts as part of the surge strategy associated with the President’s New Way Forward proposal. Rather than focusing on 12 civilian and security ministries, IRMO and MNSTC-I began targeting vital functions requiring more immediate improvement—such as budget execution, procurement and contracting—at 6 ministries (MOI, MOD, Planning, Finance, Oil, and Electricity), plus the Prime Minister’s office and the Council of Ministers’ Secretariat. Furthermore, USAID’s contracted trainers at the Iraqi government’s NCCMD also attempted to address more immediate government needs by directly training middle- and upper-level ministry staff. In May 2007, the U.S. embassy established a procurement assistance program at the Ministry of Planning to address pressing procurement problems, assisted by a DOD-provided team of U.S. civilian procurement and contracting officials and Iraqi contractors. By June 2007, the U.S. embassy had identified efforts that could improve ministry performance by September 2007. The U.S. government’s efforts also have been affected by recent changes in the leadership and organization of the U.S. mission in Iraq. In February, the embassy created a new office of the Coordinator for Economic Transition in Iraq (CETI) to work with the deputy prime minister and other senior officials to improve budget execution and to coordinate U.S. capacity development efforts to improve ministry performance immediately. In addition, on May 8, 2007, the Iraq Transition Assistance Office (ITAO) succeeded IRMO. According to an embassy official, many of IRMO’s senior consultants now report directly to other embassy offices or working groups, while ITAO coordinates senior consultants at four ministries delivering essential services (Oil, Water, Electricity, and Communications). This official also noted that ITAO is not expected to manage any additional capacity development projects. In July, the U.S. government appointed an ambassador to oversee the embassy’s economic and assistance operations. This includes responsibility for supervising and coordinating all U.S. short and medium-term capacity development programs except for the training and security functions of MNSTC-I at the Ministries of Defense and Interior, and the Rule of Law Coordinator’s Office (which provides capacity development training for justice and law enforcement functions). State noted that he now oversees USAID, ITAO, and attachés from the Departments of Treasury, Energy, Agriculture, Health, Commerce and the embassy’s economic section. U.S. efforts to develop Iraqi ministerial capacity face four key challenges that pose a risk to their success and long-term sustainability. First, Iraqi ministries have significant shortages of personnel who can formulate budgets, procure goods and services, and perform other vital ministry tasks. Second, Iraqi efforts to build a professional and nonpartisan civil service are complicated by partisan influence over the leadership and staffing of the ministries and infiltration by sectarian militias or political parties hostile to the U.S. government. Third, although the Iraqi government has taken measures to improve the capacity of its anti- corruption entities with U.S. assistance, pervasive corruption impedes the effectiveness of U.S. efforts to develop ministry capacity. Fourth, numerous U.S. and coalition officials stated that the security situation remains a major obstacle to their efforts to help the Iraqis develop capacity in areas vital to the government’s success. Iraqi government institutions suffer from significant shortages of competent personnel with the skills to perform the vital tasks necessary to provide security and deliver essential services to the Iraqi people. According to State, CPA, and other U.S. government reports and officials, Iraq’s governing capacity has suffered from years of centralized control that led to the decay of core functions, such as strategic and policy planning, financial management, information technology, and human resources management. In neglecting the civil service for almost 30 years, the central government fostered poor management practices through incompetent staffing and leadership. Moreover, in 2003, the CPA removed Ba’athist party leaders from government and provided for the investigation and removal of even junior party members from upper-level management in government, universities, and hospitals. As a result, most of Iraq’s technocratic class was pushed out of government, according to the Iraq Study Group report. In 2005, a U.S. embassy document noted that the ministries lacked skilled mid-level managers who could make decisions. The dearth of skilled personnel complicated U.S. and international efforts to engage Iraqis in capacity development efforts, according to a number of State, DOD, USAID and international officials. On the other hand, the coalition’s involvement in their budgeting and procurement processes may have hindered the ministries’ capacity to improve their own procurement and contracting systems and perform other vital services, according to MNSTC-I and embassy officials. A September 2006 U.S. embassy assessment noted that the government had significant human resource shortfalls in most key civilian ministries. The majority of staff at all but one of the ministries surveyed were inadequately trained for their positions and a quarter of them relied heavily on foreign support to compensate for their human and capital resource shortfalls. According to a senior IRMO advisor, the Minister of Planning had only one of the three deputies he needed and did not delegate authority or tasks because the ministry lacked skilled staff. This lack of trained staff made it difficult for coalition personnel to find ministry staff to work on capacity development. For example, officials from USAID and its implementing partner for capacity development stated that one of the key challenges to their program’s success was the small pool of Iraqi government employees from which to draw willing or qualified participants. Moreover, UN officials stated that one key ministry had few staff available with whom to meet when they visited. Furthermore, U.S. advisors in the defense ministry stated that most Iraqi staff lacked basic computer and information technology skills and often avoided making decisions by referring problems to higher levels. The lack of trained staff has particularly hindered the ability of the key government ministries to develop and execute budgets. U.S. and international officials noted that the lack of competent staff contributed to poor budget execution rates among some of the key civilian ministries. While a U.S. Treasury assessment reported that 8 of 12 key ministries had spent more than half of their 2006 budgets by the end of December 2006, the entire national government had executed just 17 percent of its projected 2006 capital goods expenditures by the end of the year (see fig. 3). U.S. and coalition officials noted that the inability of the Iraqi government to execute its budget jeopardized the U.S. transition strategy and capacity development objectives and prompted U.S. officials to bypass ineffective Iraqi government procurement systems in order to procure equipment and supplies more quickly. In December 2006, U.S. advisors began assisting the Ministries of Defense and Interior in procuring needed equipment for their security forces from the United States through the foreign military sales (FMS) program. While available data from the government of Iraq and analysis from U.S. and coalition officials show that spending has increased compared with spending in 2006, a September 2007 GAO report noted that a large portion of Iraq’s $10 billion capital projects and reconstruction budget in fiscal year 2007 will likely go unspent. Iraq’s government confronts significant challenges in staffing a professional and nonpartisan civil service and addressing militia infiltration of key ministries. Moreover, U.S. officials noted that affected ministries are less responsive to U.S. government capacity development efforts. A DOD report notes that many Iraqi ministry staff were selected because of their partisan affiliation. We further reported in January 2007 that the Iraqi civil service remains hampered by staff whose political and sectarian loyalties jeopardize the civilian ministries’ ability to provide basic services and build credibility among Iraqi citizens, according to U.S. government reports and international assessments. The DOD report further stated that government ministries and budgets are sources of power for political parties, staff ministry positions rewarded to party cronies for political loyalty. According to U.S. officials, this use of patronage can hinder capacity development because it leads to instability in the civil service as many staff are replaced whenever the government changes or a new minister is named. As of early August 2007, for example, 15 of the 37 Iraqi cabinet members had withdrawn from Prime Minister Maliki’s government. Six Sadrist ministers announced their resignation as a protest against the continued presence of coalition forces in April 2007, and five of their seats remain vacant as of August 2007. In early August, six Sunni ministers resigned and three additional ministers announced they would boycott cabinet meetings. Some Iraqi ministries under the authority of political parties hostile to U.S. goals use their positions to pursue partisan agendas that conflict with the goal of building a government that represents all ethnic groups. Moreover, U.S. military advisors to one of the security ministries note that Iraqi intelligence organizations are particularly hindered by infiltration because their officials believe they cannot execute intelligence operations for fear of betrayal by their colleagues. For instance, DOD reports that militia influence affects every component of the Ministry of Interior. In particular the Ministry has been infiltrated by members of the Supreme Islamic Council of Iraq or its Badr Organization and Muqtada al-Sadr’s Mahdi Army. The Mahdi Army often operates under the authority or approval of Iraqi police to detain, torture, and kill Sunni civilians. Until late April 2007, the Ministries of Agriculture, Health, Civil Society, Transportation, Governorate Affairs, and Tourism were led by ministers loyal to al-Sadr, who provided limited access to U.S. officials. U.S. embassy officials noted that the effectiveness of U.S. programs is hampered by the presence of unresponsive or anti-U.S. officials. Several U.S. embassy officials noted that one of the key ministries targeted by U.S. capacity development and budget execution efforts was particularly unresponsive to U.S. efforts to reform and improve its processes. For example, a USAID official stated that no staff from this ministry had attended USAID-sponsored budgeting, procurement, and other public management training at the National Training Center as of February 2007. Furthermore, while a senior U.S. advisor noted his frequent contacts with this minister, he is affiliated with the Supreme Council for Islamic Revolution in Iraq and his level of cooperation with U.S. capacity development efforts remains limited. According to a State document, widespread corruption undermines efforts to develop the government’s capacity by robbing it of needed resources, some of which are used to fund the insurgency; by eroding popular faith in democratic institutions seen to be run by corrupt political elites; and by spurring capital flight and reducing economic growth. In addition, an IRMO document noted that corruption is affecting the ability of critical ministries to deliver essential services. According to an IRMO assessment, one-third of the civilian ministries surveyed had a problem with “ghost employees” (i.e., nonexistent staff listed on the payroll). In addition, the procedures to counter corruption adopted at all but one of the civilian ministries surveyed were either assessed as only partly effective or ineffective. Similar problems existed in the security ministries, according to two 2007 DOD reports. Efforts to help the Iraqi government develop the capacity of its anticorruption entities have had mixed results. On the one hand, the government has made progress in developing its three main anticorruption bodies—the Commission for Public Integrity (CPI), the Board of Supreme Audit (BSA), and the inspector generals assigned to each ministry. According to U.S. officials, the government also has made progress developing the courts necessary to investigate and prosecute government corruption with the assistance of the U.S. government and its coalition and international partners. Moreover, the Ministry of Finance approved funding to increase the number of inspector general staff at the Ministry of the Interior by 1,000 during 2007. The U.S. embassy also created the Office of Accountability and Transparency (OAT) to help the Iraqis develop a national anticorruption strategy, identify capacity development needs, and combat money laundering. It also helped the government initiate its Joint Anti-Corruption Council (JACC) in February 2007, which brings together the primary anticorruption entities under the leadership of the Prime Minister. On the other hand, Iraq’s anticorruption entities face challenges. For example, in October 2007, the head of Iraq’s Commission for Public Integrity, testified that violence, intimidation, and personal attacks were a main obstacle to the Commission’s work. He stated that 31 of his staff had been assassinated since the establishment of the Commission and some of the staff and their family members had been kidnapped or detained. Another challenge is the existing legal structure. According to the Special Inspector General for Iraq Reconstruction, Article 136(b) of Iraq’s Criminal Code is a structured obstacle impeding Iraq’s anti-corruption efforts. This provision allows any Iraqi minister to grant by fiat complete immunity from prosecution to any ministry employee accused of wrongdoing. The Inspector General also stated that an order issued by the Prime Minister this past spring requires Iraq law-enforcement authorities to obtain permission from the Prime Minister’s Office before investigating current or former ministers. Numerous U.S. and coalition officials stated that the security situation remains a major obstacle to their efforts to help Iraqis develop capacity in areas vital to the government’s success. The high level of violence hinders U.S. advisor access to their counterparts in the ministries, directly affects the ability of ministry employees to perform their work, and hinders the effectiveness of U.S. capacity development programs, according to these officials. State and USAID efforts are affected by the U.S. Embassy security restrictions imposed on their movement. Embassy security rules limit, and in some cases bar, U.S. civilian advisors from visiting the ministries outside the Green Zone. For example, the senior IRMO finance advisor noted that that his team has regular access to the Finance Minister, who is located in the Green Zone. However, his team cannot visit the Ministry of Finance outside the Green Zone and has limited contact with ministry officials. Moreover, efforts to complete the installation of the FMIS system stopped after a British BearingPoint contractor and his security team were kidnapped from the Ministry of Finance in May 2007. Nevertheless, according to a State cable, an embassy organizational and staffing review concluded in late May 2007 that the embassy’s security rules were overly restrictive for embassy staff to perform their work, leading the ambassador to recommend the embassy adopt less restrictive military security standards. The security situation also complicates the capacity development efforts of the MNSTC-I advisors to the security ministries. A U.S. MNSTC-I advisor noted that the MOI headquarters is 20 minutes from the Green Zone and is particularly unsafe because sectarian militias control different floors of the building and differ in the degree to which they are hostile to the coalition forces. As a result, U.S. advisors have to be accompanied by two armed U.S. guards while visiting their Iraqi counterparts and must leave certain offices and departments no later than 10 p.m. The MOD, which is in the Green Zone, is a comparatively safe work environment for the embedded DOD advisors. International officials noted that about half of Iraqi government employees are absent from work daily; at some ministries, those who do show up only work between 2 to 3 hours a day for security reasons. U.S. and UN officials stated that, while the Ministry of Planning has a relatively skilled workforce, the security situation seriously hinders its ability to operate. These officials noted that 20 director generals (department heads or other senior officials) in the ministry have been kidnapped, murdered, or forced to leave the ministry in the 6 months prior to February 2007. One international official stated that violence is also affecting their effort to build capacity in the university system from which the government draws some of its expertise. She noted that about 360 university professors have been killed since 2003. The violence is also contributing to a brain drain within the Iraqi ministries as staff join growing numbers of refugees and internally displaced persons. According to a UN report, between March 2003 and June 2007, about 2.2 million Iraqis left the country and 2 million were internally displaced. According to U.S. and international officials, the flow of refugees exacerbates Iraqi ministry capacity shortfalls because those fleeing tend to be disproportionately from the educated and professional classes, thereby reducing the pool of qualified personnel from which the ministries can recruit. For example, according to international officials, the Iraqi medical association estimated that half of Iraq’s 34,000 registered doctors had left the country by November 2006 and over 2,000 of the remainder had been killed. Moreover, a November 2006 UN report stated that it was estimated that at least 40 percent of Iraq’s professional class had left since 2003. The exodus of employees from the ministries limits U.S. efforts to develop ministry capacity. One Iraqi official complained that the skilled personnel selected for international capacity development training were more prone to leave government employment. The U.S. government is just beginning to develop an overall strategy for its capacity development efforts. GAO’s previous analyses of U.S. multiagency national strategies have found that an integrated strategy should include a clear purpose, scope, and methodology; delineation of U.S. roles, responsibilities, coordination, and integration; desired goals, objectives, and activities; performance measures; and a description of costs, resources needed, and risk. The three agencies leading capacity development efforts in Iraq, particularly MNSTC-I, have developed some of these elements for their individual programs at the ministries, but not as part of a unified strategy for all U.S. efforts. U.S. officials reported in January 2007 that the conditions and challenges facing U.S. capacity development efforts in Iraq have impeded a structured, traditional approach to capacity development. This makes it difficult to develop an overall strategy. Nonetheless, the need for an overarching capacity development strategy is clear given that the President has identified ministry capacity development as a key to the success in Iraq, has called for greater integration of U.S. civilian and military efforts to develop Iraqi government capacity, and has requested at least $255 million in additional funding in fiscal year 2008 for these efforts. Moreover, a January 2007 report by the Iraqi National Security Council took steps to identify the critical efforts and coordination needed at key civilian ministries to support the Ministries of Defense and Interior. The report also indicated that Iraqi ministries depend on each other and need to function as a unified government. In February 2007, State Department officials provided GAO with a three- page, high-level outline proposing a U.S. strategy for strengthening Iraqi ministerial capacity. This document was a summary with few details, and State officials have not provided GAO with a timeline for completing this overall strategy. A senior USAID official indicated that it is uncertain whether the high-level summary will be developed into a strategy, although the President has received $140 million in additional funding for these efforts for fiscal year 2007. The summary noted that the capacity development strategy would be guided by the April 2006 Joint Campaign Plan issued by Embassy Baghdad and the MNF-I. In addition, it stated that the U.S. government would assist the Iraqi government in strengthening the ministries’ capacity to perform core functions, such as developing sufficient long-term plans and policies, proper legal and regulatory frameworks, transparent financial systems, and effective technology. The summary also called for U.S. agencies to coordinate efforts and approaches. Finally, it called for U.S. agencies to plan these efforts in consultation with the Iraqi ministries and work with the ministries to determine their needs and priorities. GAO has previously identified the desirable elements of a strategy: a clear purpose, scope, and methodology; a delineation of U.S. roles, responsibilities, and coordination with other donor nations and international organizations, including the UN; desired goals, objectives, and activities; performance measures; and a description of costs, resources needed, and risk. U.S. agencies have developed some of these elements in their programs for individual ministries but not as part of an overall U.S. strategy. Table 3 summarizes and describes the key elements of a strategy and provides examples of the status of the U.S. approach thus far and cites practices by some agencies at individual ministries that could be incorporated into an overall U.S. strategy. Clear purpose, scope, and methodology. We found little evidence that the U.S. government has clearly defined the purpose, scope, and methodology for developing an overall strategy. Agencies have provided some limited information on why an overall strategy is needed, what it will cover, and how it will be developed. Although the high-level outline for the overall capacity development strategy provided bullets about the purpose of U.S. capacity development efforts, it did not define capacity development or other key terms. Furthermore, it did not provide the context for such a program, such as whether it drew upon lessons learned from previous USAID, World Bank or other capacity development efforts. In terms of scope, the high-level summary indicated that the strategy would guide U.S. efforts to build capacity at the Prime Minister’s Office and the Iraqi Ministries, but did not identify specific ministries or determine which ministries were priorities or how those priorities had shifted in 2007. In addition, in terms of methodology, U.S. officials indicated only that an interagency task force would develop the strategy but not how they would do so. U.S. roles, responsibilities, and coordination. The multi-agency Joint Task Force on Capacity Development (JTFCD), established in October 2006, has helped U.S. agencies better delineate roles and responsibilities for ministry capacity development and to better coordinate efforts. However, the high-level outline and other potential strategy documents we reviewed do not address how overall efforts are to be integrated and unified. The JTFCD began cataloguing all U.S. capacity development efforts in late 2006. According to USAID officials, this effort helped inform U.S. agencies of each other’s work and helped identify responsibilities. The JTFCD has also helped coordinate efforts. For example, to avoid potential overlap, during a February 2007 JTFCD meeting, USAID worked out a way to allow officials from the security ministries to participate in budget training courses that were previously limited to the civilian ministries. However, the high-level outline and other planning documents we identified do not specify how the Embassy, USAID, and MNSTC-I capacity development efforts will be unified and integrated, such as how MNSTC-I’s security cooperation office will be transitioned into an office within the embassy. Nor do they discuss a potential lead agency to continue overall capacity development efforts, as was proposed in 2005. Moreover, other efforts to improve cooperation with the UN and other international donor nations and organizations have encountered difficulties. For example, the outline states that U.S. efforts are to be coordinated with the Iraqi government and the international donor community through the Capacity Development Working Group. Chaired by the Minister of Planning, this group was intended to secure Iraqi government input and commitment to U.S., coalition, and other donor partner capacity development objectives at the civilian ministries, but the group did not meet for about a year after forming in late 2005 and has not met since February 2007. Appendix III provides more information on the UN, other donor partners, and international organizations that have conducted efforts to build the capacity of the Iraqi government since 2003. Desired goals, objectives and activities. U.S. agencies have clearly identified the overall goals of capacity development at the Iraqi ministries, but most U.S. efforts lack clear ties to Iraqi priorities for all ministries. According to a February 2007 U.S. embassy briefing, the desired end-state for capacity development efforts is clearly defined: to assist Iraq’s transition to self-sufficiency by enabling the government to provide security and rule of law, deliver essential services, and develop a market- driven economy through democratic processes. The U.S. embassy and MNSTC-I have also identified overall goals for Iraqi ministry capacity development, such as improving service delivery, improving accountability, and reforming leadership and management skills. Moreover, MNSTC-I has taken clear steps to incorporate Iraqi priorities for its efforts at MOD. MOD’s national defense priorities are stated in the Policy of the Ministry of Defense 2006-2011. This document, which was approved and signed by the Minister of Defense, specifies MOD’s mission, values, and priorities in areas such as finance, personnel, training, and logistics. According to U.S. advisors and documents, the Ministries of Health, Electricity and Municipalities and Public Works have also demonstrated their commitment to U.S. objectives by developing capacity development organizations within each ministry to identify their specific needs and priorities. However, not all U.S. capacity development efforts are as clearly linked to Iraqi-identified needs and priorities, which may affect the sustainability of key U.S. capacity development efforts once they are turned over to the Iraqis. USAID’s capacity development plans were to help the Iraqis develop and administer ministry self-assessments to identify Iraqi needs and priorities. However, USAID officials stated in May 2007 that it was unclear when implementation of this critical effort would begin. Moreover, other efforts to secure greater Iraqi input beyond an ad hoc basis, such as the Capacity Development Working Group, have not succeeded. A January 2007 SIGIR report found that ministry capacity efforts were being conducted “based upon individual understandings reached between the Iraqi ministers and U.S. agency officials,” raising questions about whether the U.S. had obtained adequate input and commitment from the Iraqi government. Performance measures. U.S. agencies implementing capacity development projects have not developed performance measures for all of their efforts, particularly outcome-related performance measures that would allow them to determine whether U.S. efforts at the civilian ministries have achieved both U.S. and Iraqi desired goals and objectives. The U.S. embassy did conduct a baseline assessment in August 2006 of the civilian ministries to gauge their capacity to plan, prepare an operating budget, and conduct key tasks rather than the progress or impact of ministry capacity efforts. The assessment was completed by U.S. senior advisors and included indicators such as whether a ministry had a strategic plan and the percentage of budgeted funds disbursed in the previous year. U.S. officials stated that an updated State assessment of the civilian ministries was scheduled for completion at the end of June 2007, but the embassy decided in July not to continue this effort, according to embassy officials. In comparison, MNSTC-I is developing metrics to measure the progress and impact of efforts at the security ministries. MNSTC-I began conducting monthly assessments of MOD and MOI in mid-2006. However, in April 2007, MNSTC-I officials stated that the Commanding General decided to retool the assessment in consultation with the Iraqi government to better gauge the results of U.S. efforts. Officials stated that monthly assessments are being conducted at the field level to determine whether the MOD and MOI are ensuring Iraqi security forces units are sufficiently manned, have required weapons, and are being paid. MNSTC-I officials stated that they also recently began conducting quarterly assessments to determine what tasks or processes at the ministries may need to be adjusted to achieve results in the field. For example, the new assessment might determine whether capacity development efforts help MOD recruit and retain enough troops to maintain manning requirements. Officials were not able to share the new assessments with us because they are still being developed. Future costs, resource needs, and risk. The overall strategy should also address costs, priorities, and resources needed to achieve the end-state and how the strategy balances benefits, costs, and risks. Guidance on costs and resources needed using a risk management approach would assist Congress and implementing organizations to make resource decisions. Although U.S. agencies have provided data on U.S. funding for current capacity development efforts at the Iraqi civilian and security ministries, agencies have not identified the costs and resources needed beyond the budget requests for fiscal years 2007 and 2008. Moreover, they have not determined how much funding overall is necessary to achieve the stated long-term goal of a self-sufficient Iraqi government. Without these cost data, neither U.S. agencies nor Congress can reliably determine the cost of capacity development, which U.S. and international officials have noted is a long-term process. In addition, agencies have not provided information on how future resources will be targeted to achieve the desired end-state or, given the challenging situation in Iraq, how allocations balance benefits, costs, and efforts to address risks, such as addressing the risks associated with the four challenges identified above. U.S. programs to improve the capacity of Iraq’s ministries must address significant challenges if they are to achieve their desired outcomes. U.S. efforts lack an overall strategy: No lead agency provides overall direction, and U.S. priorities have been subject to numerous changes. In addition, U.S. efforts confront shortages of competent personnel at Iraqi ministries and sectarian Iraqi ministries contending with pervasive corruption. The risks are further compounded by the ongoing violence in Iraq as U.S. civilian advisors have difficulties meeting with their Iraqi counterparts and skilled Iraqi professionals leave the country. U.S. agencies have provided $169 million to improve the capacity of Iraq’s ministries as of the end of 2006. Congress appropriated $140 million more in May 2007 and the Administration wants up to $255 million for fiscal year 2008. We believe that future U.S. investments must be conditioned on the development of a unified U.S. strategy that clearly articulates agency roles and responsibilities, delineates the total costs needed, addresses risks, and establishes clear goals and measurements. Given the risks U.S. agencies face in implementing capacity development in Iraq and the funds being requested, GAO recommends that State, in consultation with the Iraqi government, complete an overall integrated strategy for U.S. capacity development efforts. Key components of an overall capacity development strategy should include a clear purpose, scope, and methodology; a clear delineation of U.S. roles, responsibilities, and coordination, including the designation of a lead agency for capacity development; desired goals, objectives, and activities, based on Iraqi- identified priorities; performance measures based on outcome metrics; and a description of how resources will be targeted to achieve the desired end-state balancing benefits, costs, and both internal risks (such as potential changes in cost, schedule, or objectives) and external risks (such as an increase in violence or militia influence). Given the absence of an integrated capacity development strategy, it is unclear how further appropriations of funding for ministry capacity development programs will contribute to the success of overall U.S. efforts in Iraq. Congress should consider conditioning future appropriations on the completion of an overall integrated strategy incorporating the key components identified above. We provided a draft of this report to the Departments of Defense and State, and USAID. DOD did not provide comments. State provided written comments, which are reprinted in appendix IV. State also provided technical comments, which we incorporated where appropriate. USAID noted that its comments were incorporated into State’s written response. In commenting on a draft of this report, State commented that it recognized the value of a unified strategy. However, it noted its concern over our recommendation to condition future appropriations for capacity development on the completion of a strategy. State also noted the recent appointment of an ambassador to supervise all short- and medium-term capacity development programs. Moreover, it stated that a strategy is only one element in a complex process that needs to be tailored to the needs and priorities of each Iraqi ministry or government organization. We do not recommend stopping U.S. investment in capacity development; the $140 million in supplemental funding appropriated in fiscal year 2007 remains available for the agencies to continue their efforts. Rather, we recommend that Congress condition future funding on the development of an overall integrated strategy. We acknowledge that State named an ambassador to coordinate the embassy’s economic and assistance operations, including supervising civilian capacity development programs. However, this action occurred in August 2007, underscoring our point that U.S. capacity development efforts have lacked overall leadership and highlighting the need for an overall integrated strategy. Finally, our recommendation does not preclude U.S. agencies from tailoring capacity development efforts to meet each ministry’s unique needs. A strategy ensures that a U.S.-funded program has consistent overall goals, clear leadership and roles, and assessed risks and vulnerabilities. We are sending copies of this report to interested congressional committees. We will also make copies available to others on request. In addition, this report is available 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. Key contributors to this report are listed in appendix V. The following are GAO’s comments on the Department of State’s letter dated September 10, 2007, and USAID’s letter dated September 13, 2007. 1. We do not recommend stopping U.S. funds investment in capacity development. In fact, the President received an additional $140 million for capacity development efforts in May 2007 from the fiscal year 2007 supplemental funds. However, we recommend that Congress consider conditioning the administration’s request for up to $255 million in additional funds for fiscal year 2008 on the completion of an overall integrated strategy incorporating the key components identified in the report. Without these key components, Congress may lack the critical information needed to weigh risks and judge U.S. costs, progress, and results of the current capacity development programs. 2. We changed our draft report to acknowledge this July 2007 change in the U.S. Embassy Baghdad’s organizational arrangements for the conduct of capacity development programs. However, this initiative is relatively new; it is too soon to evaluate whether this action has helped address coordination and leadership. This recent action underscores our point that U.S. capacity development efforts have lacked overall leadership and highlights the need for an overall integrated strategy. This is particularly so since capacity development efforts for rule of law and the security ministries are under separate leadership. 3. Our recommendation does not preclude U.S. agencies from tailoring capacity development efforts to meet each ministry’s unique needs. A strategy ensures that a U.S.-funded program has consistent overall goals, clear leadership and roles, and assessed risks and vulnerabilities. 4. We did not discuss project-level capacity development efforts at length as the focus of this engagement was on the ministry-level efforts deemed critical by State; however, we did note the substantial contributions made at the project level by the U.S. Army Corps of Engineers’ Gulf Region Division. 5. This report notes that various U.S. agencies pursued separate ministry- level capacity development efforts at various Iraqi ministries between 2004 and 2005 without the benefit of an overall strategy. We also note in this report that the U.S. embassy itself advocated in 2005 that an integrated strategy be adopted with a lead agency in charge, using as a justification its finding that capacity development efforts up to that time had been implemented in an uncoordinated and sometimes overlapping fashion and that its efforts had been fragmented, duplicative, and disorganized. 6. We note the comparative success MNSTC-I has achieved with its relatively intensive efforts at the security ministries. For example, we note that a senior MNSTC-I advisor worked with MOD staff to develop its counterinsurgency strategy. We also note in table 3 and elsewhere MNSTC-I’s comparative success in developing some aspects of a unified, integrated strategy. 7. We have acknowledged the importance of addressing the shortcomings in Iraqi budget execution and procurement procedures in this and previous reports and testimonies. For example, our September 2007 report on whether Iraq had met 18 key benchmarks stated that the government of Iraq has had difficulty spending its resources on capital projects and that some of the reported improvements in budget execution stem from funding releases to the provinces. Our September 2007 report also noted that a “commitment” in Iraq is similar to an obligation under the U.S. budget process. These commitments are not expenditures and may not be reliable indicators of future spending by ministries and provinces. Moreover, the government of Iraq’s official expenditure data, as reported by the Ministry of Finance, does not include commitments or obligations. Finally, the report notes that it is unclear whether government funds committed to contracts are a reliable indicator of actual spending. 8. We contend that budget execution rates may not be one of the best measures of effective capacity development. Our September 2007 report noted that, given the capacity and security challenges currently facing Iraq, many contracts that have government funds committed to them may not be executed and thus would not result in actual expenditures. Moreover, until more complete data on actual capital project expenditures become available, it may be premature to conclude that U.S. efforts to improve budget execution have had a “highly significant impact” on ministry capacity. We are currently conducting a review of U.S. efforts to help Iraq spend its budget and will issue a report at a later date. 9. This report acknowledges the contributions of the JTFCD to coordinating and cataloging all U.S. capacity development efforts in late 2006. However, the draft planning documents we identified do not specify how the JTFCD or other coordination groups will integrate Embassy, USAID, and MNSTC-I capacity development efforts. Further, we noted in the report that the Capacity Development Working Group, chaired by the Minister of Planning, was intended to secure Iraqi government input and commitment to U.S. and coalition capacity development objectives at the civilian ministries. However, the group did not meet for about a year after forming in late 2005 and has not met since February 2007. The Ministerial Engagement Teams are a coordinating arrangement introduced in mid-2007; it is too soon to evaluate their activities or results. 10. This report does not view short-term activities as a negative outcome. We do note that IRMO originally justified conducting short-term efforts in an attempt to jump-start capacity development in 2006 using more readily available funding. These programs would complement and support a follow-on USAID effort to conduct longer-term capacity development programs. Most of State’s short-term efforts did not begin until after USAID began its capacity development programs under its medium-term contract because of delays in the formation of the Iraqi government and in receiving fiscal year 2006 funding. Moreover, USAID officials stated that they began implementing a number of short-term efforts earlier than originally planned to address more immediate shortfalls in the Iraqi government’s capacity to plan and execute ministry budgets. 11. We addressed these elements as they were among the core ministry functions identified as common to all the key ministries. GAO reviewed how these common functions were defined and what metrics were used by State and DOD to track these elements in their assessments of the status of key ministries’ capacity development. We also noted the existence of the scholarship program as an example of a USAID capacity development program in table 2 but did not otherwise discuss it. In this report, we (1) assess the nature and extent of U.S. efforts to develop the capacity of the Iraqi ministries, (2) assess the key challenges to these efforts, and (3) assess the extent to which the U.S. government has an overall strategy for these efforts that incorporates key elements. For the purposes of this review, which we undertook under the Comptroller General’s authority to conduct reviews on his own initiative, we focused on key U.S. capacity development efforts initiated or ongoing in fiscal years 2006-2007, primarily those efforts begun after the start of the National Capacity Development Program in late 2005, the U.S. Mission Baghdad’s attempt to focus and better coordinate U.S. efforts. To describe these programs, we reviewed U.S. government documents including the Department of State’s (State) quarterly section 2207 reports to Congress from October 2004 to April 2007 on the use of Iraq Relief and Reconstruction Funds; State’s quarterly section 1227 reports to Congress from April 2006 to April 2007 on current military, diplomatic, political, and economic measures undertaken to complete the mission in Iraq; the U.S. Agency for International Development (USAID) contract awarded in July 2006 to Management Systems International, Inc., Building Recovery and Reform through Democratic Governance National Capacity Development Program; reports on USAID’s implementation of the Iraqi Financial Management Information System under the Economic Governance Project II; the U.S. Embassy-Baghdad Joint Task Force for Capacity Development’s catalogue of U.S. capacity development efforts fromApril 2007; the Department of Defense’s (DOD) quarterly reports to Congress, Measuring Security and Stability and Iraq, from July 2005 to June 2007; and Multi-National Security Transition Command-Iraq’s 2007 Campaign Action Plan. We reviewed the results of the Iraq Reconstruction Management Office’s (IRMO) September 2006 Ministerial Capacity Metrics Assessment and deemed the results sufficiently reliable to provide a broad indication of the strengths and weaknesses of the ministries surveyed. We found the procedures followed by IRMO in creating the assessment, compiling the results, and assessing data reliability to be reasonable. However, the data had significant limitations. For example, a number of subquestions were not answered for all ministries. We also examined the federal government’s fiscal years 2006, 2007, and 2008 regular and supplemental budget requests for State, USAID, DOD for capacity development efforts for the Iraqi government. Moreover, we reviewed previous GAO reports and reviews and periodic reporting from the Office of the Special Inspector General for Iraq Reconstruction (SIGIR), including its January 2007 report Status of Ministerial Capacity Development in Iraq. We also interviewed key U.S. government officials from State, USAID, DOD, and relevant contractor officials in Washington, D.C.; Iraq; and Jordan. We conducted interviews over the telephone and made site visits to Iraq and Jordan in February 2007. To assess key challenges to U.S. capacity development efforts, we reviewed and analyzed the documents mentioned above and other relevant plans, reports, and data from the Iraqi government. We designated the identified challenges as key, based on evidence presented in previous GAO reports, the frequency they were cited by U.S. officials and documents, and the importance they accorded their impact on U.S. capacity development objectives. We interviewed U.S. government officials from the Departments of State, Defense, Treasury, Justice and the Agency for International Development in Washington D.C., Iraq, and Jordan; and the Multinational Forces-Iraq (MNF-I); and other donors, including officials from the United Nations and its associated relief and development agencies, the World Bank, the European Union, the United Kingdom’s Department for International Development (DFID), and the Canadian International Development Agency. We also analyzed data on Iraq’s 2006 and 2007 budgets and 2006 budget execution through December 2006, which were provided to us by the U.S. Treasury from Iraq’s Ministry of Finance, and found that these data were sufficiently reliable for our purposes. We also interviewed relevant U.S. government officials or contractor officials working with BearingPoint; Management Systems International, Incorporated (MSI); and Military Professional Resources, Incorporated (MPRI). Finally, to examine the extent to which the U.S. government has an overall strategy for these efforts that incorporate key elements, we reviewed and analyzed, in addition to the abovementioned documents, the July 2007 Joint Campaign Plan issued by Embassy Baghdad and the Multinational Force-Iraq (MNF-I); the Multi-National Security Transition Command- Iraq 2007 Campaign Action Plan; the November 2005 National Strategy for Victory in Iraq; the President’s February 2007 New Way Forward strategy for Iraq; Iraqi government’s National Development Strategies for 2005-2007 and for 2007-2010; State’s February 2007 strawman (a three page, high- level summary) for a U.S. government strategy to strengthen Iraqi ministerial capacity; and the September 2006 U.S. Embassy-Baghdad assessment of the capacity of key Iraqi civilian ministries to perform core functions. We interviewed key U.S. officials from State, USAID, DOD, and other relevant agencies. We reviewed previous GAO reports that identified the desirable characteristics of a national strategy, including Combating Terrorism: Evaluation of Selected Characteristics in National Strategies Related to Terrorism, Rebuilding Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S. Goals, Rebuilding Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S. Goals and Overcome Challenges, Intellectual Property: Initial Observations on the STOP Initiative and U.S. Border Efforts to Reduce Piracy, and GAO, Intellectual Property, Strategy for Targeting Organized Piracy (STOP) Requires Changes for Long-term Success. We analyzed the information we obtained on U.S. capacity development efforts to identify components of an overall strategy that the three agencies leading these efforts—State, USAID, and MNSTC-I—have developed to date. We conducted our work from August 2006 through August 2007 in accordance with generally accepted government auditing standards. Increase the ability of the Iraqi Government Ministries and Prime Minister’s Office to conduct business between each other on an immediate basis. Help PMO staff develop the capacity to initiate research, coordinate new legislative initiatives, and to track legislation. Provide specialists to help develop and implement appropriate policies, strengthen core public administration functions, and create training systems to improve delivery of services. Support efforts to reform and improve the investment climate and tax policies, develop a national anticorruption strategy, and promote citizen participation in government. To provide approximately 200 training modules to each of the 10 key ministries. Establish office in Ministry of Planning to facilitate budget procurement across all Iraqi ministries. Help Ministry of Planning implement capital budget and reform procurement in coordination with the international community and subject matter experts. Help Iraqi ministries execute budgets and provide metrics for leadership. Enable Ministry of Finance staff to perform better by strategic budget development, organizational modernization, regulation development, and future sector privatization. Provide 10 SMEs to help the ministry develop policies, especially for budget execution. Enable the Ministries of Finance, Planning, and other ministries’ staffs to perform core ministerial functions and tasks better through strategic budget development, future year budgeting, modernization, and development of regional automation, and regional fiscal accounting commonalities. Produce Sector Master Plans for the ministries to better focus resources on medium-to-long-term production, sustain outputs, and meet the goals necessary to deliver essential services to the public. Develop the ministry’s capacity to provide advice and technical support for draft legislation that promotes individual freedoms, human rights, and the rule of law within the context of the Iraqi constitution. Provide software to increase CPI capability to organize and cross-reference investigative data, making working practices more efficient and anti-corruption investigations more effective. Develop a tool for the BSA and each of the 29 ministerial Inspector Generals to assess core needs. May ’07 to May ’08 sector strategic planning. Provide specific training on international and domestic water laws and policies to ministry employees responsible for formulating, negotiating, interpreting, or applying water laws and policies. Provide training in essential skills, such as strategic and contingency planning; contracting management; and human resource management. Increase the organizational, accountability, inventory management, and technology capacities of Kimadia, (a state company for marketing medical appliances and equipment in Iraq). Install a computer network within the ministry to help it manage educational activities, improve accountability, and capture and report educational data. Provide nine staff with a mixture of skills to assist a variety of national-level programs, including: establishing guidelines for transport sector development; addressing information technology standards requirements; national identity card requirements; and mentor program for management staff in order to build sustainable Iraqi expertise. Includes only programs contracted, under way, or completed as of April 2007. provided $1.5 million in-kind assistance. The United Nations, the European Union, the United Kingdom, and the Canadian government also have conducted efforts to develop the capacity of the Iraqi government since 2003. The United Nations Assistance Mission for Iraq coordinates and oversees projects with capacity development components implemented by over a dozen UN agencies in Iraq. Most of these projects are funded through the International Reconstruction Fund Facility for Iraq (IRFFI)/United Nations Development Group Iraq Trust Fund (ITF). One effort implemented by the UN Development Program (UNDP) governance program provided basic management skills training for Ministry of Municipalities and Public Works employees at a cost of $3 million in February 2007. The UN International Organization for Migration in Iraq began implementing the Capacity Building in Migration Management Project in August 2004 with support of the Australian government. This ongoing project includes helping the Ministry of Interior establish a training center for immigration officers, with an information technology lab and a library with resource materials. The European Union (EU) provided about 16 million euro through the IRFFI/ World Bank ITF from 2003 to 2005 for two World Bank capacity- development projects. These two projects included efforts to train Iraqi staff at 19 ministries in topics such as policy reform, World Bank procurement policies, and basic training in MS Excel. The EU also provided about 42 million euro through the IRFFI/UN ITF from 2003 to 2006 for governance and civil society projects, including efforts to train Iraqi government officials in reconstruction management. The United Kingdom’s Department for International Development (DFID) has conducted capacity development efforts including a $23 million project that began in 2005 to provide consultants for the Ministry of Interior to provide training and assistance for MOI staff in such areas as procurement and legal and regulatory frameworks. Another $25 million effort that began in 2005 aims to provide technical and policy advice for the Ministry of Finance in areas such as subsidy reform and budget and expenditure management. DFID has coordinated its efforts with U.S. efforts by participating in meetings of the U.S. Joint Task Force for Capacity Development. The Canadian government has funded about $14 million worth of ministry capacity efforts for implementation from 2005-2008, including human and minority rights training for Ministry of Human Rights employees and assistance for a marshland restoration project with the Ministry of the Environment, the Ministry of Water Resources, and an Iraqi university. As of February 2007, trainers from 11 nations, including Iraq, provided basic instruction and more advanced administrative courses to develop the capacity of the Iraqi police at the Jordan International Police Training Center. Between October 2003 and February 2007, 50,300 Iraqi police graduated from the center, according to the training center director. Nations contributing instructors included Australia, Austria, Belgium, Canada, Croatia, Finland, Jordan, Slovenia, the United Kingdom, and the United States. In addition, Tetsuo Miyabara, Assistant Director; Daniel Cain; Lynn Cothern; Martin De Alteriis; Etana Finkler; Elisabeth Helmer; B. Patrick Hickey; Bruce Kutnick; and Mary Moutsos made key contributions to this report. | Iraq's ministries were decimated following years of neglect and centralized control under the former regime. Developing competent and loyal Iraqi ministries is critical to stabilizing and rebuilding Iraq. The President received $140 million in fiscal year 2007 funds and requested an additional $255 million in fiscal year 2008 to develop the capacity of the Iraq's ministries. This report assesses (1) the nature and extent of U.S. efforts to develop the capacity of the Iraqi ministries, (2) the key challenges to these efforts, and (3) the extent to which the U.S. government has an overall integrated strategy for these efforts. For this effort, GAO reviewed U.S. project contracts and reports and interviewed officials from the Departments of State (State), Defense (DOD), and the United States Agency for International Development (USAID) in Baghdad and Washington, D.C. Over the past 4 years, U.S. efforts to help build the capacity of the Iraqi national government have been characterized by (1) multiple U.S. agencies leading individual efforts, without overarching direction from a lead entity that integrates their efforts; and (2) shifting timeframes and priorities in response to deteriorating security and the reorganization of the U.S. mission in Iraq. First, no single agency is in charge of leading the U.S. ministry capacity development efforts, although State took steps to improve coordination in early 2007. State, DOD and USAID have led separate efforts at Iraqi ministries. About $169 million in funds were allocated in 2005 and 2006 for these efforts. As of mid-2007, State and USAID were providing 169 capacity development advisors to 10 key civilian ministries and DOD was providing 215 to the Ministries of Defense and Interior. Second, the focus of U.S. capacity development efforts has shifted from long-term institution-building projects, such as helping the Iraqi government develop its own capacity development strategy, to an immediate effort to help Iraqi ministries overcome their inability to spend their capital budgets and deliver essential services to the Iraqi people. U.S. ministry capacity efforts face four key challenges that pose a risk to their success and long-term sustainability. First, Iraqi ministries lack personnel with key skills, such as budgeting and procurement. Second, sectarian influence over ministry leadership and staff complicates efforts to build a professional and non-aligned civil service. Third, pervasive corruption in the Iraqi ministries impedes the effectiveness of U.S. efforts. Fourth, poor security limits U.S. advisors' access to their Iraqi counterparts, preventing ministry staff from attending planned training sessions and contributing to the exodus of skilled professionals to other countries. The U.S. government is beginning to develop an integrated strategy for U.S. capacity development efforts in Iraq, although agencies have been implementing separate programs since 2003. GAO's previous analyses of U.S. multiagency national strategies demonstrate that such a strategy should integrate the efforts of the involved agencies with the priorities of the Iraqi government, and include a clear purpose and scope; a delineation of U.S. roles, responsibilities, and coordination with other donors, including the United Nations; desired goals and objectives; performance measures; and a description of benefits and costs. Moreover, it should attempt to address and mitigate the risks associated with the four challenges identified above. U.S. ministry capacity efforts to date have included some but not all of these components. For example, agencies are working to clarify roles and responsibilities. However, U.S. efforts lack clear ties to Iraqi-identified priorities at all ministries, clear performance measures to determine results at civilian ministries, and information on how resources will be targeted to achieve the desired end-state. |
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In 2002, GAO reported that the number of restatement announcements due to financial reporting fraud and/or accounting errors grew significantly between January 1997 and June 2002, negatively impacting the restating companies’ market capitalization by billions of dollars. GAO was asked to update key aspects of its 2002 report (GAO-03-138). This report discusses (1) the number of, reasons for, and other trends in restatements; (2) the impact of restatement announcements on the restating companies’ stock prices and what is known about investors’ confidence in U.S. capital markets; and (3) regulatory enforcement actions involving accounting- and audit-related issues. To address these issues, GAO collected restatement announcements meeting GAO’s criteria, calculated and analyzed the impact on company stock prices, obtained input from researchers, and analyzed selected regulatory enforcement actions. While the number of public companies announcing financial restatements from 2002 through September 2005 rose from 3.7 percent to 6.8 percent, restatement announcements identified grew about 67 percent over this period. Industry observers noted that increased restatements were an expected byproduct of the greater focus on the quality of financial reporting by company management, audit committees, external auditors, and regulators. GAO also observed the following trends: (1) cost- or expense- related reasons accounted for 35 percent of the restatements, including lease accounting issues, followed in frequency by revenue recognition issues; and (2) most restatements (58 percent) were prompted by an internal party such as management or internal auditors. In the wake of increased restatements, SEC standardized disclosure requirements by requiring companies to file a specific item on the Form 8-K when a company’s previously reported financials should no longer be relied upon. However, between August 2004- September 2005, about 17 percent of the companies GAO identified as restating did not appear to file the proper disclosure when they announced their intention to restate. These companies continued to announce intentions to restate previous financial statements results in a variety of other formats. Public confidence in the reliability of financial reporting is critical to the effective functioning of the securities markets, and various federal laws and entities help ensure that the information provided meets such standards. Federal securities laws help to protect the investing public by requiring public companies to disclose financial and other information. SEC was established by the Securities Exchange Act of 1934 (the Exchange Act) to operationalize and enforce securities laws and oversee the integrity and stability of the market for publicly traded securities. SEC is the primary federal agency involved in accounting requirements for publicly traded companies. Under Section 108 of the Sarbanes-Oxley Act, SEC has recognized the accounting standards set by the Financial Accounting Standards Board (FASB)—generally accepted accounting principles (GAAP)—as ”generally accepted” for the purposes of the federal securities laws. SEC reviews and comments on registrant filings and issues interpretive guidance and staff accounting bulletins on accounting matters. To issue securities for trading on an exchange, a public company must register the securities offering with SEC, and to register, the company must meet requirements set by the Exchange Act, as amended, including the periodic disclosure of financial and other information important to investors. The regulatory structure of U.S. markets is premised on a concept of corporate governance that makes officers and directors of a public company responsible for ensuring that the company’s financial statements fully and accurately describe its financial condition and the results of its activities. Company financial information is publicly disclosed in financial statements that are to be prepared in accordance with standards set by FASB and guidance issued by SEC. The integrity of these financial statements is essential if they are to be useful to investors and other stakeholders. In addition to the requirements and standards previously discussed, the securities acts and subsequent law set requirements for annual audits of the financial statements by registered public accounting firms to help ensure the integrity of financial statements. The applicable standards under these laws require that auditors plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes an examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements; an assessment of the accounting principles used and significant estimates made by management; and an evaluation of the overall financial statement presentation. The purpose of the auditor’s report is to provide reasonable assurance about whether the financial statements present fairly, in all material respects, the financial position of the company, the results of its operations, and its cash flows, in conformity with U.S. GAAP. The Sarbanes-Oxley Act reinforces principles and strengthens requirements (established in previous law), including measures for improving the accuracy, reliability, and transparency of corporate financial reporting. Specifically, Section 302 requires that the chief executive officer (CEO) and chief financial officer (CFO) must certify for each annual and quarterly report filed with SEC that they have reviewed the report; the report does not contain untrue statements or omissions of a material fact; and the financial information in the report is fairly presented. In addition, Section 404 requires company management to annually (1) assess its internal control over financial reporting and report the results to SEC and (2) have a registered public accounting firm attest to and report on management’s assessment of effectiveness of internal control over financial reporting. While larger public companies have implemented Section 404, most companies with less than $75 million in public float— about 60 percent of all public companies—have yet to complete this process. (See app. IV for further discussion of the act.) To oversee the auditing of publicly traded companies, the Sarbanes-Oxley Act established PCAOB, a private-sector nonprofit organization. Subject to SEC oversight, PCAOB sets standards for, registers, and inspects the independent public accounting firms that audit public companies and has the authority to conduct investigations and disciplinary proceedings and impose sanctions for violations of law or PCAOB rules and standards. Specifically, Section 105 of the Sarbanes-Oxley Act granted PCAOB broad investigative and disciplinary authority over registered public accounting firms and persons associated with such firms. In May 2004, SEC approved PCAOB’s rules implementing this authority. According to the rules, PCAOB staff may conduct investigations concerning any acts or practices, or omissions to act, by registered public accounting firms and persons associated with such firms, or both, that may violate any provision of the act, PCAOB rules, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including SEC rules issued under the act, or professional standards. Furthermore, PCAOB’s rules require registered public accounting firms and their associated persons to cooperate with PCAOB investigations, including producing documents and providing testimony. The rules also permit PCAOB to seek information from other persons, including clients of registered firms. See figure 1 for the existing system of corporate governance and accounting oversight structures. Although the number of public companies restating their publicly reported financial information due to financial reporting fraud and/or accounting errors remained a relatively small percentage of all publicly listed companies, the number of restatements has grown since 2002. For example, 314 companies announced restatements in 2002 and 523 announced restatements in 2005 (through September). In addition, of the 1,390 announced restatements we identified, the percentage of large companies announcing restatements has continued to grow since 2002.While large and small companies restate their financial results for varying reasons, change in cost- or expense-related items, which includes lease accounting issues, was the most frequently cited reason for restating. While both internal and external parties could prompt restatements, internal parties such as company management or internal auditors prompted the majority of restatement announcements. Finally, we found that, despite SEC’s efforts to create a more transparent mechanism for disclosing restatements through revisions to Form 8-K, some companies had not properly filed such disclosures and continued to announce intentions to restate previous financial statements results in a variety of other formats. The number of annual announcements of financial restatements generally increased, from 314 in 2002 to 523 in 2005 (through September)—an increase of approximately 67 percent (see fig. 2). This constituted a nearly five-fold increase from 92 in 1997 to 523 in 2005. Furthermore, from July 2002 through September 2005, a total of 1,121 public companies made 1,390 restatement announcements. Some industry observers noted that several factors may have prompted more U.S. publicly traded companies to restate previously reported financial results, including (1) the financial reporting requirements of the Sarbanes-Oxley Act, especially the certification of financial reports required by Section 302 and the internal controls provisions of Section 404; (2) increased scrutiny from the newly formed PCAOB through its inspections of registered public accounting firms; and (3) increased staffing and review by SEC. As the number of restatement announcements rose, the numbers of listed companies making the announcements increased as well. While the average number of companies listed on NYSE, Nasdaq, and Amex decreased about 10 percent from 7,144 in 2002 to 6,473 in 2005, the number of listed companies restating their financial results increased from 265 in 2002 to 439 in 2005 (through September), representing about a 67 percent increase (see table 1). On a yearly basis, the proportion of listed companies restating grew from 3.7 percent in 2002 to 6.8 percent in 2005. Over the period of January 1, 2002, through September 30, 2005, the total number of restating companies (1,084) represents 16 percent of the average number of listed companies from 2002 to 2005, as compared to almost 8 percent during the 1997-2001 period. A number of other researchers also found that restatements had increased since calendar year 2002. The researchers used somewhat different search methodologies to identify companies that restate previously reported financial information and included slightly different criteria for inclusion but arrived at similar conclusions. The Huron Consulting Group (HCG) identified 1,067 financial statement restatements from 2002 to 2004 and noted that the increase was significant from 2003 to 2004. Also, Glass, Lewis & Co. LLC (Glass Lewis) identified 2,319 restatements of previously issued financial information by U.S. public companies from 2003 to 2005 and also found an increase in the number of restatements over that period. Unlike our work, which included a limited number of companies traded OTC Bulletin Board or on Pink Sheets, the Glass Lewis study also included hundreds of smaller companies quoted on the OTC Bulletin Board or on Pink Sheets that generally lacked analyst coverage. See appendix VI for a comparison of various restatements studies. For the restatements we identified, the number of large companies announcing restatements of their previously reported financial information due to financial reporting fraud and/or accounting errors has increased. More specifically, large companies (i.e., companies having over $1 billion in total assets), as a percentage of the total restating companies have increased from about 30 percent in 2001 to over 37 percent in 2005. Likewise, the average market capitalization of a company announcing a restatement (for which we had data) has grown from under $3 billion (with a median of $277 million) in the latter half of 2002 to over $10 billion (with a median of $682 million) through September 2005. While the average size of listed companies increased about 68 percent from 2002 to 2005, the average size of companies restating their financials grew almost 300 percent. Another indication that large public companies announcing restatements has continued to increase, is the number of companies identified as announcing restatements that are listed on the NYSE, which has more large companies than the other U.S. stock exchanges. For example, between 2002 and September 2005, the number of NYSE-listed companies announcing restatements had increased 64 percent from 114 to 187. During the same time, the number of Nasdaq-listed companies announcing restatements increased 55 percent from 137 to 212, and the number of Amex-listed restating companies increased more than 175 percent from 14 to 40. While more Nasdaq-listed companies announced restatements than NYSE- listed companies, the proportion of NYSE-listed companies restating (relative to the total number of companies listed on the NYSE) surpassed Nasdaq-listed companies over the period 2002–2005. As figure 3 illustrates, for the announced restatements we identified, in 2002, about 4 percent of NYSE-listed companies announced restatements for financial reporting fraud and/or accounting errors, whereas this percentage rose to more than 7 percent by September 2005. During the same period, the percentage of Nasdaq-listed restating companies rose from less than 4 percent to almost 7 percent. From 2002 to 2005, the percentage of NYSE- and Nasdaq-listed companies restating essentially mirrored each other in movement throughout the period by declining and then increasing. However, the percentage of Amex-listed restating companies rose each year during the 2002 to September 2005 period from about 2.0 percent to almost 5.5 percent. Although public companies restate their financial results for a variety of reasons, cost- or expense-related issues accounted for more than one-third of the 1,390 restatement announcements identified from July 2002 through September 2005 (see fig. 4). We classified cost- or expense-related restatements generally to include a company understating or overstating costs or expenses, improperly classifying expenses, or any other mistakes or improprieties that led to misreported costs. Lease accounting issues that surfaced in early 2005 were also included in this category. Our analysis also shows a significant drop in restatements announced for revenue recognition reasons, which had accounted for almost 38 percent of the restatements in our 2002 report. Cost- or expense-related issues surpassed revenue recognition issues as the most frequently identified cause of restatements primarily because of a large number of announcements made in early 2005 to correct accounting for leases by the retail/restaurant industry and tax-related issues. For example, 135 public companies announced restatements involving issues solely related to accounting for leases in 2005 after SEC chief accountant’s February 7, 2005, letter regarding the treatment of certain leases and leasehold improvements. However, revenue recognition remained the second most frequently identified reason for restatements from July 2002 through September 2005, accounting for 20 percent of all the restatements. Actions that we classified under “revenue recognition” included a company recognizing revenue sooner or later than would have been allowed under GAAP, or recognizing questionable or invalid revenue. (See table 2 for a description of each reason.) While both internal and external parties—such as the restating company’s management or internal auditor, an external auditor, SEC, or others—can prompt restatements, about 58 percent of the 1,390 announced restatements were prompted by internal parties. This was an increase from about 49 percent in our 2002 report. However, in both our prior report and this report, external parties may have been involved in discovering some of these misstatements, even if the companies may not have made that information clear in their restatement announcements or SEC filings. The external auditor, SEC, or some other external party such as the media (as in the case of an August 2002 restatement announcement by AOL Time Warner Inc. (AOL)), was identified as prompting the restatement in 24 percent of the announcements (compared to 16 percent in our 2002 report). In the remaining 18 percent of the announcements (compared with 35 percent in our 2002 report), we were not able to determine who prompted the restatement because the announcement or SEC filing did not clearly state who discovered the misstatement of the company’s prior financial results. SEC has revised Form 8-K, in part, to make information on financial restatements more uniform and apparent to investors, but many companies appeared to have filed potentially deficient filings. In addition, conflicting instructions and guidance resulted in some companies disclosing similar financial information in varying degrees and formats. In a 2003 report required by the Sarbanes-Oxley Act, SEC proposed to address the lack of uniformity by amending several of its periodic disclosure forms— essentially to make issuers’ public notification of financial information uniform. Specifically, in its report, SEC proposed to amend Form 8-K to add a specific line item for public companies to disclose what was restated and why. In March 2004, consistent with its proposal in the 2003 report, SEC amended Form 8-K to, among other things, add a new line item (Item 4.02), which requires public companies to file the Form 8-K (Item 4.02) within 4 business days if management or the company’s independent auditors determine that previously issued financial statements should not be relied upon. This alerts investors to potentially important company events that may impact their investment decision. This change became effective August 23, 2004. This change to Form 8-K included a limited safe harbor for failure to timely file an 8-K in certain situations, including in a situation in which the company makes the determination the financial statements may not be relied upon, but not in a situation when the independent auditor makes such a determination. In November 2004, SEC issued additional guidance to address questions concerning the revised disclosures. This “Frequently Asked Questions” guidance states that a Form 8-K is required for Item 4.01 (Change in Accountant) and Item 4.02 events, even if a periodic report such as a Form 10-K or 10-Q disclosing such information is filed during the 4 business days following the event. The amended forms and the amended rules do not make this Form 8-K filing requirement clear, and instead indicate that the filing of a Form 8-K may not be required if previously reported. Specifically, the instructions for Form 8-K state that a public company is not required to file a Form 8-K when, substantially the same information has been previously disclosed on a periodic report. Between August 23, 2004, and September 30, 2005, about 17 percent of restating companies (111 companies) did not appear to file a Form 8-K for restatements as required by SEC guidance. According to our analysis, about 30 percent of restating companies (34 companies), during this same time period, failed to file a Form 8-K disclosing their restatements. It appears that these companies either failed to disclose the announced restatement at all or disclosed it in a Form 10-K or 10-Q or an amended form. The remaining 77 companies filed a Form 8-K disclosing their restatement, but under items other than the required 4.02—such as 2.02 (Results of Operations and Financial Condition) or 8.01 (Other Events). Furthermore, we found that the companies filing these potentially deficient filings included a mix of large and small companies. For example, over one- third of the 111 companies we identified were large companies (as measured by market capitalization, asset size, or revenue). Moreover, a study by Glass Lewis found that about one-third of companies restating in calendar year 2005 did not file a Form 8-K (Item 4.02) to notify investors, or the public in general, about such a corporate event. We estimated that—from the trading day before through the trading day after an initial restatement announcement—stock prices of the restating companies decreased by an average of almost 2 percent, compared with an average decline of nearly 10 percent in our 2002 report. In addition, we estimated that the market capitalization of restating companies decreased by over $36 billion when adjusted for overall market movements (nearly $18 billion unadjusted) compared to adjusted and unadjusted declines of around $100 billion reported in 2002. These declines, while potentially significant for the investors involved, if realized, represented about 0.2 percent of the total market capitalization of the three securities exchanges, which was about $17 trillion in 2005. The reasons for restatements also appear to have affected the severity of the impact on market capitalization, with restatements for reasons that could involve financial reporting fraud or other unspecified causes resulting in the most severe size-adjusted market reaction on average. However, revenue issues continued to have a sizeable impact and, in a change from our previous report, cost- or expense-related restatements had the greatest impact in dollar terms because there are more of them. We also found that the market impact of restatement announcements on restating companies over longer periods was mixed, in contrast to our prior report, in which we found larger, more persistent stock price and market capitalization declines for restating companies. We estimated that, for the 1,061 cases we were able to analyze from July 1, 2002, to September 30, 2005, the stock prices of companies making an initial restatement announcement fell by almost 2 percent (market- adjusted), on average, from the trading day before through the day after the announcement (the immediate impact). Unadjusted losses in the market capitalization of restating companies totaled nearly $18 billion, ranging from a net gain of almost $9 billion from July through December 2002 to a loss of about $16 billion for 2004 (see table 3). But, when the losses were adjusted for general movements in the overall market, the market capitalization of the restating companies decreased an estimated $36 billion. In our prior report, we found that the immediate impact was an average decline in stock price of nearly 10 percent and a decline, both adjusted and unadjusted, in market capitalization of around $100 billion. Thus, in total, the immediate impact for July 2002–2005 appeared to be less severe. The smaller average decline in stock price (a 2 percent decline compared with a nearly 10 percent decline) suggested that the market’s reaction for each company, on average, was not as severe. On an annual basis, and when not adjusted for market movements, in the current report the average annual decline was $5.4 billion, compared with $18.2 billion, in our 2002 report. However, when market-adjusted, the average decline was $11.2 billion over the analysis period for this report, compared with an average $17.4 billion decline for the period covered in our prior report. The increased severity of the market-adjusted immediate impact on market capitalization likely reflected the more negative reaction to a restatement announcement given the generally positive overall market movement during the 2003–2005 period, and could also reflect the fact that more, larger companies announced restatements in the July 2002–2005 period. The immediate impact on the market capitalization of restating companies, while potentially large for the investors involved, if realized, generally was less than 0.2 percent of the total market capitalization of companies listed on NYSE, Nasdaq, and Amex for a given year during 2002–2005, ranging in magnitude from 0.01 percent to 0.14 percent (see table 4). That the immediate impact—as a percentage of total market capitalization—would appear relatively small is not surprising, considering the short trading day interval that we analyzed. We chose the 3-trading-day window to focus as much as possible on the restatement announcement, to the exclusion of other factors. Later in this report, we examine losses over longer periods, as well as the effects of restatements on overall market confidence. While our analysis generally showed declines in market capitalization, the results for the second half of 2002 were positive and can be explained in large part by the influence of two large companies—Tyco International Ltd. (Tyco) and AOL. The market reactions to the restatement announcements of the two companies resulted in adjusted market capitalization gains of $4.5 billion. In the cases of Tyco and AOL, both of which involved revenue recognition issues, the restatement announcements came weeks or months after initial news of potential accounting fraud and errors surfaced, and so the market had likely already anticipated these announcements and factored the information into the companies’ stock prices well before the restatement announcement. Over the 3 trading days surrounding the announcement dates that we identified, Tyco’s market capitalization increased by around $2.8 billion and AOL’s market capitalization increased by around $1.6 billion. We also conducted a separate analysis of the immediate impact of restatement announcements for the 329 announcements that we were unable to analyze in the primary event study. This group included 159 announcements that were attributed to companies with stock not listed on the exchanges. We limited this additional analysis to a simple assessment of the unadjusted change in market capitalization over the three trading days surrounding the restatement announcement, generally relying on data we obtained from SEC’s and Nasdaq’s Web sites. We were able to gather sufficient data to analyze 242 of the 329 announcements (114 announcements made by listed companies and 128 announcements made by unlisted companies). We estimated that, on average, these restatement announcements resulted in an average decline in market capitalization of 1.5 percent from the trading day before the announcement through the trading day after the announcement, reflecting an unadjusted decline of about $3.7 billion in addition to the nearly $18 billion decline estimated in the primary event study. Announcements made for reasons that could involve financial reporting fraud or other unspecified causes, which we classified in the Other category, as well as restructuring and revenue recognition-related issues, had the largest negative impact on market capitalization when adjusted for the size of a restating company (see fig. 6); however, when measured in dollars, cost- or expense-related restatement announcements accounted for more of the immediate decline in market capitalization than each of the other reasons, over our analysis period. These results are different from the findings in our earlier report, suggesting that the nature of the market response to restatements may have changed in some respects. (We discuss how different types of restatements may have affected investor confidence in another section of this report.) To assess the immediate market impact of a given type of restatement on a restating company’s market capitalization, we computed the ratio of the estimated change in the company’s market capitalization to the company’s total market capitalization over the 3 trading days surrounding the announcement of a restatement. We then averaged these impacts for each reason. While restatement announcements involving related-party transactions, which can revolve around revenue issues, appeared to have the largest negative impact, this result was not statistically different from zero. This category accounted for a relatively small number of restatements, and the results were heavily influenced by three announcements that had sizeable market reactions. In contrast to our previous report, in which positive responses to two large restatements attributed to restructuring, asset impairment, and inventory issues led to market gains in that category, restatements made for these reasons in 2002–2005 represented about 29 percent of the market-adjusted market capitalization losses. These reasons accounted for about 11 percent of the cases we analyzed, and the median size of a company restating for these reasons was $504 million. The effect of restatements announced for revenue recognition issues on market capitalization initially appeared weaker than in our previous report. Restatements involving revenue recognition accounted for almost 20 percent of the cases, but only around 10 percent of the market-adjusted market capitalization losses. The median size of a company restating for this reason was $321 million; thus it appears that companies announcing restatements for revenue recognition reasons tended to be smaller. However, when adjusted by the size of the restating company, restatement announcements involving revenue recognition issues (more than many other reasons) resulted in an average loss that represented a larger percentage of a restating company’s market capitalization. Cost- or expense-related restatements had a greater effect on market capitalization than in our previous report, and were distinguished from restatements for other reasons in three ways. First by dollars, cost- or expense-related restatement announcements accounted for more of the immediate declines in market capitalization than other reasons over our analysis period. More specifically, cost- or expense-related restatement announcements accounted for $15.2 billion, or about 42 percent, of the $36.5 billion in total losses (market-adjusted) over our analysis period. This decline was driven in large part by the January 9, 2004, restatement announcements by Shell Transport and Trading Company, plc, and Royal Dutch Petroleum Company, which represented a decline in estimated market capitalization attributed to the cost- or expense category of over $4 billion. Second, when measured by median market capitalization, companies announcing restatements involving cost or expense issues were the largest. The median size of a company restating for cost or expense reasons was $632 million. Furthermore, of the 1,061 cases analyzed, cost or expense was the most frequently cited reason for restating (38 percent). Finally, the market did not perceive all restatements negatively. We found that announcements involving the acquisition and merger category—with a median company size of $318 million—resulted in an overall increase of over $1.5 billion in market capitalization. The positive results are in significant contrast to our previous report, in which we attributed more than $19 billion in market capitalization decline to this category. Our analysis of restatement announcements showed mixed results over intermediate and longer periods, but these announcements overall tended to have some longer-term impacts. On a market-adjusted basis, from 20 trading days before through 20 trading days after a restatement announcement (the intermediate impact), we estimated that the stock prices of restating companies declined by nearly 2 percent on average, and their market capitalization declined by over $78 billion in aggregate; whereas, on an unadjusted basis, the market capitalization of restating companies decreased around $5 billion (see table 5). This suggests that the reaction was more negative than expected given the movement in the overall market. On a market-adjusted basis, from 60 trading days before through 60 trading days after the announcement (the longer-term impact), we estimated that the stock prices of restating companies decreased by less than 2 percent on average and their market capitalization decreased by over $126 billion in aggregate (see table 6). Unadjusted, the longer-term impact was an increase of about $34 billion in the market capitalization of restating companies. In our 2002 report, we estimated that the unadjusted market capitalization of restating companies that we analyzed decreased by close to $240 billion from 60 trading days before through 60 trading days after the announcement. This large difference may be the result of the generally positive overall market movement during 2003–2005, an increased number of restatements that the market did not view negatively, or the possibility that the financial markets have grown increasingly less sensitive to restatement announcements since 2002. As we considered longer event time frames, this increased the possibility that other factors and events may have affected a restating company’s stock price. Nevertheless, expanding the event window beyond the immediate trading days around the restatement announcement date allowed us to assess the longer-term impact of restatement announcements. The longer time frame also allowed us to capture any impact from earlier company announcements, which may have signaled restatements (for example, a company’s CFO departing a company suddenly, its outside audit firm resigning, or the notice of an internal or SEC investigation at the company). With such events, investors may sense that more negative news is forthcoming and drive the company’s stock price lower. For example, speculation about potential accounting problems at AOL first appeared publicly in mid-July 2002 in The Washington Post; however, it was not until mid-August that the company announced that it would restate. Our immediate impact analysis around the August 14, 2002, announcement date revealed a sizeable positive impact. However, our intermediate impact analysis showed that the market reacted negatively to the release of the news over this event window. Finally, our analysis only attempts to control for overall market movements, and so for these longer periods we cannot adjust for other factors such as company-specific news unrelated to the restatement. For example, several weeks after announcing a restatement a company could win a lucrative contract or be the target of an acquisition, both of which would likely have a positive impact on its stock price. We subsumed the impacts of any additional, unrelated events that occurred during this time period, which would attribute them to the restatement announcement. Appendix I provides additional details about these measures, along with information about their limitations. Although researchers generally agree that restatements can have a negative effect on investor confidence, the surveys and indexes of investor confidence that we reviewed did not indicate definitively whether investor confidence increased or decreased since 2002. Researchers noted several reasons for the inconclusive results about the effects of restatements on investor confidence. For example, some researchers have noted that, since 2002, investors may have had more difficulty discerning whether a restatement represented a response to aggressive or abusive accounting practices, constituted remediation of past accounting deficiencies, or merely represented technical adjustments. Furthermore, investor confidence remains difficult to quantify because it cannot be measured directly and because investors consider a variety of factors when making investment decisions. However, we identified several survey-based indexes that use a variety of methods to measure investor confidence; we also identified empirical work by academics and financial industry experts. A periodic UBS/Gallup survey-based index aimed at gauging investor confidence found that, although investor confidence remains low, accounting issues appear to be of less concern. In contrast, according to the Yale index, which asks a different set of questions, institutional investors have had slightly more confidence in the stock market since 2002; the index produced uncertain results for individual investors. Although researchers generally have agreed that restatement announcements could send unfavorable messages about restating companies to the capital markets, an analyst with whom we spoke expressed less agreement about the causes and effects of restatement announcements on investors (and investor confidence) since 2002. While we found some evidence in our 2002 report that suggested that restatement announcements prior to July 2002 may have led to widespread concerns about the perceived unreliability of financial reports, the impact of restatements since July 2002 on investor confidence has been more uncertain because the driving forces behind the increase in restatements have been less clear. For example, some analysts have suggested that investors may not have been able to discern whether restatements since 2002 represented a response to: aggressive or abusive accounting practices, the complexity of accounting standards, the remediation of past accounting deficiencies, or just technical adjustments. Some analysts indicated that the increase in the restatements is a serious problem with negative consequences on investor confidence. Other analysts have said that restatements might have minimal (or positive) effects on confidence if investors saw them as a remediation of accounting problems existing prior to the passage of the Sarbanes-Oxley Act, recognizing some restatements as the expected byproduct of a greater focus on the quality of financial reporting by management, audit committees, external auditors, and regulators since 2002. Although accounting issues discovered at one company could cause capital market participants to reassess the credibility of financial statements issued by other companies, researchers also noted the absence, so far, of large numbers of restatements that represent deliberate violations of GAAP—the same kind of restatements many believed produced widespread effects on investor confidence in 2001 and 2002 (e.g., Enron, WorldCom, and Adelphia). In that vein, others noted that the Sarbanes-Oxley Act, the collapse of Arthur Andersen, and perceived litigation risks have encouraged more conservative approaches that resulted in restatements to correct small errors or technical adjustments that likely were irrelevant to investors. Some believed that at least a portion of the restatements since 2002 have resulted from excessive complexity in accounting principles or the second-guessing of legitimate judgment calls that did not appear relevant to the valuations of the companies involved. One expert expressed concern that restatements may have lost their salience to market participants because they now occur so frequently, while others noted that investor confidence would be negatively affected if the number of restatements did not decline in the near future. Directly measuring the effect of restatements on investor confidence remains difficult because so many factors go into any investment decision and the reasons for restatements, which can affect investor response, often are unclear. However, we have highlighted results from two respected survey-based indexes of investor confidence, obtained from UBS Americas, Inc. and the International Center for Finance at the Yale School of Management. The UBS Index has been acknowledged for its accuracy and timeliness, and the Yale School of Management Indexes are considered to be the longest-running effort to measure investor confidence. The UBS/Gallup Index of Investor Optimism suggests that investor confidence remains well below the March 2002 level, when investor optimism had started to rebound following the Enron scandal. As shown in figure 7, according to the survey, concerns about accounting practices and corporate governance started to affect investor optimism, which were heightened following the WorldCom restatement announcement in June 2002. The index continued to decline until March 2003 when it reached an all-time low of 5—mirroring a similar decline in stock markets. However, in April, the survey indicates that investors where becoming more confident in the U.S. economic recovery throughout most of 2003. By January 2004, the index was back up to 108 before experiencing another steep decline by September 2005 as markets reacted, in part, to a sharp increase in energy prices. While the Index increased over the reminder of 2005, it remained below the March 2002 level through the second quarter of 2006. These trends are consistent with various proxies for investor confidence. For example, since April 2003, net new cash flows to equity mutual funds have been positive. And, according to “Barron’s Confidence Index,” investor confidence returned to its historical average by mid-2004 and— despite a decline in investor confidence in 2005—has remained above its lows in 2002 and 2003. While the 2002 and 2003 surveys reported that the leading concern expressed by investors was the negative impact of questionable accounting practices on the market, in 2005 and 2006, investors identified a number of other reasons as more significant for the decline in investor optimism. The major reasons cited for the decline were (1) the price of energy, including gas and oil; (2) the outsourcing of jobs to foreign countries; (3) the federal budget deficit; (4) the situation in Iraq; and (5) the economic impact of Hurricane Katrina and other storms. While some of these reasons reflect current events, others consistently were viewed as less important than accounting issues in the 2002, 2003, and 2004 surveys. However, it should be noted that accounting issues continue to be viewed as more important than a variety of other forces affecting the investment climate such as expectations regarding inflation, the value of dollar, and the threat of more terrorist attacks. While a significant portion of all investors surveyed continue to believe that accounting issues were negatively affecting the market, according to the UBS/Gallup survey the percent of investors feeling this way has decreased (see fig. 8). While 91 percent of all investors surveyed in 2002 felt that accounting issues were negatively impacting the market, about 71 percent felt that way in May 2006. Moreover, the percentage of investors indicating that accounting issues were hurting the investment climate in the United States “a lot” fell from 80 percent in July 2002 to 39 percent in May 2006. The results of UBS surveys were consistent with the findings of the Securities Industry Association’s (SIA) annual investor surveys. SIA found that, although accounting at U.S. corporations was still a major concern among investors in 2004, concern had declined significantly from 2002. Moreover, in 2004, investors seemed more concerned with the political environment and the state of the U.S. economy than accounting fraud and corporate governance issues. What has happened since 2004 is unclear because no survey was conducted for 2005. However, a newer index, the State Street Investor Confidence Index, which attempts to measure investors’ risk appetite by measuring the percent of risky assets investors hold in their portfolio, found that investor confidence remained relatively unchanged throughout 2005 and into 2006. In our 2002 report, we noted the Yale Indexes suggested significantly different impacts of restatements on investor confidence than the UBS/Gallup Index of Investor Optimism; however, since the 2003, the differences in the indexes have become less significant. The International Center for Finance at the Yale School of Management calculates four indexes that are based on survey questions directed to both wealthy individual and institutional investors. Although the indexes do not all move in the same direction over time, or even approximately so, the indexes generally show a small improvement in institutional investor confidence over the value for June 2002, but a slight decline in individual investor confidence with one exception. Some of the Yale indexes show pronounced volatility in short-term confidence. In fact, there were periods during 2003, 2004, and 2005, where some measures of confidence declined significantly before rebounding in 2006. Although these confidence indexes did not directly measure the impact of restatements on investor confidence, they illustrate the difficulty in attempting to gauge general confidence in the market and how different classes of investors can interpret and respond to events in different ways. As in 2002, we focused on the three indexes that most directly measured investor confidence. The first Yale index is the One-Year Confidence Index, which indicated that institutional investor confidence fluctuated between June 2002 and May 2006, but ended higher than 2002 levels. During the same periods, individual investor confidence also fluctuated, but continued to trend downward. This implies a divergence in opinion between individual and institutional investors, but it is unclear what this difference means for overall confidence in the stock market and how restatements affect confidence. These findings do appear to suggest that developments during 2004 and 2005 had some longer-term negative effect on individual investors’ confidence, but that any negative effect on institutional investors’ confidence was temporary. The second Yale index is the Buy on Dip Confidence Index, which suggests confidence has been virtually unaffected despite fluctuations in both directions from 2004 to 2005. Since the period immediately after September 11, 2001, and the beginning of the Enron scandal, a few months later individual and institutional confidence that the stock market would rise the day after a sharp fall has diverged, with institutional dropping and individual confidence rising somewhat. However, between December 2003 and May 2006, institutional investor confidence increased from 57 to 68 percent, somewhat above its June 2002 value (62 percent), while individual investor confidence fluctuated up and down but eventually settled just 1 percentage point below its June 2002 value. The price-to-earnings ratio functioned as an indicator supporting the finding of unchanged confidence; in January 2006, the ratio was equivalent to its June 2002 value, and has remained valued at more than the historical average. The third Yale index is the Crash Confidence Index, which suggested that confidence generally has been low—less than 50 percent—for both individual and institutional investors, providing the only evidence of a similar movement. Despite remaining low since October 2002, when the market reached its lowest point in 6 years, confidence has shown a distinct increase for both individual and institutional investors. Specifically, by May 2006 this index showed an improvement from June 2002 values, with a 43 percent and a 17 percent increase for institutional and individual investors, respectively. However, confidence in the probability that a catastrophic stock market crash would not occur in the United States may provide very little insight into whether market participants are confident in the reliability of financial information transmitted to investors, because not even the accounting scandals of 2001 and 2002 triggered a major collapse in market valuations. Instead, the increase in confidence observed may merely be a vote of general confidence in the resiliency of U.S. capital markets. The number of SEC enforcement cases involving financial fraud and issuer reporting issues increased more than 130 percent from fiscal year 1998 to 2005. Moreover, in fiscal year 2005, cases involving financial fraud and issuer reporting issues constituted the largest category of enforcement actions. The resources SEC devoted to enforcement grew as well. Of the enforcement actions SEC resolved between March 1, 2002, and September 30, 2005, most of the actions were taken against companies or their directors, officers, employees, and other related parties. Finally, the newly created PCAOB also has broad investigative and disciplinary authority over public accounting firms that have registered with it and persons associated with such firms; PCAOB has brought several enforcement actions since its inception. SEC’s Division of Enforcement investigates possible violations of securities laws, including those related to financial fraud and issuer reporting issues. Between fiscal years 2001 and 2005, these types of cases have increased as a percent of SEC’s total enforcement cases from 23 to almost 30 percent (see fig. 9). From fiscal years 2002 to 2005, SEC has initiated an average of about 588 enforcement actions per year, compared to an average of 497 for fiscal years 1998 to 2001. Of these actions, an average of about 135 per year involved financial fraud or issuer reporting issues compared to an average of 97 per year for the prior period. In fiscal year 2005, cases involving financial fraud and issuer reporting issues were the largest category of enforcement actions accounting for almost one-third of the cases, followed by broker-dealer and investment company cases. For examples of some of the cases involving accounting- and/or auditing-related issues see our detailed case studies on American International Group Inc., (app. IX), Federal National Mortgage Corporation ( app. XI), and Qwest Communications International, Inc. (app. XII). In our 2002 report, we found that SEC’s enforcement function was strained because of resource challenges and an increased workload; however, as a result of several high-profile corporate failures, and financial reporting fraud, among other things, the Sarbanes-Oxley Act authorized a 65 percent increase in SEC’s 2003 appropriations, which directed the additional funding to be used in certain areas. Specifically, no fewer than 200 positions were to be used to strengthen existing program areas, including enforcement. In fiscal year 2003, enforcement resources increased over 20 percent, including 194 staff in Washington, D.C. and SEC’s regional and district offices. Moreover, between fiscal years 2003 and 2004, enforcement staffing increased about 29 percent. SEC has taken a variety of accounting- and audit-related enforcement actions against various entities and individuals, ranging from public companies and audit firms to CEOs and CPAs. Accounting-related violations identified included fraud, lying to auditors, filing misleading information with SEC, and failing to maintain proper books and records. Investigations can lead to SEC-prompted administrative or federal civil court actions. Depending on the type of proceeding, SEC can seek sanctions that include injunctions, civil money penalties, disgorgement, cease-and-desist orders, suspensions of registration, bars from appearing before the Commission, and bars from participating as an officer or director of a public company. As previously reported, most enforcement actions are settled, with respondents generally consenting to the entry of civil, judicial, or administrative orders without admitting or denying the allegations against them. We found this to be true of the auditing- and accounting-related cases we reviewed as well. For a more detailed discussion of SEC’s enforcement process, see appendix VII. About 90 percent of the more than 750 actions resolved between March 2002 and September 2005 were brought against companies or their directors, officers, employees, or other parties. Another 10 percent involved audit firms and individuals associated with firms, including audit managers, partners, and engagement auditors. In the cases involving public companies and their officials and related persons, we found that SEC has taken a variety of actions against a wide range of officials and employees. Historically, SEC was reluctant to seek civil monetary penalties against companies in financial fraud cases because such costs would be passed along to shareholders who had already suffered as a result of the violations. In the AAERs reviewed from March 2002 to September 2005, we found that SEC started to take increasingly aggressive actions against public companies, including the levy of millions of dollars in civil money penalties in 2003 and 2004. However, SEC’s position on civil money penalties against public companies continued to evolve. In January 2006, SEC outlined its position on this issue when it announced the filing of two settled actions against McAfee, Inc. and Applix, Inc. In one case the company paid a civil money penalty and in the other, the company did not. According to the release, SEC thought it was important to “provide the maximum possible degree of clarity, consistency, and predictability in explaining the way that its corporate penalty authority will be exercised.” The release discussed how the Sarbanes-Oxley Act changed the ultimate disposition of penalties, because SEC can now take penalties paid by individuals and entities in enforcement actions and add them to disgorgements for the benefit of victims through the Fair Funds provision. Under this provision, civil money penalties that SEC collects no longer go to the Department of Treasury; instead, they can be used to help compensate victims for the losses they experienced, which would include harmed shareholders. The Commission announced that it planned to more closely review actions involving civil money penalties against public companies and laid out the principles it planned to follow in making such determinations. The overarching principle appears to be that corporate penalties are an essential part of an aggressive and comprehensive enforcement program. In addition, SEC’s view of the appropriateness of the penalty against corporations versus the individuals who actually commit the violations is to be based on two considerations. First, SEC considers whether the corporation received a direct benefit as a result of the violations (e.g., the violation resulted in reduced expenses or higher revenues). Second, the degree to which the penalty will recompensate or further harm injured shareholders. Other factors, SEC will consider are: the need to deter the particular type of offense, the extent of the injury to innocent parties, whether complicity in the violation is widespread throughout the the level of intent on the part of perpetrators, the degree of difficulty in detecting the particular type of offense, the presence or lack of remedial steps by the corporation, and the extent of cooperation with the Commission and other law In our 2002 report, we also noted that Congress, market participants, and others, had questioned the lack of severity of many of the sanctions given the level of investor harm. At least one SEC official, at the time, felt that because monetary penalties are often paid by officer and director insurance policies, or are considered insignificant in relation to the violation, SEC should pursue more officer and director bars. However, the test for imposing officer and director bars was viewed as too restrictive. Since that time, the Sarbanes-Oxley Act changed the threshold for seeking officer and director bars by amending the securities acts’ requirement from “substantial unfitness” to “unfitness,” thereby making it easier for SEC to pursue officer and director bars. From March 2002 through September 2005, SEC obtained officer and director bars against hundreds of officials. Specifically, SEC resolved charges against hundreds of CFOs or chief accounting officers and CEOs with securities fraud or issuer reporting violations between March 2002 and December 2005. See appendixes IX, XI, and XII for a summary of the actions taken by SEC in three of the six cases we analyzed. SEC may also bring an enforcement action against other individuals such as officers and principals who are not part of top management (other participants and responsible parties). In the AAERs we reviewed, SEC charged such individuals with accounting-related violations that resulted in injunctions, civil monetary penalties, disgorgements, cease-and-desist orders; and officer and director bars. For example, SEC and in some cases the Department of Justice, have filed suit against several senior officers at public companies—including chairmen, chief operating officers, controllers, directors, vice presidents, and clients. These executives have been charged with securities law violations such as fraud, reporting violations, record-keeping violations, and insider trading. Although the Sarbanes-Oxley Act provided PCAOB enforcement authority over registered public accounting firms and their associated persons (which we discuss below), SEC continues to have the authority to bring actions against accounting firms. In addition to investigating violations of the securities laws, Enforcement investigates improper professional conduct by accountants and other professionals who appear before SEC, and the agency may pursue administrative disciplinary proceedings against these professionals under SEC’s Rules of Practice 102(e). If SEC finds that securities laws have been violated or improper professional conduct has occurred, it can prohibit professionals from appearing before SEC temporarily or permanently. A licensed accountant engages in improper professional conduct if he or she intentionally or knowingly violates an applicable professional standard or engages in either of the two types of negligent conduct defined under the rule. From March 2002 to September 2005, SEC has taken action against numerous firms and dozens of individuals. The actions included injunctions, civil monetary penalties, bars or suspensions from appearing before the Commission, cease- and- desist orders, officer and director bars, and censures. As mentioned previously, the Sarbanes-Oxley Act authorized PCAOB to conduct investigations concerning any acts or practices, or omissions to act, by registered public accounting firms and persons associated with such firms, or both, that may violate any provision of the act, PCAOB’s rules, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including SEC rules issued under the act, or professional standards. In May 2004, SEC approved PCAOB’s rules implementing this authority. When PCAOB alleges a violation, it has the authority after an opportunity for a hearing, to impose appropriate sanctions. The sanctions can range from revoking a firm’s registration or barring a person from participating in audits of public companies, to imposing monetary penalties or requirements for remedial measures, such as training, new quality control procedures, or the appointment of an independent monitor. Between May 2005 and July 2006, PCAOB has instituted and settled five disciplinary proceedings against registered public accounting firms and associated persons. These proceedings dealt with cases involving concealing information from PCAOB and submitting false information to it, in connection with a PCAOB inspection; noncompliance with PCAOB rules, independence standards, and auditing standards in auditing the financial statements; and failing to take prompt and appropriate steps in response to indications that an issuer audit client may have committed an illegal act. The associated sanctions ranged from revoking the firm’s registration, barring the involved individual from being an associated person of a registered public accounting firm, and censuring firms and associated persons. A variety of factors appear to have contributed to the increased trend in restatements, including increased accountability requirements on the part of company executives; increased focus on ensuring internal controls for financial reporting; increased auditor and regulatory scrutiny (including clarifying guidance); and a general unwillingness on the part of public companies to risk failing to restate, regardless of the significance of the event. Given the new regulatory and oversight structure, and the current operating environment, it is unclear if and when the current trend toward increasing restatements will subside. The number of restatements may continue to increase in the immediate future, as new areas of scrutiny (for example, small public company implementation of the Sarbanes-Oxley Act internal control requirements and hedge accounting rules), by SEC and others, may trigger future restatements similar to the trends experienced after the focus on accounting for leases or income taxes in early 2005. Currently, approximately 60 percent of public companies—generally smaller public companies—have yet to fully implement the internal control requirements of the Sarbanes-Oxley Act, which could also impact the number of restatements. In recent years, the larger public companies’ implementation of Section 404 requirements resulted in many companies announcing financial restatements. Alternatively, the number of restatement announcements could subside after the regulatory and firm changes called for in the Sarbanes-Oxley Act have been fully implemented and allowed to play through. Companies that announce restatements generally continue to experience decreases in market capitalization in the days around the initial announcement; however, the magnitude of the impact has significantly decreased from the period analyzed in our 2002 report. The exact reason for this decline is unclear, but may include a variety of factors such as investors’ inability to discern the reason for the restatement, varying reactions by investors about what the restatement means (e.g., whether the company is improving its disclosures), or investors’ growing insensitivity to financial statement restatement announcements. These views, in part, are supported by some investor confidence data and research including that, while investor confidence seems to have increased, investors often are unable to decipher the reason for the restatement; restatements may be viewed in various ways by investors, depending on whether they believe that the trend is part of a “cleansing process” (i.e., public companies strengthening their internal controls), or whether they merely reflect technical adjustments for compliance. SEC improved disclosure of restatement announcements in 2004 by requiring additional information on Form 8-K. However, some public companies continue to announce restatements that result in non-reliance on prior financial statements outside of the required Form 8-K (Item 4.02) filing process. That is, about 17 percent of companies announcing restatements that resulted in non-reliance between August 2004 and September 2005 failed to disclose this information under the appropriate item or failed to file an 8-K at all. While most filed the information under an item other than 4.02 in the Form 8-K, some appeared to have disclosed the information in a Form 10-K or 10-Q, which raises questions inconsistencies between the Form 8-K instructions versus staff questions-and-answers discussion concerning filing requirements under Item 4.02. The result of the potential noncompliance is that some companies continue to restate without consistently informing investors and the general public that such restatements have occurred and that previously issued financial statements should not be relied upon—which raises concerns about compliance with SEC’s revised Form 8-K disclosure requirements and the ongoing transparency and consistency of public disclosures. To better enable SEC to enforce its regulations and improve the consistency and transparency of information provided to investors about financial restatements, we recommend that SEC take specific actions to improve oversight and compliance of disclosures of certain restatements. First, SEC should direct the head of the Division of Corporation Finance to investigate the instances of potential noncompliance we, and Glass Lewis, identified, and take appropriate corrective action against any companies determined to have filed a deficient filing. Second, SEC should harmonize existing instructions and guidance concerning Item 4.02 by amending the instructions to Form 8-K and other relevant periodic filings to clearly state that an Item 4.02 disclosure on Form 8-K is required for all determinations of non-reliance on previously issued financial statements (Item 4.02), irrespective of whether such information has been disclosed on a periodic report or elsewhere. We provided a draft of this report to the Chairmen of SEC and PCAOB, for their review and comment. We received written comments from SEC and PCAOB that are summarized below and reprinted in appendixes II and III. Both SEC and PCAOB provided technical comments that were incorporated into the report as appropriate. In response to our first recommendation that the Division of Corporation Finance investigate the instances of potential noncompliance identified and take appropriate corrective action, the Director of the Division of Corporation Finance stated that SEC appreciated the recommendation and that it will continue its long history of examining instances of potential noncompliance with federal securities laws. Finally, in response to our recommendation that SEC harmonize existing instructions and guidance, SEC stated that it will carefully consider our recommendation to harmonize existing instructions and guidance related to a company’s need to notify the public that previously issued financial statements or results should not be relied upon. In commenting on the draft report, the Chairman of PCAOB stated that as the organization charged by the Sarbanes-Oxley Act with overseeing the audit of public companies, the report’s findings on the causes of, and trends in restatements by public companies would be useful to PCAOB’s oversight efforts. As agreed with your office, we plan no further distribution of this report until 30 days from its issuance unless you publicly release its contents sooner. At that time, we will send copies of this report to the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member of the Senate Subcommittee on Securities and Investment, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member, Senate Committee on Governmental Affairs; the Chairman and Ranking Minority Member, House Committee on Financial Services; and other interested congressional committees. We will also send copies to the Chairman of the SEC and the Chairman of the PCAOB and will make copies available to others upon request. In addition, this report is also available on GAO Web site at no charge at http://www.gao.gov. If you have any questions concerning this report, please contact Orice M. Williams at (202) 512-5837 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. See appendix XV for a list of other staff who contributed to the report. | In 2002, GAO reported that the number of restatement announcements due to financial reporting fraud and/or accounting errors grew significantly between January 1997 and June 2002, negatively impacting the restating companies' market capitalization by billions of dollars. GAO was asked to update key aspects of its 2002 report (GAO-03-138). This report discusses (1) the number of, reasons for, and other trends in restatements; (2) the impact of restatement announcements on the restating companies' stock prices and what is known about investors' confidence in U.S. capital markets; and (3) regulatory enforcement actions involving accounting- and audit-related issues. To address these issues, GAO collected restatement announcements meeting GAO's criteria, calculated and analyzed the impact on company stock prices, obtained input from researchers, and analyzed selected regulatory enforcement actions. While the number of public companies announcing financial restatements from 2002 through September 2005 rose from 3.7 percent to 6.8 percent, restatement announcements identified grew about 67 percent over this period. Industry observers noted that increased restatements were an expected byproduct of the greater focus on the quality of financial reporting by company management, audit committees, external auditors, and regulators. GAO also observed the following trends: (1) cost- or expense-related reasons accounted for 38 percent of the restatements, including lease accounting issues, followed in frequency by revenue recognition issues; and (2) most restatements (58 percent) were prompted by an internal party such as management or internal auditors. In the wake of increased restatements, SEC standardized disclosure requirements by requiring companies to file a specific item on the Form 8-K when a company's previously reported financials should no longer be relied upon. However, between August 2004-September 2005, about 21 percent of the companies GAO identified as restating did not appear to file the proper disclosure when they announced their intention to restate. These companies continued to announce intentions to restate previous financial statements results in a variety of other formats. Although representing about 0.4 percent of the market capitalization of the major exchanges, which was $17 trillion in 2005, the market capitalization of companies announcing restatements between July 2002 and September 2005 decreased $63 billion when adjusted for market movements ($43 billion unadjusted) in the days around the initial restatement announcement. Researchers generally agree that restatements can negatively affect overall investor confidence, but it is unclear what effects restatements had on confidence in 2002-2005. Some researchers noted that investors might have grown less sensitive to the announcements. Others postulated that investors had more difficulty discerning whether restatements represented a response to aggressive or abusive accounting practices, complex accounting standards, remediation of past accounting deficiencies, or technical adjustments. Although researchers generally agree that restatements can have a negative effect on investor confidence, the surveys, indexes, and other proxies for investor confidence that GAO reviewed did not indicate definitively whether investor confidence increased or decrease since 2002. As was the case in the 2002 report, a significant portion of SEC's enforcement activities involved accounting- and auditing-related issues. Enforcement cases involving financial fraud- and issuer-reporting issues ranged from about 23 percent of total actions taken to almost 30 percent in 2005. Of the actions resolved between March 1, 2002, and September 30, 2005, about 90 percent were brought against public companies or their directors, officers, and employees, or related parties; the other 10 percent involved accounting firms and individuals involved in the external audits of these companies. |
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We found that Indian Affairs does not have complete and accurate information on safety and health conditions at all BIE schools because of key weaknesses in its inspection program. In particular, Indian Affairs does not inspect all BIE schools annually as required by Indian Affairs’ policy, limiting information on school safety and health. We found that 69 out of 180 BIE school locations were not inspected in fiscal year 2015, an increase from 55 locations in fiscal year 2012 (see fig. 2). Further, we determined that 54 school locations received no inspections during the past 4 fiscal years. At the regional level, Indian Affairs did not conduct any annual school safety and health inspections in 4 of BIA’s 10 regions with school facility responsibilities—the Northwest, Southern Plains, Southwest, and Western regions—in fiscal year 2015, accounting for 52 of the 180 school locations (see fig. 3). Further, the same four regions did not conduct any school inspections during the previous 3 fiscal years. In the Western region, we found three schools that had not been inspected since fiscal year 2008 and three more that had not been inspected since fiscal year 2009. Indian Affairs’ safety office considers the lack of inspections a key risk to its safety and health program. BIA regional safety officers that we spoke with cited three key factors affecting their ability to conduct required annual safety and health inspections: (1) extended vacancies among BIA regional safety staff, (2) uneven workload distribution among BIA regions, and (3) limited travel budgets. Officials told us that one BIA region’s only safety position was vacant for about 10 years due to funding constraints. As an example of uneven workload distribution, one BIA region had two schools with one safety inspector position, while another region had 32 schools with one safety inspector position. Currently, Indian Affairs has not taken actions to ensure all schools are annually inspected. Without conducting annual inspections at all school locations, Indian Affairs does not have complete information on the frequency and severity of safety and health deficiencies at all BIE school locations and cannot ensure these facilities are safe for students and staff and currently meet safety and health requirements. We also found that Indian Affairs does not have complete and accurate information for the two-thirds of schools that it did inspect in fiscal year 2015 because it has not provided BIA inspectors with updated and comprehensive inspection guidance and tools. In particular, we found that Indian Affairs’ inspection guidance lacks comprehensive procedures on how inspections should be conducted, which Indian Affairs’ safety office acknowledged. For example, BIA’s Safety and Health Handbook—last updated in 2004—provides an overview of the safety and health inspection program but does not specify the steps inspectors should take to conduct an inspection. Further, according to some regional safety staff, Indian Affairs does not compile and provide inspectors with a reference guide for all relevant current safety and health standards. At the same time, BIA inspectors use inconsistent inspection practices, which may limit the completeness and accuracy of Indian Affairs’ information on school safety and health. For example, at one school we visited, school officials told us that the regional safety inspector conducted an inspection from his car and did not inspect the interior of the school’s facilities, which include 34 buildings. The inspector’s report comprised a single page and identified no deficiencies inside buildings. Concerned about the lack of completeness of the inspection, school officials said they arranged with the Indian Health Service (IHS) within the Department of Health and Human Services to inspect their facilities. IHS identified multiple serious safety and health problems, including electrical shock hazards, emergency lighting and fire alarms that did not work, and fire doors that were difficult to open or close. Currently, Indian Affairs does not systematically evaluate the thoroughness of school safety and health inspections and monitor the extent to which inspection procedures vary within and across regions. According to federal internal control standards, internal control monitoring should be ongoing and assess program performance, among other aspects of an agency’s operations. Without monitoring whether safety inspectors across BIA regions are consistently following inspection procedures and guidance, inspections in different regions may continue to vary in completeness and miss important safety and health deficiencies at schools that could pose dangers to students and staff. To support the collection of complete and accurate safety and health information on the condition of BIE school facilities nationally, we recommended that Interior (1) ensure all BIE schools are annually inspected for safety and health, as required by its policy, and that inspection information is complete and accurate and (2) revise its inspection guidance and tools, require that regional safety inspectors use them, and monitor safety inspectors’ use of procedures and tools across regions to ensure they are consistently adopted. Interior agreed with these recommendations. We also found that Indian Affairs is not providing schools with needed support in addressing deficiencies or consistently monitoring whether they have established safety committees, which are required by Indian Affairs. In particular, according to Indian Affairs information, one-third or less of the 113 schools inspected in fiscal year 2014 had abatement plans in place, as of June 2015. Interior requires that schools put in place such plans for any deficiencies inspectors identify. Because such plans are required to include time frames, steps, and priorities for abatement, they are an initial step in demonstrating how schools will address deficiencies identified in both annual safety and health and boiler inspection reports. Among the 16 schools we visited, several schools had not abated high- risk deficiencies within the time frames required by Indian Affairs. Indian Affairs requires schools to abate high-risk deficiencies within 1 to 15 days, but we found that inspections of some schools identified serious unabated deficiencies that repeated from one year to the next year. For example, we reviewed inspection documents for two schools and found numerous examples of serious “repeat” deficiencies—those that were identified in the prior year’s inspection and should have been corrected soon afterward but were not. One school’s report identified 12 repeat deficiencies that were assigned Interior’s highest risk assessment category, which represents an immediate threat to students’ and staff safety and health and require correction within a day. Examples include fire doors that did not close properly; fire alarm systems that were turned off; and obstructions that hindered access/egress to building corridors, exits, and elevators. Another school’s inspection report showed over 160 serious hazards that should have been corrected within 15 days, including missing fire extinguishers, and exit signs and emergency lights that did not work. Besides these repeat deficiencies, we also found that some schools we visited took significantly longer than Indian Affairs’ required time frames to abate high-risk deficiencies. For example, at one school, 7 of the school’s 11 boilers failed inspection in 2015 due to various high-risk deficiencies, including elevated levels of carbon monoxide and a natural gas leak (see fig. 4). Four of the 7 boilers that failed inspection were located in a student dormitory. The inspection report designated most of these boiler deficiencies as critical hazards that posed an imminent danger to life and health, which required the school to address them within a day. School officials told us they continued to operate the boilers and use the dormitory after the inspection because there was no backup system or other building available to house the students. Despite the serious risks to students and staff, most repairs were not completed for about 8 months after the boiler inspection. Indian Affairs and school officials could not provide an explanation for why repairs took significantly longer than Indian Affairs’ required time frames. Limited capacity among school staff, challenges recording abatement information in the data system, and limited funding have hindered schools’ development and implementation of abatement plans, according to school and Indian Affairs officials. Additionally, Indian Affairs has not taken needed steps to build the capacity of school staff to abate safety and health deficiencies, such as by offering basic training for staff in how to maintain and conduct repairs to school facilities. While some regional officials told us that they may provide limited assistance to schools when asked, such ad hoc assistance is not likely to build schools’ capacity to abate deficiencies because it does not address the larger challenges faced by schools. Several officials at Indian Affairs’ safety office and BIA regional offices acknowledged they do not have a plan to build schools’ capacity to address safety and health deficiencies. Absent such a plan, schools will continue to face difficulties in addressing unsafe and unhealthy conditions in school buildings. Finally, we found that Indian Affairs has not consistently monitored whether schools have established safety committees, despite policy requirements for BIA regions to ensure all schools do so. Safety committees, which are composed of school staff and students, are vital in preventing injuries and eliminating hazards, according to Indian Affairs guidance. Examples of committee activities may include reviewing inspection reports or identifying problems and making recommendations to abate unhealthy or unsafe conditions. However, BIA safety officials we interviewed in three regions estimated that about half or fewer of BIE schools had created safety committees in their respective regions, though they were unable to confirm this because they do not actively track safety committees. Without more systemic monitoring, Indian Affairs is not in a position to know whether schools have fulfilled this important requirement. To ensure that all BIE schools are positioned to address safety and health problems with their facilities and provide student environments that are free from hazards, we recommended that Interior (1) develop a plan to build schools’ capacity to promptly address safety and health problems with facilities and (2) consistently monitor whether schools have established required safety committees. Interior agreed with these recommendations. In conclusion, because Indian Affairs has neither conducted required annual inspections for BIE schools nationwide nor provided updated guidance and tools to its safety inspectors, it lacks complete and accurate safety and health information on school facilities. As a result, Indian Affairs cannot effectively determine the magnitude and severity of safety and health deficiencies at schools and is thus unable to prioritize deficiencies that pose the greatest danger to students and staff. Further, Indian Affairs has not developed a plan to build schools’ capacity to promptly address deficiencies or consistently monitored whether schools have established required safety committees. Without taking steps to improve oversight and support for BIE schools in these key areas, Indian Affairs cannot ensure that the learning and work environments at BIE schools are safe, and it risks causing harm to the very children that it is charged with educating and protecting. Interior agreed with our recommendations to address these issues and noted several actions it plans to take. Chairman Calvert, Ranking Member McCollum, and Members of the Subcommittee, this concludes my prepared remarks. I will be happy to answer any questions you may have. If you or your staff have any questions about this testimony or the related report, please contact Melissa Emrey-Arras 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 statement. Key contributors to this statement and the related report include Elizabeth Sirois (Assistant Director), Edward Bodine (Analyst-in- Charge), Lara Laufer, Jon Melhus, Liam O’Laughlin, Matthew Saradjian, and Ashanta Williams. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | This testimony summarizes the information contained in GAO's March 2016 report, entitled Indian Affairs: Key Actions Needed to Ensure Safety and Health at Indian School Facilities , GAO-16-313 . The Department of the Interior's (Interior) Office of the Assistant Secretary-Indian Affairs (Indian Affairs) lacks sound information on safety and health conditions of all Bureau of Indian Education (BIE) school facilities. Specifically, GAO found that Indian Affairs' national information on safety and health deficiencies at schools is not complete and accurate because of key weaknesses in its inspection program, which prevented GAO from conducting a broader analysis of schools' safety and health conditions. Indian Affairs' policy requires its regional safety inspectors to conduct inspections of all BIE schools annually to identify facility deficiencies that may pose a threat to the safety and health of students and staff. However, GAO found that 69 out of 180 BIE school locations were not inspected in fiscal year 2015, an increase from 55 locations in fiscal year 2012. Agency officials told GAO that vacancies among regional staff contributed to this trend. As a result, Indian Affairs lacks complete information on the frequency and severity of health and safety deficiencies at BIE schools nationwide and cannot be certain all school facilities are currently meeting safety requirements. Number of Bureau of Indian Education School Locations That Were Inspected for Safety and Health, Fiscal Years 2012-2015 Indian Affairs is responsible for assisting schools on safety issues, but it is not taking needed steps to support schools in addressing safety and health deficiencies. While national information is not available, officials at several schools GAO visited said they faced significant difficulties addressing deficiencies identified in annual safety and health and boiler inspections. Inspection documents for two schools GAO visited showed numerous high-risk safety and health deficiencies—such as missing fire extinguishers—that were identified in the prior year's inspection report, but had not been addressed. At another school, four aging boilers in a dormitory failed inspection due to elevated levels of carbon monoxide, which can cause poisoning where there is exposure, and a natural gas leak, which can pose an explosion hazard. Interior's policy in this case calls for action within days of the inspection to protect students and staff, but the school continued to use the dormitory, and repairs were not made for about 8 months. Indian Affairs and school officials across several regions said that limited staff capacity, among other factors, impedes schools' ability to address safety deficiencies. Interior issued an order in 2014 that emphasizes building tribes' capacity to operate schools. However, it has not developed a plan to build BIE school staff capacity to promptly address deficiencies. Without Indian Affairs' support of BIE schools to address these deficiencies, unsafe conditions at schools will persist and may endanger students and staff. |
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UOCAVA, as amended, generally protects the right to register and vote by absentee ballot in federal elections for military personnel and U.S. citizens who live overseas. The act also requires that states adopt a number of processes, such as permitting absent servicemembers and overseas voters to use the Federal Write-in Absentee Ballot in general elections for federal office, subject to certain exemptions. In 2002, Congress passed and the President signed the Help America Vote Act of 2002, which amended UOCAVA and required states to be more transparent about sending and rejecting UOCAVA ballots by, for example, requiring states to provide voters the reasons for rejecting a registration application or absentee ballot request and to report the number of ballots sent to servicemembers and overseas voters and the number returned by those voters and cast in the election. Most recently, Congress passed and the President signed the Military and Overseas Voter Empowerment Act in 2009, which amended UOCAVA to require, among other things, that states transmit a validly requested absentee ballot within a certain time frame to absent uniformed services voters or overseas voters and that DOD’s FVAP expand its efforts to raise voter awareness regarding voter registration and absentee ballot procedures and resources. The U.S. election system for servicemembers and U.S. citizens living overseas comprises a complex network of communication with disparate and geographically disperse populations extending over seven continents, 55 states and territories, and thousands of voting jurisdictions, and relies on the coordinated efforts of federal, state, and local governments to carry out their roles and responsibilities. The Secretary of Defense is the presidential designee with the primary responsibility for the federal functions under UOCAVA, generally including educating and assisting voters covered by UOCAVA and for working with states to facilitate absentee voting. The Secretary implements UOCAVA and related legislation through DOD’s FVAP, which is guided by DOD Instruction 1000.04 and is overseen by the Defense Human Resources Activity within the Office of the Under Secretary of Defense for Personnel and Readiness. FVAP officials stated that the program works to ensure that servicemembers, their eligible family members, and overseas citizens are aware of their right to vote and have the resources to vote successfully from anywhere in the world. To carry out this purpose, FVAP coordinates with DOD components and the Department of State to provide information to, respectively, military personnel who vote absentee and to U.S. citizens who reside abroad. Voter education and assistance efforts for military personnel are largely implemented by the military services through voting assistance officers, who are assigned this role in addition to their primary duties. As of December 2015, DOD officials estimated that the military services collectively had approximately 4,500 unit voting assistance officers. The voting assistance officers distribute and help UOCAVA voters to complete FVAP forms, such as the Federal Post Card Application and the Federal Write-in Absentee Ballot, as well as any state or local forms that voters may use to register and request a ballot. See appendixes IV and V for copies of these forms, for which FVAP is generally responsible in accordance with statutory and regulatory requirements. Similarly, the Department of State is responsible for designating a voting action officer to oversee the implementation of its voting assistance program, and designates voting assistance officers at each of its embassies and consulates to provide voting assistance for U.S. citizens living abroad. An additional FVAP election cycle responsibility is to survey UOCAVA voters and other stakeholders, such as DOD voting assistance officers and local election officials, and report on FVAP’s voter assistance. Specifically, after every presidential election, DOD is required by statute to transmit a report to the President and Congress on the effectiveness of assistance, including a statistical analysis of uniformed services voter participation, a separate statistical analysis of overseas nonmilitary participation, and a description of state-federal cooperation. In addition, DOD is required by statute to transmit a report each year to the President and relevant congressional committees to include an assessment of the effectiveness of voting assistance activities, voter registration and participation by servicemembers and other overseas voters, and, in years following federal election years, information related to absentee ballots. Figure 1 provides a general timeline of some of the voting activities that DOD undertakes during federal election cycles. FVAP conducts surveys of UOCAVA voters and state and local election officials, in coordination with the Defense Manpower Data Center and the Election Assistance Commission, respectively, to obtain some of this and related information. For example, FVAP works with the Defense Manpower Data Center to survey servicemembers about their UOCAVA voting experience. The surveys include questions to determine how voters used DOD and FVAP voting assistance resources and how voters requested, received, and returned their absentee ballots. FVAP also works with the Defense Manpower Data Center to survey DOD’s voting assistance officers about the process of delivering voting services to servicemembers. In addition, FVAP collaborates with the Election Assistance Commission. Their partnership began in 2013 in preparation for the 2014 election, in which they conducted a joint survey of state-level election offices about the state’s interaction with UOCAVA voters. The local election office survey gathers data about the number of UOCAVA voters that requested and submitted ballots, the methods by which voters requested and submitted ballots, and the rates of and causes for rejected ballots, among other things. The U.S. election system is decentralized and relies on complex interactions between people, processes, mail, and technology. Voters, local election jurisdictions, states and territories, and the federal government all play roles in the election process. FVAP’s role is to share information about this process with its customers—UOCAVA voters—and stakeholders that have roles in other parts of the process. The elections process is primarily the responsibility of the individual states and territories and their local election jurisdictions. Thus, the registration and voting process is a multistep process that varies by state and territory. As we have reported previously, states and territories have considerable discretion in how they organize the elections process, which is reflected in the diversity of procedures and deadlines the states and jurisdictions establish for voter registration and absentee voting. Further, states and jurisdictions employ a variety of voting methods, including mailed paper ballots, emails, and faxes. In order to vote, UOCAVA voters register, obtain and complete an absentee ballot in accordance with state requirements (such as providing a signature), and return the voted ballot to the local election office in time to meet state election deadlines, which also vary. In addition to the time it takes a voter to complete these steps, local election offices must process these materials. Studies have shown that most UOCAVA voters still rely on the mail to request, receive, and return their ballots. Figure 2 depicts the steps of the absentee voting process for military and overseas voters. Following is a description of each step of the multistep absentee voting process in greater detail. 1. Voter Prepares and Submits Voter Registration Application and/or The voter prepares and submits a voter registration application and/or absentee ballot request. According to FVAP’s voting assistance guide, all states accept voter registration and ballot request forms by mail. UOCAVA voters can choose whether to use the Federal Post Card Application, the registration and absentee ballot request form that FVAP developed and maintains, or their state’s voter registration application and state ballot request form. Federal law requires all states to accept the Federal Post Card Application, which is both a voter registration and ballot request form. Some states offer online voter registration and ballot request options directly from their websites. Ballot request options include, depending on the state, for voters to receive their ballot by mail, email, fax, or other electronic method, if applicable. For some ballot request forms, including the Federal Post Card Application, the voter can select the method by which they would like to receive their ballot from the local election office, including mail, email, or fax. 2. Local Election Office Receives and Processes Voter Registration Application and/or Absentee Ballot Request and Sends Blank Ballot to Voter The local election office receives and processes the voter registration application and/or absentee ballot request form or Federal Post Card Application and sends the absentee ballot to the voter. Local election offices provide a confirmation notice to voters that their voter registration and absentee ballot requests have been approved, or a letter indicating the reason the request was denied. The Military and Overseas Voter Empowerment Act amended UOCAVA to require, among other things, that states establish procedures to offer voters the option to receive a ballot electronically. Local election offices transmit absentee ballots to voters via email, fax, online download, or by mail, depending on how the voter requested the ballot. 3. Voter Receives, Marks, and Returns the Absentee Ballot The voter receives, marks, and returns the absentee ballot. According to FVAP’s voting assistance guide, all states accept the completed ballot by mail and some states accept completed ballots by email, fax, or an online system. If the voter does not receive the ballot from the local election office or believes the ballot may arrive too late to return the ballot to meet the state deadline, the voter can submit a Federal Write-in Absentee Ballot, a backup ballot that FVAP developed and maintains, in order to meet state deadlines. FVAP makes the Federal Write-in Absentee Ballot available to voters on its website and through unit voting assistance officers, who distribute hard copies of the ballot. Federal law requires all states to accept the Federal Write-in Absentee Ballot as a backup ballot. 4. Local Election Office Receives and Processes the Absentee Ballot The local election office receives and processes the absentee ballot or Federal Write-in Absentee Ballot. The local election office must determine whether the ballot was received by the deadline and whether the ballot is valid for counting, depending on requirements such as, according to FVAP, the ballot arriving at the local election office on time and the signature on the ballot matching the signature on the voter’s registration form, among other requirements. Some states provide a confirmation to voters that their ballot has been received. DOD has taken various steps to identify challenges and needed improvements to its overseas voting assistance efforts. Specifically, DOD commissioned two studies on FVAP—one issued in 2014 and one in 2015—and administers surveys of absentee voters and voting assistance officers after every federal election. Through these efforts, DOD has identified long-standing issues with the limited awareness of FVAP resources and unpredictable postal delivery of UOCAVA ballots that continue to pose challenges to the program’s effectiveness. DOD has identified some actions and has taken some steps to address these challenges such as simplifying and standardizing instructions in FVAP’s voting assistance guide to better support UOCAVA voters and their advocates, analyzing quantitative and qualitative research on barriers to voting success, and increasing the usage of online marketing tools to improve outreach. However, these long-standing challenges persist in part because DOD has not established time frames for completing actions intended to address them. Since we last reported on FVAP in 2010, DOD has taken various steps to identify challenges and needed improvements to its military and overseas voting assistance efforts. For example, since the 2012 presidential election, DOD has commissioned two studies that identified challenges faced by absentee voters—including active-duty military members, family members of military personnel, overseas federal government employees, and overseas civilian voters—as well as challenges faced by FVAP within its own organization. Specifically, in 2013, DOD commissioned the RAND Corporation to conduct a study of FVAP’s strategic focus in order to assist the program in aligning its strategy and operations to better fulfill its mission and serve its stakeholders. According to FVAP officials, the customers of the program are absentee voters, and the program stakeholders include the federal agencies with which it collaborates, state and local election officials that have a role in the absentee voting process, and the voting action officers and military service voting assistance officers. The RAND Corporation also identified additional stakeholders, such as congressional staff on relevant committees, organizations that represent state and local election officials such as the National Association of State Election Directors, the National Association of Secretaries of State, the Election Center, as well as nongovernment organizations that represent overseas citizens such as the Overseas Vote Foundation. The study, issued in 2014, found in part that stakeholders did not understand FVAP’s purpose and role in the voting process due to: (1) an ambiguous mission that was not commonly understood by program staff, (2) fragmentation among program activities such as assistance and institutional support, (3) inadequate capacity in data collection and analysis, and (4) the inefficient use of staff to carry out program priorities. Based on the results, DOD began taking steps to address these issues, including reexamining FVAP’s mission and purpose and implementing changes in how it works with external stakeholders. In July 2015, DOD released the results of another commissioned study on FVAP in which it identified barriers to UOCAVA voting success and social and behavioral factors that influence voters. This study found that building relationships with positions outside of DOD that communicate with overseas voters—such as human resources managers, study abroad leaders, and nongovernmental organizations—could help share information with potential absentee voters. In addition, this study found that DOD needed to share accurate information about the absentee voting process to contradict the myth that absentee ballots are not counted except in rare circumstances. In addition to these studies, FVAP is required to conduct surveys of voters and voting assistance officers and to provide an assessment of activities undertaken and the effectiveness of assistance. Using the results of the 2014 survey—the most recent results available—DOD compared UOCAVA registration and voter participation rates for the 2014 general election with the results of prior post-election surveys to better understand dissemination of absentee voting information among the UOCAVA voter population. These studies and post-election surveys have helped DOD to identify new and emerging issues with its voting assistance program. In particular, two long-standing issues continue to pose challenges to the program’s effectiveness. In both of the 2014 and 2015 studies that it issued and in all of the post-election surveys that it administered between 2008 and 2014, DOD repeatedly identified that challenges persist with the limited awareness of FVAP’s resources and the unpredictable mail delivery of UOCAVA ballots. In addition, both of these issues were discussed in all four reports that we issued on this subject between 2001 and 2010. Further details about these two challenges are provided below. According to DOD, efforts to vote by servicemembers and U.S. citizens living overseas are most successful when voters are aware of the tools and resources that are available through FVAP. However, as previously noted, the results from recent studies and post-election surveys indicate that there is limited awareness of FVAP’s resources among military and overseas voters. For example, FVAP’s 2014 post-election survey indicated that, of the active duty servicemembers who responded, 61 percent did not seek voting assistance from FVAP and were not aware of FVAP’s assistance, while 60 percent did not seek voting assistance from unit voting assistance officers and were not aware of voting assistance officers. Under DOD guidance implementing UOCAVA, FVAP is responsible for establishing and maintaining a program to assist all eligible voters. This involves various activities including, but not limited to, collecting and reporting on survey data, prescribing forms for UOCAVA voters to use when registering to vote, and coordinating with the states. Furthermore, DOD Instruction 1000.04 requires FVAP to establish a means to inform absent uniformed servicemembers of absentee voting information and resources 90, 60, and 30 days before each federal election. The types of information military and overseas absentee voters need to be aware of in order to prepare to vote include, but are not limited to: election dates and deadlines for submitting an absentee ballot; FVAP forms and online assistance for completing those forms; DOD voting assistance resources available such as the installation or the location where the voter is registered/eligible to vote; the way to request a blank ballot; unit voting assistance officer; and information on FVAP’s resources, such as FVAP’s website; call center; and email address. Consistent with its designated responsibilities, FVAP has developed education and outreach materials such as brochures, wallet cards, a voting assistance guide, and a website to provide information to citizens about the absentee voting process, including state-specific information and service voting assistance programs. In addition, to increase awareness of FVAP as a resource, DOD has hired contractors to support FVAP’s voter assistance campaigns through communication and outreach. For example, FVAP’s contractors assist FVAP in the development of promotional materials such as videos, posters, and social media messages. In our 2007 report, we noted that the U.S. election system is highly decentralized and that states and territories have considerable discretion in determining how they organize the election process, which is reflected in the diversity of procedures and deadlines that states and jurisdictions establish for voter registration and absentee voting. In its 2008 post- election report to Congress, FVAP similarly highlighted the variation in and complexity of absentee voting procedures. For the 2014 general election, the Election Assistance Commission report summarized 8,200 survey responses from local election offices across the United States and territories about ballots that those offices transmitted to and were returned from UOCAVA voters. To help voters and voting assistance officers to be aware of these variations, FVAP maintains a website with links to state election office websites, and regularly updates its Voting Assistance Guide, which includes state-specific instructions and timelines for completing the required voting forms. Despite such resources, the results of the two DOD-commissioned studies and FVAP’s post-election surveys administered between 2008 and 2014 showed that awareness of FVAP materials to assist voters needed improvement. For example, by conducting focus groups and interviews with servicemembers and U.S. citizens living overseas, one of the reports commissioned by DOD found that voters were uncertain about registration deadlines, which, as previously noted, vary by jurisdiction. Further, while FVAP offers UOCAVA voters online assistance with completing, among other things, the Federal Post Card Application and the Federal Write-in Absentee Ballot online, a DOD–commissioned study found specifically that some military voters interviewed as part of its study were not aware of the Federal Post Card Application or that it could be used to both register and request a ballot. As a result, servicemembers may be taking additional time to separately request a ballot not realizing that they can do so using the same form. Further, that study cited one of the most significant improvements in UOCAVA voting as the states’ transmission of blank ballots to UOCAVA voters online through email or a state portal as a result of the Military and Overseas Voter Empowerment Act. Yet as of 2014, many overseas absentee voters interviewed as part of the research study were unaware that they could receive their ballots online. DOD’s commissioned reports also found that state and local election offices are not fully aware of FVAP’s role as a resource that can assist with implementation of UOCAVA requirements. To raise awareness about FVAP’s availability as an election resource to state and local election officials, FVAP assists election officials by providing online training and guidance, sending email alerts, funding research grants, participating in conferences, conducting other local outreach, and making direct (person- to-person) contact. Upon request, FVAP can also help state election officials look up servicemembers’ military postal addresses. However, some local election officials and other stakeholders that we spoke with stated that the information that FVAP provides to states may not filter down to the smaller localities. For example, one of the local election officials we spoke with was not aware that FVAP could look up active- duty servicemembers’ addresses for election officials. FVAP officials stated that they focus coordination at the state level because, in their experience, some state officials prefer to filter the information that FVAP provides about UOCAVA voting to their localities. To address state and local awareness of FVAP resources, the Defense Human Resources Activity, on behalf of FVAP, entered into an agreement with the Council of State Governments in 2013. Among other things, the agreement required the creation and support of two advisory groups, one to identify and promote best practices for absentee voting laws, regulations, and policy for military and overseas voters and the second to standardize data collection and encourage state and local election jurisdictions to test and implement tools to report uniform data from voter registration and election administration systems. The council submits activity reports from this partnership to FVAP on a quarterly, semi-annual, or annual basis depending on the type of report or deliverable, as specified in the agreement. In December 2015, the Council of State Governments released a series of recommendations to the states, based on the results of this collaboration. The recommendations were related to voter communication, the Federal Post Card Application, online voter registration, and engagement with the military community. The second category of challenges identified by DOD and in our prior work relates to the unpredictable postal delivery of absentee ballots to and from UOCAVA voters. In addition to meeting any documentation requirements, such as providing a signature or appropriately completing all required sections, absentee ballots must be returned to the appropriate election office by the specified deadline in order to have the votes counted. However, the mail system, for a variety of reasons, can be unpredictable for military and overseas voters. Specifically, the time it takes for UOCAVA voters to receive an absentee ballot depends on their location and may involve a complex and lengthy transit via different transportation modes and speeds. For example, officials from the Military Postal Service Agency noted that military mail transits between U.S. Postal Service and Military Postal Service networks, and that voted absentee ballots are shipped from overseas via air carriers. Military mail does not enter a foreign country’s mail processing network and is considered domestic mail, according to officials. However, overseas citizens use foreign postal systems and DOD reported that civilians who use those systems expressed distrust for them in certain countries. In our 2001 report, we noted that overseas voters who do not have access to the military postal system may have faced problems such as longer transit times and unreliable mail service. Further, we noted that some ballots that originated from overseas may not have been postmarked until they arrived in the United States, raising the potential for local jurisdictions in states with an extended deadline to disqualify them because they lacked an overseas postmark or bore a postmark dated after Election Day. All states provide the option to request or print ballots online, but the availability of resources to active duty military can be limited based on their location. For example, a service voting assistance officer stated that U.S. Navy ships have a limited number of computer terminals, bandwidth, and printers, which may prevent servicemembers from accessing or printing their ballots. Furthermore, mail delays experienced by servicemembers may also be the result of deployment changes including the timing of their arrival at a new duty station or departure from a current duty station. As such, guidance on the different factors that may affect the timeliness of an absentee ballots’ transit is critical to help ensure that those voters are optimally positioned to meet U.S. voting deadlines. In the 2014 general election, postal mail was the primary mode of ballot transmission for many UOCAVA voters. For example, FVAP’s 2014 post- election survey report to Congress stated that 61 percent of UOCAVA ballots were transmitted to potential voters via postal mail, and 75 percent of the UOCAVA ballots counted were received via postal mail. For active duty servicemembers, a subset of UOCAVA voters, 75 percent of those who requested a blank ballot obtained it from their local election office through mail delivery from the U.S. Postal Service and the Military Postal Service—which handles military mail—and 84 percent of those members returned their voted ballot through the mail. FVAP is required to coordinate with the Military Postal Service Agency (MPSA), an extension of the U.S. Postal Service components which monitors and oversees Military Postal Service functions, to implement measures to ensure voting materials are moved expeditiously, to the maximum extent practicable, by military postal authorities. To help UOCAVA voters meet the deadline to successfully cast their vote in a U.S. election, U.S. Postal Service, in conjunction with MPSA, provides servicemembers and overseas voters with recommended absentee ballot mailing days and the corresponding dates by which voters should mail their ballot prior to the election date. The MPSA recommends ballot mailing dates for each Army or fleet post office location. According to MPSA officials, the mailing dates are determined by consulting with the major commands and combatant commands and reviewing transportation routes and frequency. These dates provide an estimate of the number of days required for a ballot to reach local election offices through Military Postal Service and U.S. Postal Service networks. In January 2016, the MPSA issued the recommended mail times for the 2016 election, and those times ranged from 7 to 30 days for ballots to be transmitted to local election offices in the United States. Some of the locations with longer transit recommendations include Ethiopia (30 days), Egypt (20 days), and Afghanistan (20 days). In addition, MPSA recommends that all deployed Navy ships in the Atlantic and Pacific fleets mail their ballots at least 25 days before the 2016 election but no later than October 10, 2016. These recommended mailing times can be helpful to voters; however, based on our analysis, they also indicate that some military and overseas voters who rely solely on mail delivery may not have enough time to both request a blank ballot and cast their vote. For example, we found that voters on deployed Navy ships in the Atlantic and Pacific fleets may experience a 25-day transit time. Therefore, to allow for transit of (1) the Federal Post Card Application that the voter mails to his or her local election office, (2) the blank ballot the local election office sends to the voter, and (3) the voted ballot that the voter mails back to the local election office, a voter would have to multiply the recommended transit time by three to account for each of those transits. Further, if a voter who is deployed in the Atlantic and Pacific fleets relies solely on mail and the local election office sends the blank ballot not later than 45 days prior to the election as required by statute, it is unlikely that the voted ballot will be returned on time because those two parts of the process may take up to 50 days, according to MPSA’s recommended mailing times. In addition to recommending mailing dates, MPSA issues a Strategic Postal Voting Action Plan to assist military voters during each general election cycle. This action plan specifies, among other things, deadlines for ballots to be collected and postmarked at overseas military postal outposts. The plan further notes that overseas military postal activities with intermittent transportation networks or other limiting factors may establish alternative mailing deadlines to help ensure that absentee ballots reach election offices by the election date. States reported to the Election Assistance Commission that they had rejected approximately 8,500 of the approximately 146,000 UOCAVA ballots received for the 2014 general election, and that the reason ballots were most commonly rejected is because they were received after a state’s ballot receipt deadline. Military personnel in overseas military postal locations can return their absentee ballots via Express Mail using an Express Mail Label 11-DOD that can be used only for absentee ballots originating from overseas military postal locations. Local election officials we spoke with stated that they send their ballots to the designated military post office via First-Class Mail or Standard Mail because of the expense of sending a ballot via Express Mail. Election officials have the option to use a special identification tag for official ballot First-Class or Standard Mail addressed for domestic or international delivery; however, this is not required. We previously reported that the U.S. Postal Service changed its delivery standards for some types of mail in 2012 and 2015, which generally increased the number of days to deliver some First-Class Mail in the continental United States. For copies of the Express Mail Label and the official ballot identification tag, see appendix VI. DOD has identified some actions and has taken some steps to address challenges associated with the awareness of voter resources provided by FVAP and the unpredictable postal delivery of UOCAVA ballots. However these long-standing challenges persist, in part, because DOD has not established time frames for completing the actions intended to address them. Standards for Internal Control in the Federal Government specify that management should complete and document actions, including resolutions of audit findings, to remediate challenges on a timely basis. To address its finding that the awareness of voter resources provided by FVAP continues to be limited among UOCAVA voters and stakeholders, DOD identified various actions that it will take to resolve the issue through several reports, including its annual reports, and a press release that FVAP issued along with the results of its qualitative study. For example, the actions identified range from targeting its outreach to first-time voters to conducting more comprehensive analyses of the process used by military and overseas voters when voting absentee. Similarly, DOD identified actions that it would take to address the unpredictable delivery of ballots to overseas voters, such as researching technological innovations that could improve mail processing times and assessing the effect of the newly modernized mail redirection system on the number of undeliverable ballots. Table 1 lists the actions that DOD has identified in response to both categories of voter assistance challenges and the report in which each challenge was identified. DOD’s identification of actions related to FVAP challenges is a key step to addressing the challenges. However, these long-standing challenges persist in part because DOD has not established time frames for completing the actions intended to address the challenges. The documentation we reviewed on DOD’s planned actions did not indicate milestones or completion dates for these actions. DOD officials noted that they establish time frames for election activities in voting action plans, but our review of their most recent 2016 voting action plan contained a list of deadlines related to the election only, and it did not contain time frames for actions to address program challenges. Key management practices call for developing control activities to ensure management’s directives are being met, such as clearly defining the time frame associated with projects and tracking whether the projects are meeting their goals. Specifically, Standards for Internal Control in the Federal Government state that control activities should be designed and implemented to ensure that management’s directives are achieved and that projects should be tracked so that managers can determine whether they are meeting their goals. Further, A Guide to the Project Management Body of Knowledge states that project time management includes the processes required to manage the timely completion of the project, such as defining activities, sequencing activities, estimating activity resources, and estimating activity durations. Without establishing time frames for the actions it identified, DOD will lack the necessary processes to manage the timely completion of improvements to its voting assistance activities, which would help the department achieve FVAP’s stated goals. Further, given the magnitude and complexity of FVAP’s work, establishing time frames would better position DOD to effectively target resources to high-priority initiatives. Finally, time frames would help to provide benchmarks against which DOD can demonstrate FVAP’s progress to Congress and other stakeholders, including through the statutorily required annual reporting process. Stakeholder involvement and performance measures for FVAP are discussed in more detail in the next section of this report. DOD’s implementation of its voting assistance program exhibits some characteristics of the six selected leading practices associated with the initial stages of effective federal strategic planning but has not fully exhibited any of these practices. For example, leading practices—such as defining goals, identifying resources, and using performance measures— are only partially exhibited, in part, because DOD largely plans its activities around federal election cycles, during which it focuses on near- term needs, driven by the upcoming election, and federal fiscal year budgeting cycles, according to officials. Furthermore, as of February 2016, DOD does not have a long-term strategy for its voting assistance program, such as a strategic plan, to help ensure the long-term effectiveness of the program. During our review, we found that DOD’s voting assistance program exhibits some characteristics of each of the six selected leading practices of effective federal strategic planning. Our prior work has identified these leading practices for the initial stages of federal strategic planning, which we derived in part from the Government Performance and Results Act (GPRA), as updated by the GPRA Modernization Act of 2010, associated guidance, and our prior work. Specifically, these leading practices are to: (1) define the mission and goals, (2) define strategies that address management challenges and identify resources needed to achieve goals, (3) ensure leadership involvement and accountability, (4) involve stakeholders, (5) coordinate with other federal agencies, and (6) develop and use performance measures. Table 2 describes the six selected leading practices and the extent to which they are exhibited in DOD’s implementation of FVAP. Below we discuss in more detail our assessment of the extent to which FVAP exhibits the characteristics of each selected leading practice of federal strategic planning. FVAP has recently revised its mission statement, purpose, and strategic goals; however, we rated this leading practice as “partially exhibits” because FVAP has not made them publicly available. Standards for Internal Control in the Federal Government state that management should communicate information externally through established reporting lines so that external parties can help the entity achieve its objectives. FVAP officials referred us to FVAP’s website, which states that the purpose of the program is to ensure that servicemembers, their eligible family members, and overseas citizens are aware of their right to vote and have the resources to do so. However, the purpose statement on FVAP’s website does not match the revised mission statement and DOD Instruction 1000.04 does not clearly define the mission of the program, although it identifies the various voting assistance activities and responsibilities throughout DOD. As previously noted, in 2013, DOD commissioned the RAND Corporation to conduct a study on aligning FVAP’s strategy and operations. The results of the study, which DOD and the RAND Corporation released in October 2015, found, among other things, that FVAP lacked a clearly articulated mission, shared among its staff and stakeholders. For example, the report noted that FVAP thought UOCAVA voters were best served through intermediaries such as voting assistance officers and local election officials. However, the intermediaries identified did not have a similar understanding of their role and connection to FVAP and voters, and were generally unsure of what FVAP was doing and why. In anticipation of the report’s findings and before the final report was issued, FVAP leaders and staff convened an offsite meeting during the summer of 2015 and proactively developed a new mission statement, vision, and strategic goals. FVAP officials provided us with this new mission statement, purpose, and associated strategic goals during our review, but as of January 2016 these new statements had not been made publicly available. According to FVAP officials, the new mission and strategic goals are part of a forthcoming strategic plan, and they do not plan to make them publicly available until after November 2016 to avoid distraction prior to the upcoming presidential election. However, without communicating its updated mission, vision, and strategic goals publicly, FVAP stakeholders may continue to be unclear about FVAP’s purpose and their role in its achievement. In addition, without a consistent understanding between program staff and stakeholders about FVAP’s role, potential UOCAVA voters may not receive information that is needed to help maximize their opportunity to vote in the upcoming 2016 presidential election. We also found that FVAP has not maintained consistent strategic goals for its program. In November 2015, a senior FVAP official told us that FVAP has three broad strategic goals that will help it achieve its mission: (1) reducing obstacles to voting, (2) educating and making voters aware of the voting process, and (3) being a highly valued customer service organization. We reviewed FVAP’s fiscal year 2014-2016 budget justification documents, which contain FVAP’s strategic goals and corresponding performance measures and found that FVAP has changed its strategic goals in fiscal years 2014 and 2015, and changed the performance measures associated with the strategic goals from year to year. In addition, the mission and strategic goals are different than the purpose statement that FVAP shares publicly on its website. Although the changes in FVAP’s strategic goals are not substantial, the frequency with which they have changed, coupled with the fact that FVAP does not share its goals publicly, inhibits FVAP’s ability to track and demonstrate progress over time. Table 3 shows how FVAP’s strategic goals have changed. Further, FVAP has not consistently publicized the aforementioned strategic goals on, for example, its website or in its annual reports to Congress, where they could be made available for FVAP’s customers and stakeholders. Without consistent, publicly available strategic goals and their intended results, FVAP cannot effectively demonstrate to essential stakeholders and potential voters how its efforts are helping to achieve progress toward its goals. DOD has identified some challenges faced by FVAP related to voter awareness. As a result, we rated this leading practice as “partially exhibits.” In our work on performance management, we have previously reported that it is particularly important that agencies develop strategies that address management challenges, outside of their control, that threaten their ability to meet long-term strategic goals. During our review, officials acknowledged that FVAP faces challenges beyond its control, especially related to military and overseas citizens’ interest in voting. To make decisions about populations on which to concentrate voter awareness activities, DOD used the results of post-election surveys to group individuals based on how likely they are to vote. For example, FVAP’s post-election surveys suggest that servicemembers with spouses vote at consistently higher rates than those who are unmarried. DOD officials told us that a significant portion of the program’s budget— approximately $1.2 million of a total $3.5 million to $4 million annually—is used to fund FVAP’s voter awareness campaign, and that the information obtained from post-election surveys will enable FVAP to more effectively target the distribution of outreach materials based on the unique characteristics of each group. However, DOD has not taken similar steps to define strategies or devote resources to address challenges that FVAP has identified related to unpredictable mail processing and its potential impact on the timely transmission of ballots between voters and local election offices. Without identifying strategies and resources needed to address all of FVAP’s identified challenges, FVAP cannot ensure the program’s ability to meet its long-term strategic goals. FVAP’s current Director, whom DOD designated in November 2013, has demonstrated involvement in the program; however, we rated this leading practice as “partially exhibits” because DOD has not established and institutionalized mechanisms to help ensure the accountability of the FVAP Director in achieving program goals. Leading practices suggest that a program’s leadership is responsible for ensuring that strategic planning becomes the basis for day-to-day operations and that formal and informal practices hold managers accountable and create incentives for working to achieve the agency’s goals. Prior to the current Director, FVAP was led by four different Directors from 2008 through 2013, and, according to DOD officials, these leadership transitions were routinely accompanied by changes in program priorities. FVAP’s current Director has demonstrated involvement in the program by taking initial steps to identify issues that may pose challenges to DOD’s voting assistance efforts and to develop a strategic plan. For example, the Director initiated and included program staff in a 3-year study that FVAP commissioned the RAND Corporation to conduct on FVAP. The study found that FVAP staff could not reach consensus about the program’s purpose and its role in the voting community. In response to these results, the Director led staff in the development of the new mission, vision, and purpose statements previously discussed, as well as in the revision of strategic goals for DOD’s voting assistance program. With regard to leadership accountability, FVAP’s Director provides a weekly report on program activities to the Acting Director of the Defense Human Resources Activity, which includes information about media inquiries, inquiries from Congress, and high-profile meetings, among other activities. In addition, the Defense Human Resources Activity tracks FVAP’s budget execution and procurement actions throughout the fiscal year. While the Defense Human Resources Activity requires its programs to submit a mission, goals, and performance measures as part of the budget justification according to a senior official, the official told us that the Defense Human Resources Activity uses that information to identify resource needs only, and not to measure FVAP’s progress toward goals. Further, the official stated that Defense Human Resources Activity does not use formal mechanisms, such as a strategic plan, to hold FVAP or any of its other programs accountable for the achievement of program goals. Without accountability mechanisms, DOD will have a limited ability to maximize the current and future Director’s ownership of and focus on FVAP’s mission and progress. DOD coordinates extensively with some of the stakeholders involved in its voting assistance efforts; however, we rated this leading practice as “partially exhibits” because it has not fully involved all of its stakeholders in the development of FVAP’s mission, goals, and strategies. For example, FVAP involved its stakeholders in the studies it commissioned to identify internal and external challenges, and those studies incorporated the stakeholder perspectives into their findings. However, FVAP did not fully involve stakeholders in the development of its mission and goals. Involving stakeholders in developing a program’s mission, goals, and strategies is important to help ensure that they target the highest priorities, as specified in the leading practices for federal strategic planning. UOCAVA voting is a complex process that involves multiple stakeholders, and DOD officials told us that there are several key stakeholders with whom they routinely communicate. In addition, FVAP and the stakeholders provided a number of examples of coordination and information sharing, such as a monthly teleconference that FVAP holds with voting action officers from all the services to make announcements, share information, and discuss issues related to its voting assistance efforts. In addition, FVAP shares information related to voting assistance with stakeholders on its website, by developing voting awareness materials and public service announcements. FVAP also works with local election offices to facilitate absentee voting under UOCAVA and to help ensure mutual understanding of state- specific absentee voting procedures, in accordance with the DOD instruction. DOD officials also told us that they routinely communicate FVAP-related information to the states via the Council of State Governments. Specifically, in 2013 the Defense Human Resources Activity entered into a cooperative agreement with the Council of State Governments to establish two working groups to advise FVAP—one focused on best practices for absentee voting laws, regulations, and policy for absent uniformed service and overseas voters and the other focused on election technology initiatives. These working groups comprise state and local election officials including secretaries of state, election directors, and voter registrar positions, and in December 2015, developed recommendations to the states to improve the absentee voting process for UOCAVA voters. However, DOD officials also noted that their interactions with other FVAP stakeholders typically occur on an as-needed basis. For example, DOD officials told us that FVAP representatives attend conferences held by state organizations and state and local election officials to share information on UOCAVA voting. We spoke with local election officials in two districts and other stakeholders who similarly told us that FVAP does not involve them directly in its activities; rather, states communicate information—at their discretion—from FVAP to local election offices. As a result, local election officials may not receive FVAP-related information on a consistent basis if it is not shared by state election officials. Further, the October 2015 RAND Corporation report stated that some stakeholders did not clearly understand FVAP’s role and others felt that stakeholder engagement was largely driven by the agendas of agency officials rather than by the agency’s mission. Without involving all of its stakeholders in developing FVAP’s mission, goals, and strategies, program officials cannot ensure that they are optimally targeting the highest priorities for improving voting assistance activities. FVAP coordinates with related federal agencies and entities, including the uniformed services and the Coast Guard, the Election Assistance Commission, the Department of State, and MPSA to help ensure that agencies with a role in the absentee voting process are working toward similar results; however, we rated this leading practice as “partially exhibits” because, while DOD coordinates with these federal entities to provide voting assistance, FVAP has not involved its federal partners in the development of its mission and goals. A senior FVAP official stated that FVAP staff developed only the program’s mission and goals, although the program worked with stakeholders to identify absentee voting challenges, as previously discussed. FVAP carries out its coordination with these agencies and state election officials in accordance with DOD Instruction 1000.04. For example, the instruction requires FVAP, in coordination with the military services, to develop training materials for installation voting assistance offices, unit voting assistance officers, and recruiters to provide voter registration and absentee ballot assistance. FVAP develops these training materials, which include a description of the absentee voting process and the resources available to assist that process, and provides them on its website. FVAP also provides in-person training workshops on installations worldwide. In addition, FVAP holds monthly teleconferences with the service voting action officers—who are responsible for voting assistance operations within their service—in which they discuss issues and plans related to voting assistance. A senior FVAP official provided examples of FVAP’s coordination with the Department of State to leverage data on the overseas citizen population, to quantify the population and identify areas where overseas citizens are concentrated. Specifically, the Department of State provides FVAP avenues to reach overseas citizens with voting process awareness messaging, through their in-country U.S. citizen registration process, Smart Traveler Enrollment Program, embassies, consulates, and warden networks. The official further stated that FVAP considered partnering with other federal agencies that maintain information on overseas citizens, such as the Internal Revenue Service and the Social Security Administration, but did not pursue it due to the sensitive nature of the data those agencies maintain. UOCAVA requires FVAP to coordinate with the Election Assistance Commission and chief state election officials to develop standards for the states to report data on the numbers of ballots transmitted and received during a general election. To carry out this requirement, FVAP partnered with the Election Assistance Commission in 2014 to combine existing surveys for local election offices to report the number of UOCAVA voters who requested and submitted ballots, the methods by which UOCAVA voters requested and submitted ballots, and the rates of and causes for rejected ballots, among other relevant issues. This partnership allows both FVAP and Election Assistance Commission to meet statutory reporting requirements while eliminating duplicate requests for local election officials to provide election data. DOD collects data for three sets of metrics that are intended to evaluate DOD’s voting assistance; however, we rated this leading practice as “partially exhibits” because, according to a senior DOD official, none of these sets of metrics are used to evaluate FVAP’s performance toward the program’s strategic goals. The performance measures identified by FVAP include: Measures of Effect and Performance: DOD Instruction 1000.04 requires FVAP to prescribe metrics for the DOD components and services to use to evaluate their individual voting assistance programs and, to the extent practicable, establish and maintain an online portal to collect and consolidate program metrics. FVAP developed its Measures of Effect & Performance initially in 2011, and updated those measures in October 2014. These measures are intended for the service voting assistance officers to track the assistance they provide, and include counts of the number and types of personnel assisted, the methods of assistance, and the number of forms distributed. A senior FVAP official told us that FVAP uses these metrics to monitor activities and make real-time resource decisions, but did not plan to use these metrics to assess FVAP’s performance toward meeting program goals. In addition to developing and prescribing that the military departments collect these metrics, FVAP developed a portal for the military services to record their program metrics. Under DOD’s guidance, installation and unit-level voting assistance officers in each service are encouraged to collect and record information about the voting assistance they provide on a quarterly basis. These metrics are not linked to FVAP’s strategic goals and are not evaluative. In addition, one voting action officer noted that the measures are not reflective of voting assistance activities. Rather, the measures are tallies that record the number and types of actions taken by voting assistance officers. In 2010, we identified similar limitations in a previous version of FVAP’s Measures of Effect and Performance, including reliability concerns and concerns that the measures were credible to evaluate only some of FVAP’s efforts. In 2013, the DOD Inspector General also reported that FVAP had not applied clearly defined voting assistance program goals and metrics to enable program officials to evaluate program performance and effectiveness, and that the focus of FVAP’s metrics was limited to measuring the level of activity. However, in 2015 the DOD Inspector General reported that FVAP had begun tracking the measures of effect and performance on January 1, 2015, and that those measures were designed to provide FVAP with a more accurate representation of the resources utilized for voting assistance and would help to determine the level and type of assistance that is being sought by servicemembers. Budget Estimate Performance Measures: FVAP identifies strategic goals and related performance measures in its annual budget justification submission for the Defense Human Resources Activity Operation and Maintenance budget estimates. FVAP’s submission includes performance measures because the Defense Human Resources Activity requires that they be included in budget estimates, according to an official. As previously stated, our review of FVAP’s budget estimates for fiscal years 2014-16 indicates that FVAP has changed its strategic goals and the associated performance measures, thus preventing FVAP from assessing or demonstrating its performance over time. In addition, a senior FVAP official told us that these performance measures are aligned with short-term goals that change from year to year based on factors such as the election cycle and program initiatives. One senior-level FVAP official told us that the performance measures listed in the budget estimates do not communicate a full picture of all of the program activities that FVAP is undertaking and thus FVAP does not regularly use them to evaluate the program; rather, the performance metrics are used mostly to meet the information requirements of FVAP’s budget requests. Further, an official from the Defense Human Resource Activity noted that while the office asks the programs for which it has oversight (including FVAP) to identify their performance measures as a budget exhibit, it does not require the programs to demonstrate how the performance measures are used to evaluate progress. Call Center Metrics: FVAP maintains a call center for UOCAVA voters and FVAP stakeholders to submit questions, via phone, fax, email, or FVAP’s website, about all aspects of absentee voting. Once a service that FVAP contracted out to a third party, FVAP officials noted that they recently brought the call center back in house and knowledgeable FVAP staff now manage the center and respond to questions. In addition, FVAP maintains a portal with metrics describing the assistance it provides through the call center. Like the measures of effect and performance, the call center metrics are tallies of the number of inquiries, broken down by method of inquiry, type of caller (military, overseas citizen, local election official, or other), and the nature of the inquiry. Further, the call center metrics include feedback from the caller about satisfaction with the assistance provided. While the call center metrics are initial steps to help FVAP demonstrate how it provides assistance and identify challenges that callers are facing, these metrics do not allow FVAP to track the progress it is making toward its mission and all three of its strategic goals While these three mechanisms help FVAP collect data that enables program officials to monitor voting assistance activities, the data do not measure how well these activities make progress toward FVAP’s goals of (1) reducing obstacles to voting, (2) being a highly valued customer service organization, and (3) educating and making voters aware of the voting process. Without establishing performance measures and using the information that those measures are intended to collect, FVAP cannot track the progress it is making toward its goals to inform decision making or demonstrate progress to its staff, DOD, and stakeholders. According to officials, as of February 2016, FVAP did not have a long- term strategy, such as a strategic plan, to institutionalize ongoing practices and establish accountability for efforts still being developed, such as the partially exhibited leading practices that we have identified above. Instead, FVAP plans its activities in the near-term around federal election cycles, and links its activities to statutory requirements and some challenges that it has identified. FVAP’s most recent strategic plan was published in 2010, but a senior FVAP official told us they stopped using the plan in 2012. FVAP officials also told us that they do not have a current strategic plan because there has been frequent turnover in the program director position, and that the transitions in leadership were often accompanied by changes in priorities. As a result, FVAP operated without a strategic plan to guide its overseas voting assistance efforts throughout the 2012 and 2014 general election cycles. According to a DOD official and as evidenced in its annual reports to Congress, FVAP is accustomed to cyclical planning, by identifying lessons learned about overseas absentee voting following each federal election and applying those lessons to the next election cycle. Instead of updating their previous strategic plan, FVAP’s senior officials told us that they are in the process of developing a new strategic plan that they expect to finalize internally among FVAP staff in the summer of 2016. However, these officials further stated that they do not plan to publish the strategic plan until after November 2016 so as to avoid any distraction from FVAP’s voter assistance responsibilities prior to and during the upcoming presidential election. While FVAP officials provided a timeline for some steps they will take to develop a new strategic plan, they did not have documentation of a draft strategic plan because they said it was early in the development phase. Without a strategic plan that institutionalizes a long-term vision, it will be difficult for FVAP to demonstrate progress in addressing its long-standing challenges, such as those previously discussed. Furthermore, a strategic plan would help to incorporate all of the leading practices of federal strategic planning that can help to ensure that FVAP has a defined and sustainable path through the dynamic voting environment and any future transitions in leadership. Since our first report on FVAP in 2001, DOD has taken steps to improve its assistance to servicemembers and overseas voters. For example, DOD has proactively commissioned studies that identified challenges with FVAP and it has administered and analyzed the results of post-election surveys to identify areas needing improvement. While these are positive steps, some of the challenges identified, such as the limited voter and stakeholder awareness of FVAP resources and the unpredictable postal delivery of absentee ballots, are long-standing issues and continue to persist—in part because DOD has not established time frames for completing identified corrective actions. Having time frames would help DOD to better focus its effort and resources and would provide important benchmarks against which DOD could demonstrate program progress to Congress and other stakeholders, including through the statutorily required annual reports. Further, while DOD’s leadership of FVAP has stabilized since 2013, DOD has not fully implemented the six selected leading practices for federal strategic planning into the day-to-day operation of the program. In addition, DOD has not developed a long-term strategy that could help focus the program and further develop and institutionalize the leading practices that it partially exhibits through future leadership transitions, so it can effectively respond to the changing nature of the voting environment. We are making three recommendations to improve DOD’s management of FVAP. We recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to establish time frames to complete actions that its Federal Voting Assistance Program has identified it will take to address challenges, and also to use these time frames to demonstrate progress for stakeholders, including through its statutorily required annual reporting. We recommend that the Under Secretary of Defense for Personnel and Readiness, through the Defense Human Resources Activity, direct FVAP’s Director to fully implement the six selected leading practices of federal strategic planning into the day-to-day operations of the program. We recommend that the Under Secretary of Defense for Personnel and Readiness, through the Defense Human Resources Activity, direct FVAP’s Director to complete the development of a strategic plan that fully exhibits the six selected leading practices of federal strategic planning, including, but not limited to: a statement of FVAP’s revised mission and goals; an identification of strategies that address management challenges and resources needed to achieve goals; a description of leadership involvement and accountability; a description of stakeholder involvement in the development of FVAP a coordination strategy to communicate the program’s mission and goals to other federal agencies; and a description of performance measures, aligned with program goals that FVAP will use to track progress toward achieving goals. In commenting on a draft of this report, DOD partially concurred with one of our three recommendations, and concurred with the other two recommendations. DOD’s comments are reprinted in appendix VII. DOD, the U.S. Postal Service, and the MPSA also provided technical comments, which we incorporated, as appropriate. In partially concurring with our first recommendation that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to establish time frames to complete actions that FVAP has identified that it will take to address challenges, and to use these time frames to demonstrate progress for stakeholders, DOD agreed that time frames can provide a “yard stick” for measuring program effectiveness. However, DOD stated that it had not specified time frames because recommendations in FVAP’s reports to Congress are taken for immediate action and election cycles provide a natural timeframe for completion. DOD further highlighted a number of efforts that are complete or underway for the 2016 election cycle and that it plans to include in its next report to Congress. As stated in our report, we recognize that FVAP is accustomed to a cyclical planning process that is largely driven by the 2-year timeframe of the federal election schedule. In addition, we note in our report steps that have been taken to address long-standing challenges such as increasing voter awareness of FVAP resources and mitigating unpredictability in postal delivery. However, these long-standing challenges persist in part because DOD has not established time frames for completing actions intended to address them, as discussed in our report. We believe that, if time frames are not established with the specificity needed to help ensure that actions are completed in a timely manner for implementation into the next election cycle, actions may not be properly prioritized, resources may not be effectively targeted; and decision makers and stakeholders may not have necessary information regarding FVAP’s progress with respect to improvements. In concurring with our second recommendation that the Under Secretary of Defense for Personnel and Readiness, through the Defense Human Resources Activity, direct FVAP’s Director to fully implement the six selected leading practices of federal strategic planning into the day-to-day operations of the program, DOD stated that its formal efforts to implement selected leading strategic planning practices began in 2015 when the RAND Corporation assessed FVAP’s organizational structure and FVAP took initial steps to position itself as a customer-focused service delivery organization. We agree that FVAP’s strategic planning activities began during the review by the RAND Corporation, and in our report note FVAP’s efforts to revise the mission and strategic goals through a staff offsite after initial feedback from the RAND Corporation. In addition, DOD highlighted the following steps it has taken to incorporate the characteristics of strategic planning leading practices that our analysis identified as missing, and provided examples that demonstrate progress in some of these areas. 1. Define the mission and goals: DOD noted that FVAP will make the complete strategic plan publicly available in December 2016. We agree that this is a positive step, and note in our report FVAP’s plan to issue a strategic plan after November 2016 because FVAP wanted to avoid distraction prior to the upcoming presidential election. 2. Define strategies that address management challenges and identify resources needed to achieve goals: DOD stated that most factors that influence the success of a voter are outside the influence or control of DOD. Further, DOD stated that FVAP works to facilitate the voting process and improve areas where it has the ability to affect the process. While we agree that DOD does not control many of the factors that influence the success of a voter to cast a ballot, we note in our report that it is particularly important that agencies specifically develop strategies to address those management challenges that are outside of their control. We believe that, by identifying the challenges that are outside of its control, FVAP can also identify a reasonable level of resources to devote to address certain challenges, or determine how to leverage partnerships with the stakeholders that have more direct control on absentee voting such as states, the voters, and the MPSA. 3. Ensure leadership involvement and accountability: DOD noted that it has a well-established chain of command in carrying out its responsibilities under UOCAVA and those lines of accountability are articulated in a relevant directive and instruction. We disagree with DOD’s implication that the guidance alone ensures leadership involvement and accountability, and have concerns that the strategic planning activities initiated by the current Director could be diminished by a future leadership transition. Officials noted during our review that leadership transitions were routinely accompanied by changes in program priorities. 4. Involve stakeholders: DOD noted that stakeholder involvement was part of the RAND Corporation’s study, during which stakeholder views of FVAP responsibilities were solicited. Further, DOD stated that some of the stakeholder misconceptions about FVAP's role were based on previous communication from FVAP. In our report, we note the involvement of FVAP's stakeholders in the RAND Corporation study and continue to believe that a strategic plan could help FVAP communicate its role consistently and publicly to its stakeholders, to address the misconceptions, such as the perception that FVAP stakeholder coordination was driven by individual agendas, which the RAND study uncovered. 5. Coordinate with other federal agencies: DOD stated that it coordinated with other federal agencies, which were also included in the RAND study, in the development of its mission, goals, and strategies. These efforts led to the newly defined and focused strategic goals. We do not have evidence from the stakeholders we spoke with, listed in appendix III, that the RAND Corporation or FVAP consulted them specifically regarding the development of FVAP's mission, goals, and strategies. 6. Develop and use performance measures: DOD stated that FVAP and each of its employees are evaluated by yearly performance measures tied to the work conducted on a daily basis. We disagree that annual performance evaluations for individual staff constitute performance measures that help FVAP measure progress toward achieving its strategic goals, even when these performance measures are tracked, as DOD suggests, upward from the individual to the FVAP office, the Defense Human Resources Activity, the Under Secretary of Defense (Personnel and Readiness), and overall DOD strategies and goals. In addition, DOD noted that FVAP will refine its analysis of metrics collected by service voting assistance officers and compare the numeric values collected with historical values over time. However, the metrics we reviewed were a tally of numbers associated with a type of assistance or service provided. Those metrics did not contain a baseline to indicate how such assistance efforts compared with assistance needed or with the size of the UOCAVA voter population. In concurring with our third recommendation to complete the development of a strategic plan that fully exhibits the six selected leading practices of federal strategic planning, DOD stated that FVAP embraces GAO’s six selected leading practices of strategic planning, and that, as noted earlier, it will publicly issue a final strategic plan in December 2016. While FVAP’s identification of a time frame for issuing its strategic plan demonstrates progress, it also indicates that FVAP will not have a plan to guide its work through another presidential election. We noted in our report that the program did not have a strategic plan during the 2012 and 2014 general election cycles. Further, in its comments, DOD took issue with our statement that the lack of a strategic plan has hindered FVAP’s ability to respond to challenges faced in the military and overseas citizen voting environment. We disagree and continue to believe that, as discussed in our report, it will be difficult for FVAP to demonstrate progress in addressing its long-standing challenges without a strategic plan. Further, we continue to believe that a publicly available strategic plan will help FVAP communicate its role to stakeholders and customers, clearly state its program goals, and identify the metrics that FVAP will use to measure progress toward its goals and to mitigate challenges. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Chairman, Joint Chiefs of Staff; the Secretaries of the military departments, and the Commandant of the U.S. Marine Corps. This report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VIII. We reviewed 2008-14 general election survey data from the Election Assistance Commission, which show that the turnout of voters covered under the Uniformed and Overseas Citizens Absentee Voting Act has fluctuated between the mid-term and presidential elections, and that states have received a higher number of ballots from voters covered by the Act during presidential elections. In table 4 we show that, of the ballots that local election offices received, counted, and rejected during each election, the state-provided absentee ballots were the most common in each category. Further, the usage of Federal Write-in Absentee Ballots, FVAP’s write-in backup ballot for eligible UOCAVA voters who have not received their requested ballots at least 30 days before federal elections, increased between the 2008 and 2012 presidential elections. Specifically, local election offices received, counted, and rejected Federal Write-in Absentee Ballots at higher rates in the 2012 presidential election than the 2008 presidential election. The Election Assistance Commission reported that local election offices rejected absentee ballots primarily because they had received those ballots after the deadline in each election. Local election offices also rejected ballots for other reasons, such as because a voter’s name or address did not match that voter’s registration or because local election offices did not have an absentee ballot registration on file. We have made 12 recommendations related to military and overseas voting and the Federal Voting Assistance Program (FVAP) to the Department of Defense (DOD) between 2001 and 2010. All recommendations have been closed. Of the recommendations we made, eight were closed as implemented and four were closed as not implemented. In table 5, we list the 12 recommendations and summarize the status of each recommendation at the time we closed it. To determine the extent to which the Department of Defense (DOD) has identified challenges associated with its military and overseas absentee voting assistance efforts and developed plans to address those challenges, we interviewed program officials at the Federal Voting Assistance Program (FVAP); obtained relevant documents, studies, and data; and discussed their voting assistance efforts, including challenges and planned corrective actions. We interviewed the senior service voting representative and voting action officers from each of the military services, including the U.S. Coast Guard, to discuss their coordination with FVAP and management of the service voting assistance activities. We also contacted officials at other DOD organizations, the military services, other executive branch agencies, and nongovernmental organizations to discuss the challenges that FVAP faces in providing voting assistance to military and overseas voters. In table 6 we list the DOD entities, other federal agencies, and other organizations that we contacted for this review. We reviewed reports that resulted from two studies on FVAP that DOD commissioned and that were issued in 2015 and 2014, respectively. The first study, conducted by the RAND Corporation, examined FVAP’s internal operations; the second study, conducted by Lake Research Partners, identified challenges faced by overseas absentee voters, their eligible family members, DOD’s voting assistance officers, overseas citizens, and local election officials. We interviewed staff from the RAND Corporation that conducted the study of FVAP’s internal operations to discuss their views of the program and its challenges. We reviewed documentation that FVAP provided from the Lake Research Partners study, including transcripts from focus groups with voters covered under the Uniformed and Overseas Citizens Absentee Voting Act (UOCAVA), including servicemembers, their family members, and overseas citizen to identify the absentee voting challenges faced by those FVAP customers. We also reviewed and analyzed the results of post-election surveys that FVAP had conducted with the Defense Manpower Data Center and the Election Assistance Commission between 2008 and 2014. The surveys are used to determine participation in the electoral process by UOCAVA voters; assess the impact of FVAP’s efforts to simplify and ease the process of voting absentee; evaluate progress made to facilitate absentee voting; and identify remaining obstacles to voting by individuals covered by UOCAVA. These surveys include questions for the voter about the methods voters used to cast a ballot and the effectiveness of the information sources the voters consulted. The surveys also collect data from local election officials regarding the numbers of absentee ballots processed and the reasons for rejection. We determined that that FVAP’s surveys with the Defense Manpower Data Center and the Election Assistance Commission were sufficiently reliable for the purposes of our report. We reviewed communication plans and a media engagement plan that FVAP uses to promote awareness of its resources. We reviewed our previous reports on DOD’s FVAP, including the recommendations that had resulted from those reports and the status of those recommendations. In addition, we learned about challenges faced by local election officials by attending an Election Data Summit sponsored by the Election Assistance Commission, in which election officials from fourteen states spoke about challenges they face. In addition, we interviewed local election officials in Virginia and Colorado, among the states with large populations of UOCAVA voters, to discuss their perspectives on challenges associated with overseas absentee voting. We compared FVAP’s identification of and plans for addressing challenges with applicable internal control standards and relevant program management criteria. Specifically, we reviewed the plans and actions that FVAP had identified to address challenges in post-election survey reports and press releases. We compared FVAP’s actions with Standards for Internal Control in the Federal Government, which call for agencies to complete and document actions to remediate challenges on a timely basis. We also compared those actions with the Project Management Body of Knowledge practice for identifying time frames associated with projects to determine whether projects are meeting their goals. The PMBOK® Guide provides guidelines for managing individual projects, including developing a project management plan. We interviewed officials from the U.S. Postal Service and the Military Postal Service Agency to discuss the process for identifying and transmitting UOCAVA election materials and ballots, and to determine how those agencies track the transit time for UOCAVA ballots. We also obtained information regarding Military Postal Service Agency’s process for developing recommended dates by which UOCAVA voters should mail their completed ballots in order for those ballots to return in time for local election offices to count, and compared the 2016 recommended mailing times with related statutory requirements for the transmission of ballots to voters. To determine the extent to which has DOD implemented strategic planning practices to help ensure the long-term effectiveness of FVAP, we reviewed documentation of FVAP’s long-term planning, including information FVAP provides on its public website; annual budget estimates FVAP submits to the Defense Human Resource Agency, which include strategic goals and performance measures that FVAP intends to measure progress toward those goals; FVAP’s annual reports to Congress, which include FVAP’s goals and actions it intends to take to meet those goals; and documentation of the performance metrics FVAP uses to collect data to monitor its activities. We also reviewed a cooperative agreement between the Defense Human Resources Activity and the Council of State Governments related to FVAP; commissioned reports from the RAND Corporation and Lake Research Partners; and annual reports from 2008- 14 that the DOD Inspector General conducted on FVAP and the services’ implementation of their respective voting assistance programs. We interviewed relevant DOD and military service officials, as well as key stakeholder officials from the Election Assistance Commission, the Department of State, U.S. Vote Foundation, and selected local election offices, among others, to discuss their coordination with FVAP and their knowledge of FVAP’s long-term planning activities. We compared these activities with leading practices for strategic planning that we have identified in prior work, informed, in part, by requirements from the Government Performance and Results Modernization Act. Specifically, in prior work, we identified six leading practices in federal strategic planning by reviewing (1) the Government Performance and Results Act (GPRA) of 1993, as updated by the GPRA Modernization Act of 2010 (2) associated Office of Management and Budget (OMB) guidance; and (3) related leading practices that we have identified in past work. We selected the six leading practices because, according to officials, FVAP’s current strategic planning efforts are in the initial planning stage, and we judged these practices to be the most relevant to evaluating FVAP’s strategic planning activities to date. To assess whether FVAP planning activities exhibited each of the six selected leading practices in federal strategic planning, two analysts independently conducted a content analysis of documents related to DOD’s plans for its UOCAVA voter assistance program to determine the extent to which they exhibited six selected leading practices of federal strategic planning. The analysts independently rated each of the six selected leading practices as “exhibits,” “partially exhibits,” or “does not exhibit” by DOD. We determined that DOD “exhibits” a leading practice for federal strategic planning when FVAP’s activities explicitly addressed all characteristics set forth in the leading practice and determined that DOD “partially exhibits” a leading practice when FVAP’s activities addressed at least one or more characteristics of the leading practice, but not all characteristics of the leading practice. Finally, we determined that DOD “does not exhibit” a leading practice when FVAP’s activities did not address any characteristics of the leading practice. We compared the two sets of independent observations, discussed how each analyst arrived at the assigned rating, and collectively reconciled any rating differences. We conducted this performance audit from June 2015 to April 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Federal Post Card Application acts as a registration and absentee ballot request form for absent servicemembers, their families, and citizens residing outside the United States. The Federal Voting Assistance Program (FVAP) provides the Federal Post Card Application to the services for distribution to overseas voters. In addition, on its website, FVAP compiles and distributes descriptive material on state procedures related to the application and instructions for completing and sending the application. The Federal Write-in Absentee Ballot is a write-in backup ballot that absent servicemembers, their families, and citizens residing outside the U.S. can complete to vote in federal general elections. The Federal Voting Assistance Program (FVAP) provides the ballot to the services for distribution to overseas voters. In addition, FVAP compiles descriptive material on state procedures related to the ballot and provides instructions for completing and sending the ballot on its website. Servicemembers in overseas military postal locations can use Label 11- DOD to return envelopes containing completed absentee ballots via Express Mail service—the fastest mail service offered by the U.S. Postal Service—for regularly scheduled federal general elections. The U.S. Postal Service produces and supplies the label to the Department of Defense (DOD). The Joint Military Postal Activity, which monitors all postal functions for military post offices with Army Post Office, Fleet Post Office, Armed Force America, and Armed Forces Europe designations, supplies the Label-11 DOD to all Army and Fleet Post Offices. Tag 191 is developed and distributed by the U.S. Postal Service, and used by election officials to identify ballot mail prepared at the First-Class Mail or Standard Mail rates and addressed for domestic or international delivery. Although use of the tag is optional, it provides greater visibility to containers of ballot mail as they move through Postal Service processing and distribution operations. In addition to the contact named above, Kimberly Mayo, Assistant Director; Sara Cradic; Alana Finley; Rebecca Gambler; Stephanie Heiken; Tom Jessor; Mae Jones; Tamiya Lunsford; Michael McKemey; Amanda Miller; Terry Richardson; Michael Shaughnessy; Amie Lesser; and Leslie Stubbs made key contributions to this report. U.S. Postal Service: Actions Needed to Make Delivery Performance Information More Complete, Useful, and Transparent. GAO-15-756. Washington, D.C.: September 30, 2015. Elections: Observations on Wait Times for Voters on Election Day 2012. GAO-14-850. Washington, D.C.: September 30, 2014. U.S. Postal Service: Information on Recent Changes to Delivery Standards, Operations, and Performance. GAO-14-828R. Washington, D.C.: September 26, 2014. Elections: Issues Related to State Voter Identification Laws. GAO-14-634. Washington, D.C.: September 19, 2014. Elections: State Laws Addressing Voter Registration and Voting on or before Election Day. GAO-13-90R. Washington, D.C.: October 4, 2012. Elections: DOD Can Strengthen Evaluation of Its Absentee Voting Assistance Program. GAO-10-476. Washington, D.C.: June 17, 2010. Elections: Action Plans Needed to Fully Address Challenges in Electronic Absentee Voting Initiatives for Military and Overseas Citizens. GAO-07-774. Washington, D.C.: June 14, 2007. Elections: All Levels of Government Are Needed to Address Electronic Voting System Challenges. GAO-07-576T. Washington, D.C.: March 7, 2007. Elections: DOD Expands Voting Assistance to Military Absentee Voters, but Challenges Remain. GAO-06-1134T. Washington, D.C.: September 28, 2006. Elections: The Nation’s Evolving Election System as Reflected in the November 2004 General Election. GAO-06-450. Washington, D.C.: June 6, 2006. Elections: Absentee Voting Assistance to Military and Overseas Citizens Increased for the 2004 General Election, but Challenges Remain. GAO-06-521. Washington, D.C.: April 7, 2006. Election Reform: Nine States’ Experiences Implementing Federal Requirements for Computerized Statewide Voter Registration Lists. GAO-06-247. Washington, D.C.: February 7, 2006. Elections: Views of Selected Local Election Officials on Managing Voter Registration and Ensuring Eligible Citizens Can Vote. GAO-05-997. Washington, D.C.: September 27, 2005. Elections: Federal Efforts to Improve Security and Reliability of Electronic Voting Systems Are Under Way, but Key Activities Need to Be Completed. GAO-05-956. Washington, D.C.: September 21, 2005. Elections: Additional Data Could Help State and Local Elections Officials Maintain Accurate Voter Registration Lists. GAO-05-478. Washington, D.C.: June 10, 2005. Department of Justice’s Activities to Address Past Election-Related Voting Irregularities. GAO-04-1041R. Washington, D.C.: September 14, 2004. Elections: Electronic Voting Offers Opportunities and Presents Challenges. GAO-04-975T. Washington, D.C.: July 20, 2004. Elections: Voting Assistance to Military and Overseas Citizens Should Be Improved. GAO-01-1026. Washington, D.C.: September 28, 2001. Elections: The Scope of Congressional Authority in Election Administration. GAO-01-470. Washington, D.C.: March 13, 2001. | The Uniformed and Overseas Citizens Absentee Voting Act generally protects the rights of military personnel and overseas citizens to register and vote absentee in federal elections. In 2014, the most recently completed federal election, the Election Assistance Commission estimated that around 6 percent, or 8,500 of the 146,000 ballots submitted by voters covered under the act, were rejected. DOD's Federal Voting Assistance Program (FVAP) generally implements many of the act's provisions and provides absentee voting support. GAO was asked to review matters related to FVAP. GAO assesses the extent to which DOD has (1) identified challenges with its military and overseas voting assistance efforts and developed plans to address those challenges, and (2) implemented strategic planning practices to help ensure the long-term effectiveness of FVAP. GAO reviewed 2010-14 post-election surveys, 2014-15 DOD-commissioned studies, and compared documentation of FVAP plans with leading federal strategic planning practices; and interviewed FVAP officials and program stakeholders. The Department of Defense (DOD), through its Federal Voting Assistance Program (FVAP), has taken steps to identify challenges and needed improvements to its military and overseas absentee voting assistance efforts. However, two long-standing issues—limited awareness of resources for voters and the unpredictable postal delivery of absentee ballots—continue to pose challenges. DOD-commissioned studies and post-election survey results indicate that there is limited awareness of FVAP's resources among military and overseas voters. A 2015 study found, for example, that the online availability of blank ballots led to one of the most significant improvements in military and overseas absentee voting. At the same time, the full benefits of the improvement had not been realized because voters remained unaware that ballots could be requested online. Regarding the unpredictable postal delivery of absentee ballots, the timeliness of a voter's receipt or return of an absentee ballot depends on a number of variables, such as the mode and speed of transportation used to transmit mail. DOD has identified actions that it will take to address these and other issues. However, these challenges persist, in part, because DOD has not established time frames for completing the actions it has identified. DOD's implementation of FVAP partially exhibits six selected leading practices of federal strategic planning. As shown below, the program exhibits some, but not all, of the characteristics that make up each practice. According to officials, as of February 2016, DOD did not have a long-term, comprehensive strategy, such as a strategic plan, for its voting assistance program, to institutionalize existing practices and establish accountability for efforts that need further development—such as those related to the partially exhibited leading practices identified. Without a comprehensive strategic plan that institutionalizes a long-term vision, it will be difficult for FVAP to respond to the dynamic nature of the voting environment and frequent turnover in program leadership, and to demonstrate progress in addressing its long-standing challenges. GAO recommends that DOD establish time frames for actions FVAP identified to address challenges, fully implement the selected leading practices of federal strategic planning into its day-to-day operations, and develop a strategic plan that fully exhibits the six selected leading practices of federal strategic planning. DOD generally concurred with GAO's recommendations. |
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Operation Safe Home is administered by HUD’s OIG to combat violent crime and drug trafficking in public and assisted housing. It began as an anticrime initiative in February 1994 and was announced as a joint effort among HUD, the Department of Justice the Department of the Treasury, and the Office of National Drug Control Policy. To implement Operation Safe Home, the OIG—through its 11 district offices—establishes and participates in law enforcement task forces. Its partners include federal law enforcement agencies—such as the Federal Bureau of Investigation (FBI) and the Drug Enforcement Agency (DEA)—as well as state and local law enforcement agencies. The task forces investigate criminal activity in public and assisted housing, and OIG special agents conduct undercover operations, make arrests, and refer cases for criminal prosecution. As of December 2000, 280 task forces were active in numerous U.S. cities. In addition, under Operation Safe Home, the OIG facilitates the relocation of witnesses and their families who assist law enforcement efforts. According to the Inspector General’s September 1999 Semiannual Report to the Congress, the OIG had facilitated the relocation of 637 families since the beginning of Operation Safe Home. The OIG supports this activity by using HUD Section 8 vouchers set aside for this purpose. The HUD OIG has not effectively managed the Operation Safe Home funding earmarked by the Congress since fiscal year 1996. Whereas the OIG did not spend a substantial amount of the funds it allotted for Operation Safe Home law enforcement task forces between fiscal years 1996 and 2000, the OIG also estimates that--during that same period--it used other OIG funds to supplement the Operation Safe Home salaries and expenses allotment. In addition, the OIG did not have information on the amount of money allotted to and spent by each of its 280 task forces, and had only limited information on how this money was specifically spent. From fiscal year 1996 through 2001, the Congress earmarked $92.5 million to the HUD OIG to fund Operation Safe Home, and these funds are available until expended. The Congress began funding Operation Safe Home in fiscal year 1996 with $2.5 million and raised this to $10 million in fiscal year 1997. From fiscal year 1998 through 2001, the Congress annually earmarked $20 million to the OIG to administer Operation Safe Home. The OIG has allotted Operation Safe Home funds for two purposes: (1) expenses associated with law enforcement task forces such as overtime pay for local law enforcement, vehicle leasing, and training, and (2) salaries and expenses of OIG special agents working on Operation Safe Home drug and violent crime investigations and witness relocation activities. As figure 1 shows, in fiscal year 1996, the OIG allotted all of the appropriation—$2.5 million—for task force activities, and since fiscal year 1997, the OIG has split the appropriation evenly—50 percent for task force activities and 50 percent for salaries and expenses. The source of congressional funding for Operation Safe Home is the Public Housing Drug Elimination Program. The Congress established the Drug Elimination Program to provide grants to public housing authorities to reduce or eliminate drug-related crime in public housing developments. Eligible uses of this grant money include—but are not limited to— employing security personnel and making physical improvements to housing structures to increase security. As figure 2 illustrates, in fiscal year 2000, about 6 percent of the Drug Elimination Program’s appropriation was earmarked for the HUD OIG to fund Operation Safe Home. As figure 3 shows, the $20 million the OIG received in fiscal year 2000 for Operation Safe Home represented about 22 percent of the OIG’s budget for that fiscal year. The HUD OIG has not spent a substantial amount of the funds it allotted for Operation Safe Home task forces; conversely, it has expended all the funds it allotted to pay for the salaries and expenses of OIG special agents engaged in Operation Safe Home activities and has also used other OIG funds for this purpose. In particular, from fiscal year 1996 through 2000 (the last full fiscal year for which data are available) the OIG had not obligated about $10 million of the $37.5 million it allotted to fund Operation Safe Home law enforcement task forces. In addition, of the $27.5 million that had been obligated, about $8 million had not been expended by the end of fiscal year 2000. While these funds remain available to the OIG until expended, more than half of the unexpended funds were obligated in fiscal year 1999 or earlier, as shown in figure 4. We plan to review these unexpended balances as part of our budget justification review of HUD’s proposed fiscal year 2002 budget. The Inspector General told us that Operation Safe Home task force money is unobligated because the HUD OIG has received more funding than was needed. OIG officials stated that as a result, HUD’s proposed fiscal year 2002 budget request for Operation Safe Home was reduced from $20 million to $10 million, and that Operation Safe Home’s unobligated balances would finance task force activities through fiscal year 2002. In contrast to the HUD OIG not expending the task force allotment, the OIG estimates that it has used other OIG monies to pay for the salaries and expenses of special agents working on Operation Safe Home activities. Specifically, from fiscal year 1997 through fiscal year 2000 (the last full fiscal year for which data are available) the OIG allotted $35 million of Operation Safe Home earmarks for salaries and expenses. However, the OIG estimates that during this period it expended $38.9 million on salaries and expenses of special agents working on Operation Safe Home activities. Therefore, the OIG estimates that it used $3.9 million of other OIG funds—about 10 percent more than initially allotted—to pay for the salaries and expenses of special agents working on Operation Safe Home activities. The use of other OIG funds to pay for Operation Safe Home activities was permitted by law. Figure 5 illustrates the OIG's estimates of funds expended annually to pay for the salaries and expenses of OIG special agents engaged in Operation Safe Home activities. HUD OIG officials were able to provide only limited information on how the task force funds were spent. Specifically, while the OIG was able to supply overall obligation and expenditure data, it could not readily identify how much money was allotted to and obligated and expended by individual task forces. Furthermore, it could not readily provide information on what specific activities were funded. For example, HUD's accounting system could not accurately provide information on how much was expended for training and payment of overtime costs. OIG officials stated that while HUD's accounting system has specific expenditure levels—such as training and payment of overtime costs--that OIG staff rarely use and have not been required to use the more detailed levels. As figure 6 illustrates, in fiscal year 2000, 63 percent of the expenditures for task force activities were categorized as “Other.” The OIG is acting to improve accountability over funds allotted for task force activities. As a result of our review, the HUD OIG is instituting additional mechanisms to identify the funding allotted to and obligated and expended by each of its 280 task forces. The OIG has further advised its district offices to provide more detailed information on specific task force obligations and expenditures. In addition, in November 2000, the Inspector General placed some restrictions on the use of Operation Safe Home funds allotted for task force activities. These restrictions precluded the formation of additional task forces, although existing task forces continue to be funded and may request additional funding. OIG officials stated that the restrictions were necessary because of delays in contracting for the required audits of Operation Safe Home and due to allegations of misuse of funding at the OIG’s Denver office. When we completed our review, the required audit of Operation Safe Home was under way and was scheduled to be completed in July 2001, and the FBI and OIG were investigating the allegations in the Denver office (as discussed later in the report). The HUD OIG cannot accurately determine the number of arrests and convictions that have resulted from Operation Safe Home activities because the data it has maintained are unreliable. According to the OIG database, investigations stemming from Operation Safe Home have resulted in about 25,000 arrests and 500 convictions since 1994; however, these data are unreliable because they are not consistent, complete, or accurate. We found that the OIG lacked a single and reliable information system and instead used multiple data collection methods of questionable reliability. For example, the OIG: used narrative reports composed by OIG special agents to compile arrest and conviction statistics. However, the OIG had not developed guidance detailing the type of information that should be included in the narrative reports. As a result, OIG special agents could and did have differing interpretations on what to include. For example, while some OIG special agents told us they only counted arrests for which they were physically present, others counted all Operation Safe Home arrests executed by any task force participant. Also, some OIG special agents told us they only tracked federal convictions, while others tracked federal, state, and local convictions. compiled the narrative reports by highlighting discussions of arrests and convictions and then entered the data into a database. This method is highly prone to error because it relied on the interpretation of the individuals reading the narrative reports and manually identifying and transferring information. For example, we found at least 57 instances of apparent double entries of arrest data, potentially resulting in the OIG overreporting 600 arrests. maintained arrest and conviction data in its Investigator Case Management System database. This database was originally developed in 1980 to track the time and attendance of OIG special agents but was expanded in 1994 to track Operation Safe Home investigative data. OIG special agents told us the system was antiquated, cumbersome, unreliable, and highly prone to error and technical difficulties. For example, OIG staff said they frequently lost data they had entered or were “booted out” of the case management system for no apparent reason. As a result, according to one OIG official, tracking and inputting investigative data was a “huge clerical effort” and was thus often a low priority for special agents. To supplement the data collected from the systems named above, the HUD OIG also manually compiled investigative information through periodic “data calls” to district offices. These calls were meant to collect information on selected items such as indictments, prosecutions, and search warrants that have resulted from OIG investigative activities. The HUD OIG used these data collection mechanisms to compile summary data—including the number of arrests resulting from Operation Safe Home investigations—and reported to the Congress every 6 months on Operation Safe Home and its other activities. However, the OIG could not provide workpapers or documentation supporting the number of arrests reported in 12 semiannual reports to the Congress. Therefore, the arrest statistics that the OIG reported to the Congress since 1994 are neither reliable nor supportable. The HUD OIG has recognized major weaknesses in its information systems and has taken actions to improve the reliability of Operation Safe Home arrest and conviction data. For example, the OIG began working with a consultant in 1995 to develop a new information system to better manage its investigative data collection activities. The new system was implemented in March 2001. A OIG official stated that it allows OIG special agents in the field to directly input data into a single information system, and thus automates and centralizes the OIG’s investigative data collection efforts. OIG officials believe that this system will ultimately resolve reliability problems and concerns. Further, as a result of our review, the OIG is developing guidance for OIG special agents so that they consistently report arrests and convictions. We could not precisely determine the number of complaints lodged against HUD OIG special agents working on Operation Safe Home investigations because OIG officials told us that they had no central system for reporting, documenting, and addressing allegations. Instead, a Special Agent in Charge—at the OIG’s 11 district offices—adjudicated complaints filed against OIG special agents. The Assistant Inspector General for Investigations and Special Agents in Charge told us that they were aware of seven complaints lodged against OIG special agents engaged in Operation Safe Home activities from January 1997 through May of 2001. An OIG special agent executing a search warrant with local police officers was accused of excessive use of force when handcuffing residents—who were minors—during a search. The OIG investigated the complaint, found that the allegation of excessive use of force had no merit, and the OIG closed the allegation. An OIG special agent was accused of sexual harassment by a local police officer. The complaint was investigated by the OIG. The investigation disclosed that although no sexual harassment, per se, occurred, the special agent acted inappropriately and unprofessionally to the police officer and others. During the investigation, the OIG identified additional misconduct. The special agent chose to leave the OIG and therefore, the OIG closed the allegation. An OIG special agent was accused of having an improper intimate relationship with an informant. The OIG investigated the allegation and, as a result, subsequently removed the special agent from federal employment. An OIG special agent was accused of improper use of authority and other infractions. The OIG investigated the allegation and, as a result, removed the special agent from federal employment. An OIG special agent was accused of multiple offenses including mishandling evidence, insubordination, and conducting unauthorized activities. The OIG was investigating the allegation. An OIG special agent was accused of violating the guidelines of the HUD OIG Firearms Manual. The OIG was investigating the allegation. OIG special agents in the Denver district office were accused of misuse of funds, abuse of authority, and personal misconduct. The FBI and OIG were investigating these allegations. In commenting on a draft of this report, the Acting Deputy HUD Inspector General stated that the HUD OIG employs a contractor that provides it centralized information concerning allegations of misconduct filed against OIG employees, and that all complaint files were also maintained at OIG headquarters. This was not consistent with the information provided earlier by the former Assistant Inspector General for Investigations who stated that no such system existed and that all records were kept in the 11 district offices. Furthermore, during a meeting in February 2001 conducted to confirm facts ascertained during our review, OIG managers—including the Inspector General—agreed to the former Assistant Inspector General's characterization. The Acting Deputy HUD Inspector General also provided additional information concerning disciplinary actions taken against a number of OIG employees from January 2000 through January 2001. However, this information was insufficient to determine whether it included any additional allegations against OIG special agents engaged in Operation Safe Home activities. In August 2000, the HUD OIG established policies and procedures pertaining to employee misconduct that includes a centralized internal affairs investigations unit and a unified process to (1) receive and investigate allegations of employee misconduct, (2) evaluate the misconduct, and (3) where appropriate, propose disciplinary action. These new policies and procedures took effect on June 4, 2001. The HUD OIG's independence to conduct audits and investigations of HUD’s programs to reduce violent and drug-related crime in public and assisted housing is subject to question given its role in Operation Safe Home. Although the Congress has authorized the OIG to administer Operation Safe Home to combat violent and drug-related crime and has earmarked funds to the OIG for this purpose, in August 2000, we raised concerns about the impact the OIG’s role in Operation Safe Home could have on its ability to assess law enforcement activities at public and assisted housing by HUD, its grantees, and contractors. In a May 2001 letter to the Inspector General, we further explained our concerns. First, under applicable Government Auditing Standards, the OIG cannot independently and impartially audit and investigate activities it is directly involved in. Since the HUD OIG directly administers and carries out Operation Safe Home activities, the OIG cannot independently and impartially audit and investigate those activities it carries out itself. For example, OIG special agents investigate individuals committing violent or drug-related crime in public and assisted housing, and the OIG administers a funding program to compensate participating local law enforcement agencies for overtime and investigative expenses. Second, since both HUD and the HUD OIG are involved in combating violent and drug-related crime in public and assisted housing, the OIG may not be perceived as impartial when auditing HUD’s efforts to combat drugs and crime in public and assisted housing. HUD’s mission includes fostering safe and decent public housing, and HUD’s programs include various activities to reduce violent and drug-related crime in public and assisted housing in support of that mission. For example, under the Public Housing Drug Elimination program and other programs, public housing agencies receive grants to reimburse local law enforcement agencies for additional security, to reimburse local agencies to investigate and prosecute drug-related crime, and other purposes. Given that Operation Safe Home is also designed to reduce violent and drug-related crime in public and assisted housing, the OIG may not be perceived as impartial when auditing or investigating HUD programs that are also designed to accomplish the same objective. Operation Safe Home does not have the necessary information systems and management controls to ensure that HUD’s OIG managers can readily monitor the obligation and expenditure of funds and track the numbers of arrests and convictions. As a result, the OIG does not have a reliable mechanism for effectively allocating program resources or for accurately estimating its funding needs. Furthermore, in the absence of complete, consistent, or accurate information, the OIG has not had the means to accurately report the results of its investigations and thus to provide the Congress with reliable and supportable information on what Operation Safe Home has accomplished. The OIG has recognized the need for more effective management controls within Operation Safe Home and has begun to address the problems. These actions, once implemented, should improve the ability of the OIG to allocate resources more effectively, better estimate future funding needs, and more accurately measure and report the program’s accomplishments. Nevertheless, while management improvements are under way, we remain concerned about the consequences of a long-term involvement of the OIG in Operation Safe Home. The OIG cannot independently and impartially audit or investigate Operation Safe Home, and may not be perceived as impartial when auditing other similar HUD programs. For these reasons, as we stated in August 2000, Operation Safe Home raises questions about the OIG’s ability to independently audit and investigate HUD programs designed to reduce violent and drug-related crime in public and assisted housing. We believe that the Congress should consider whether the long-term involvement of the HUD OIG in Operation Safe Home is worth the actual or perceived impairment of the OIG’s independence in performing audits and investigations of HUD’s programs to reduce violent and drug-related crime in public and assisted housing. We recommend that the HUD Inspector General or the Secretary of HUD—depending on Congress’ decision regarding the involvement of the HUD OIG in Operation Safe Home—should ensure that actions begun by the Inspector General to improve the management and oversight of Operation Safe Home are fully and effectively implemented in a timely manner. Specifically, improve the accountability over Operation Safe Home task force activity funds by developing and implementing a system to track funding allotted to and obligated and expended by individual task forces, and improve the reliability of Operation Safe Home investigative data by (a) promulgating additional guidance to be used by HUD staff when inputting investigative information into the recently developed information system and (b) properly maintaining documentation supporting investigative data reported to the Congress. On June 8, 2001, the Acting Deputy Inspector General of HUD provided the HUD OIG’s written comments to a draft of this report (see app. I). The OIG agreed with our proposed recommendations and reported that it had completed actions to implement them. The OIG did not dispute our conclusions regarding its independence to conduct audits and investigations of HUD’s programs, but disagreed with other information presented in the report. Specifically, the OIG suggested that the draft report's findings lacked supporting criteria, that a number of facts presented were inaccurate, and that the conclusions were overstated given the facts presented. We believe that the HUD OIG has not yet fully implemented two of the three proposed recommendations contained in the draft report. On June 5, 2001, the OIG issued new procedures to track funding allotted to and obligated and expended by individual task forces; however, further action is needed to ensure that the OIG fully and effectively implements this system. Action also is still needed to promulgate guidance for OIG staff in reporting arrests and convictions and to establish procedures to properly maintain documentation supporting investigative data reported to the Congress. We therefore retained these recommendations in the final report. However, we agree that on June 4, 2001, the HUD OIG fully implemented its policies and procedures pertaining to employee misconduct, and we have deleted the proposed recommendation and revised the report to reflect this action. Although the HUD OIG did not dispute our conclusions regarding its independence to conduct audits and investigations of HUD’s programs to reduce violent and drug-related crime in public and assisted housing, the Acting Deputy Inspector General questioned our matter for congressional consideration that the Congress should assess whether the long-term involvement of the OIG in Operation Safe Home is worth the actual or perceived impairment of the OIG’s independence. According to the Acting Deputy Inspector General, the Congress has already considered our concerns and “apparently determined them to be without merit." We do not believe that the Congress has made any definitive statement in law or legislative history regarding the concern discussed in this report about Operation Safe Home and the OIG’s audit and investigative independence. The OIG is relying upon the absence of such a provision in a bill or proposed amendment to infer approval; however, unless there is an explanation in the legislative history or the reason is indisputably clear from the context, the effect of such an omission or deletion is inconclusive. Therefore, we made no change to our proposed matter for congressional consideration. The Acting Deputy Inspector General disagreed that the HUD OIG could not identify how much funding was allotted to and obligated and expended by Operation Safe Home task forces and that the OIG had limited information on how task force funds were spent. The Acting Deputy Inspector General stated that reliable financial information exists within the OIG but was decentralized and under the control of Operation Safe Home case agents in the field to protect sensitive and confidential investigative information. While we acknowledge that a review of field office financial records was outside the scope of our review, we disagree that it was incumbent upon us to examine, review, summarize, and aggregate records in 11 locations to reconstruct how the OIG spent its Operation Safe Home funds. Instead, we believe that the OIG is responsible for maintaining useful aggregate financial information and that confidentiality concerns do not obviate the responsibility of program managers to exercise basic oversight. OMB Circular A-127 requires that federal agency financial management systems provide “for tracking of specific program expenditures,” that they “ensure that consistent information is readily available and provided to internal managers at all levels within the organization,” and that they “be able to provide financial information in a timely and useful fashion to . . . support fiscal management of program delivery and program decisionmaking.” Without basic financial information, such as the amount of funding allotted to individual task forces and how it was spent, OIG managers did not have sufficient information to effectively allocate resources or estimate funding needs. As such, we disagree with the OIG that our conclusion that the OIG did not effectively manage Operation Safe Home funds is overly broad and made no changes to the report. The Acting Deputy Inspector General also disagreed that the HUD OIG cannot determine the number of arrests and convictions that have resulted from Operation Safe Home activities. The OIG stated that although it is developing a centralized management information system for arrest and conviction data, it is not required to have one, and that we could have accurately determined the number of arrests and convictions by reviewing or sampling the nearly 300 case files in each of the OIG’s 11 district offices. We disagree with the OIG that it is not responsible for centrally and accurately accounting for investigative information. The Inspector General Act of 1978, as amended, requires the OIG to report to the Congress on its activities semiannually, including convictions resulting from cases it refers for prosecution. While the OIG has provided investigative data to the Congress, the OIG has not fulfilled the requirement effectively because the data it has provided were unreliable and unsupportable. The OIG provided no evidence during our review concerning the accuracy of its case files, nor could it demonstrate or document whether or how such information was used to compile and report arrest and conviction data. As OMB Circular 123 stipulates, agencies “should design management structures that help ensure accountability for results.” Agencies’ “management controls” must “reasonably ensure that reliable and timely information is obtained, maintained, reported and used for decision making.” Additionally, “documentation . . . must be clear and readily available for examination.” Furthermore, the Acting Deputy Inspector General did not dispute the facts presented in our draft report supporting the conclusion that the OIG’s arrest and conviction data were unreliable and unsupportable. We therefore made no changes to the report. As discussed in the report, the Acting Deputy Inspector General disputed the statement in our draft report that the HUD OIG had no centralized system for reporting, documenting, and addressing allegations against OIG special agents. He stated that the OIG uses a contractor to maintain information concerning allegations of misconduct filed against OIG employees, and that all complaint files were also maintained at OIG headquarters. We modified the report to reflect the fact that this information was not consistent with the information provided earlier by OIG officials during our review. The Acting Deputy Inspector General also provided us additional information concerning disciplinary actions taken against a number of OIG employees from January 2000 through January 2001. As discussed in the report, we reviewed the additional information and it was not sufficient to determine whether it included any additional allegations against OIG special agents engaged in Operation Safe Home activities. In February 2001, we presented a written statement of facts concerning Operation Safe Home financial information, arrest and conviction data, and complaints filed against HUD OIG special agents to the HUD OIG. We discussed this statement of facts with the Inspector General, the Deputy Inspector General, the Assistant Inspector General of Audits, the Acting Assistant Inspector General for Management and Policy, the Assistant Inspector General for Investigations, the General Counsel, and others. At that time, all OIG officials agreed with the facts we subsequently presented in this report. For these reasons, as well as the reasons discussed above, we made no changes to the facts and conclusions presented. We have, however, made modifications where appropriate to clarify the issues presented in the report. To review Operation Safe Home issues, we reviewed HUD OIG reports, funding data, regulations, databases, and other documents, and discussed these with OIG staff in Washington, D.C., including the Assistant Inspector General for Investigations and his staff, and the Acting Assistant Inspector General for Management and Policy and his staff. We also conducted telephone interviews with the Special Agents in Charge at each of the OIG’s 11 district offices. Our review of Operation Safe Home focused on the HUD OIG’s violent and drug-related crime initiatives; however, the OIG also uses the term Operation Safe Home to encompass selected high priority white collar fraud investigations. We did not independently verify the HUD OIG’s budget and financial data. In addition, we reviewed funding data at OIG headquarters in Washington, D.C.; we did not review funding data maintained by the 11 OIG district offices. Further, our review of federal funding for Operation Safe Home was limited to the funding provided to the HUD OIG; we did not determine what funds have been expended by other federal law enforcement agencies, such as the FBI and DEA, participating in Operation Safe Home activities. To assess the reliability of arrest and conviction data, we (1) performed checks of the data for accuracy, completeness, and reasonableness and (2) interviewed OIG headquarters and field officials to learn how the information system was structured, controlled, and used. We conducted our review from November 2000 through May 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Senate Committee on Banking, Housing & Urban Affairs; the Senate Appropriations Committee; the Senate Budget Committee; the Senate Finance Committee; the Senate Governmental Affairs Committee; the House Committee on the Budget; the House Committee on Appropriations; the House Committee on Financial Services; the House Committee on Government Reform; the Office of Inspector General, Department of Housing and Urban Development; the Secretary of the Department of Housing and Urban Development; the Attorney General of the Department of Justice; the Acting Director of the Federal Bureau of Investigations; and the Administrator of the Drug Enforcement Agency. We will also make copies available to others upon request. If you have any questions regarding this report, please call me or Steve Cohen at (202) 512-7631. Key contributors to this report are listed in app. II. The following are GAO’s comments on the HUD Office of Inspector General’s (OIG) letter dated June 8, 2001. 1. We agree that, on June 4, 2001, the HUD OIG fully implemented its policies and procedures pertaining to employee misconduct, and we have deleted the proposed recommendation and revised the report to reflect this action. However, the OIG has not yet completed action on two other recommendations. While on June 5, 2001, the OIG issued new procedures to track funding obligated and expended by individual task forces, further action is needed to ensure that the OIG fully and effectively implements this system. Action is also still needed to promulgate guidance to be used by OIG staff in reporting arrests and convictions and to establish procedures to properly maintain documentation supporting investigative data reported to the Congress. 2. The HUD OIG stated that although it agreed with the recommendations it did not agree with many of the facts and conclusions supporting those recommendations. However, the OIG did not provide evidence or additional information to support its position. For example, although the OIG disagreed that it cannot accurately determine the number of arrests and convictions that have resulted from Operation Safe Home activities, it also did not dispute any of the facts we presented to support our finding that Operation Safe Home arrest and conviction data were unreliable. A more detailed analysis of the statements in the OIG's letter is presented in the comments that follow. While we made no changes to the facts and conclusions in our draft report, we made modifications where appropriate to clarify the issues presented in the report. 3. We agree that the HUD OIG does not maintain its own accounting system, and have made modifications to the report where appropriate to reflect that the OIG uses HUD’s accounting system. While we recognize there are limitations in HUD’s accounting and financial management systems and have reported on these limitations in the past, we do not believe that these limitations inherently prevent the OIG from identifying funding by individual task forces or preclude it from centrally maintaining more detailed information spending data. For example, the OIG is currently working with HUD to use HUD’s accounting system to enable it to track the use of funds by individual task forces and provide greater detail on how funds are spent. 4. We disagree that our finding that the OIG has not effectively managed Operation Safe Home funding is “overly broad.” We based this conclusion on several factors, including the OIG’s inability to readily identify how much funding was allotted to and obligated and expended by individual task forces and the limited information the OIG had centrally on how task force funds were spent. As a result, it did not have a reliable mechanism for estimating its funding needs, allocating program resources, and determining how funds were spent—and thus effectively manage its Operation Safe Home funding. We agree with the HUD OIG’s statement that administration and management responsibilities for Operation Safe Home have been largely delegated to the OIG’s 11 district offices and that decentralized financial information exists in each of those offices. We acknowledged that we did not review data maintained by the field offices; however, we do not believe that it was incumbent upon us to examine, review, summarize, and aggregate records in 11 locations to reconstruct how the OIG spent its Operation Safe Home funds. Instead, we believe that the OIG is responsible for maintaining useful aggregate financial information and that decentralization of program administration does not obviate the responsibility of headquarters program managers to exercise basic oversight. For example, Office of Management and Budget (OMB) Circular A-127 states that financial management systems should "ensure that consistent information is readily available and provided to internal managers at all levels within the organization" and that they “be able to provide financial information in a timely and useful fashion to…support fiscal management of program delivery and program decision making” (OMB Circular A-127, Financial Management Systems, July 23, 1993, www.whitehouse.gov/omb/circulars/a127/a127.html) (see also comment 13). 5. Where appropriate, we modified our discussion on the use of Operation Safe Home funds to avoid any possible inference that the HUD OIG’s allocation of funds was improper. See comments 7 through 12. 6. We disagree that this statement is inaccurate. As comment 13 discusses, our finding that information on task force expenditures was limited was based on the fact that the OIG could not readily identify the funding allotted to and obligated and expended by its individual task forces and could only account for Operation Safe Home obligations and expenditures in four broad categories. 7. While we have no objection to the OIG’s allotment of its Operation Safe Home appropriations, we disagree that the Congress “mandated” specific Operation Safe Home allotments for task force operations and salaries and expenses from fiscal year 1996 through fiscal year 2001. First, the OIG has more flexibility in allotting the funds than is stated in its letter. The Congress appropriates monies for Operation Safe Home through two set-asides in the Public Housing Drug Elimination Grant Program account contained in HUD’s annual appropriation. One of the set-asides is to “be used in connection with efforts to combat violent crime in public and assisted housing under the Operation Safe Home Program administered by the Inspector General of the Department of Housing and Urban Development.” The other set aside is “provided to the Office of Inspector General for Operation Safe Home.” See, for example, Pub. L. 106-377, 114 Stat. 1441, 1441A-24 (2000). The language of each set-aside is broad enough to permit the payment of expenses incurred by the Inspector General in carrying out Operation Safe Home. For example, the salary of an OIG agent working undercover in connection with an Operation Safe Home investigation could be funded out of either set-aside. Neither appropriation is limited as the OIG has stated. Both appropriations are available for carrying out Operation Safe Home. Second, as a technical matter, the Congress does not allot funds. It appropriates funds. Once the Congress appropriates funds, the OMB apportions the funds to assure an effective and orderly use of the appropriated funds. Upon receipt of an apportionment, the responsible agency official, consistent with the apportionment, will allot the funds among the various programs and activities for which the Congress had appropriated the funds. Thus, the “Congress appropriates, OMB apportions, and the receiving agency allots (or allocates) within the apportionment.” 1 Principles of Federal Appropriations Law Ch.1, Part D, Sec. 3.a (emphasis in original). 8. Our report does not suggest (as the HUD OIG stated on page 2 of its letter) that there is "anything wrong" with the purpose and timing of the OIG’s obligation and expenditure of Operation Safe Home funds. We made modifications to the report to more clearly outline how the OIG obligated and expended Operation Safe Home funds. 9. We do not believe, and the draft report did not state, that the existence of unexpended or unobligated balances, by itself, means that the HUD OIG has not effectively managed Operation Safe Home funds. Instead, the report’s finding that the OIG has not effectively managed Operation Safe Home funds is based on a combination of information gathered, including the OIG’s inability to readily identify how much funding was allotted to and obligated and expended by individual task forces, and the limited information it had on hand on how task force funds were spent. 10. We believe we have given the HUD OIG’s fiscal year 2002 budget request the proper emphasis. As stated in the report, we discussed our findings on unobligated and unexpended Operation Safe Home funds with HUD and HUD OIG officials in February 2001. Subsequent to this discussion, in April 2001, HUD submitted its proposed fiscal year 2002 budget requesting that the annual earmark for Operation Safe Home be reduced from $20 million to $10 million over fiscal year 2001 levels. OIG officials told us they plan to use Operation Safe Home’s unobligated balances to finance task force activities through fiscal year 2002. We made no modifications to the report. 11. As discussed in comment 7, the Congress has, in recent years, earmarked a portion of the Drug Elimination Grant Program appropriation for Operation Safe Home and the funds are transferred to the OIG Salaries and Expense account (See, e.g., Pub. L. 106-377, 114 Stat. at 1441A-24 and 1441A-48.) Our discussion in the draft report—that the OIG does not separately account for the expenditure of earmarked funds it allots for OIG salaries and expenses—was descriptive in nature and included, in the same sentence quoted in the OIG’s letter, the statement that this practice was permissible. Nevertheless, we amended our discussion to allay any concerns that we were criticizing the OIG’s practices. 12. We agree with the OIG that the balance of its Salaries and Expenses account, not solely the earmarked funds, is available to pay for salaries earned and expenses incurred in connection with Operation Safe Home. Although the draft report did not suggest otherwise, we have modified the report to make clear that the use of funds from the OIG Salaries and Expense account to pay for Operation Safe Home salaries and expenses was permitted by law. 13. We disagree that the statements in the report cited by the OIG were inaccurate. These statements were based on the fact that cognizant OIG officials could not centrally and readily identify the funding it provided to its individual task forces and could only account for Operation Safe Home obligations and expenditures in four broad categories. The OIG stated that more detailed financial records are available in OIG’s 11 field offices, suggesting that an examination of these records would have provided detailed information on Operation Safe Home task force obligations and expenditures. We acknowledge that a review of field office financial records was outside the scope of our review. However, we disagree that it was incumbent upon us to examine, review, summarize, and aggregate records in 11 locations to reconstruct how the OIG spent its Operation Safe Home funds. Instead, we believe that the OIG is responsible for maintaining useful aggregate financial information and that a decentralized program management arrangement does not obviate the responsibility of program managers to exercise basic oversight. OMB Circular A-127 requires that federal agency financial management systems provide “for tracking of specific program expenditures,” that they “ensure that consistent information is readily available and provided to internal managers at all levels within the organization,” and that they “be able to provide financial information in a timely and useful fashion to…support fiscal management of program delivery and program decision making" ” (OMB Circular A-127, Financial Management Systems, July 23, 1993, www.whitehouse.gov/omb/circulars/a127/a127.html). We also disagree that the HUD OIG cannot have useful aggregate financial information about Operation Safe Home without compromising sensitive and confidential information, or that confidentiality concerns obviate the responsibility of program managers to exercise basic oversight. It is not necessary to centrally record “every confidential informant payment, contraband purchase, or hour of police overtime” as the OIG suggests. Without basic financial information such as the amount of funding allotted to individual task forces and how it was spent, OIG managers did not have sufficient information to effectively allocate resources or estimate funding needs. In addition, the HUD OIG’s statement that entries in HUD’s accounting system “reflect the funding of task force cases and reference the corresponding case numbers” is incorrect. The OIG headquarters did not maintain financial data on Operation Safe Home by individual task forces until it issued new procedures on June 5, 2001 to track the use of Operation Safe Home task force funds by task force case number. 14. Although the HUD OIG states that its financial information must be decentralized to protect sensitive and confidential information, we noted that it has also initiated actions to centralize accounting for Operation Safe Home task force funds. We welcome this development and urge the OIG to fully and effectively implement these actions. 15. While the HUD OIG stated it disagrees that it cannot accurately determine the number of arrests and convictions that have resulted from Operation Safe Home activities, it also did not dispute any of the facts we presented to support our finding that Operation Safe Home arrest and conviction data were unreliable. For example, the OIG’s letter does not address the problems we identified in the OIG’s mechanisms to aggregate arrest and conviction data or the fact that the OIG could not provide documentation supporting the summary investigative data reported to the Congress. We therefore made no changes to the report. Further, while the OIG stated that there is no requirement for it to have a “management information system for arrest and conviction data,” it is responsible for accurately and centrally accounting for investigative information. The Inspector General Act of 1978, as amended, requires the OIG to report to the Congress on its activities semiannually, including convictions resulting from cases it refers for prosecution. While the OIG has provided investigative data to the Congress, the OIG has not fulfilled the requirement effectively because—as our report outlines—the data it has provided are unreliable and unsupportable. The OIG provided no evidence during our review concerning the accuracy of its case files, nor could it demonstrate or document whether or how such information was used to compile and report arrest and conviction data. As OMB Circular A-123 stipulates, agencies “should design management structures that help ensure accountability for results” and that “management controls are…used to reasonably ensure that reliable and timely information is obtained, maintained, reported and used for decision making” and that “documentation…must be clear and readily available for examination” (OMB Circular A-123, Management Accountability and Control, June 21, 1995, www.whitehouse.gov/omb/circulars/a123/a123.html). We welcome the implementation of a new management information system for arrest and conviction data. While we believe that it is too soon to determine if the information maintained by the new system will in fact generate reliable arrest and conviction data, we urge the OIG to fully implement the new system, including promulgating additional guidance to be used by HUD staff when inputting investigative information into the recently developed information system and to also properly maintain documentation supporting investigative data reported to the Congress. 16. The OIG states that we could have accurately determined the number of arrests and convictions by reviewing or sampling records in each of the OIG’s 11 district offices. First, as discussed in comment 15, the OIG is responsible for accurately and centrally accounting for investigative information and thus we disagree that it was incumbent upon us to collect, interpret, and summarize nearly 300 case files in 11 locations to reconstruct the number of arrests and convictions resulting from Operation Safe Home investigations. Second, the OIG offered no evidence that case file records located in its district offices were accurate. For example, although the OIG said that internal reviews of case files demonstrated that summary case data reported to OIG headquarters by the districts was accurate, the OIG did not provide these assessments, nor was it able to provide any documentation of any summary case file data reported to OIG headquarters, or to demonstrate how that information was used to generate summary data reported to the Congress. Further, given these reliability and supportability concerns, there is no evidence to suggest that arrests have been underreported. 17. The statement in the draft report—that we could not precisely determine the number and disposition of complaints filed against HUD OIG special agents engaged in Operation Safe Home activities—was based on statements from the Assistant Inspector General for Investigations and other OIG officials who told us that (a) the OIG did not have a centralized system for reporting, documenting, and addressing allegations and (b) the OIG’s 11 district offices adjudicated complaints filed against OIG special agents. Therefore, we—in coordination with OIG officials—constructed a record of allegations filed against OIG special agents engaged in Operation Safe Home activities since 1997 based on the OIG's collective institutional memory. The OIG’s letter stated that (a) the OIG has a contractor that provides it centralized information concerning allegations of misconduct filed against OIG employees and (b) all complaint files are maintained at OIG headquarters. This information was not consistent with the information provided earlier by the former Assistant Inspector General for Investigations and other OIG officials who stated that no such system existed and that all records were kept in the 11 district offices. Furthermore, during a meeting in February 2001 conducted to confirm facts ascertained during our review, OIG managers—including the Inspector General—agreed to the former Assistant Inspector General's characterization. We revised the report to explain these events and to reflect the new information provided by the HUD OIG. Along with its letter the OIG provided information obtained from its contractor concerning disciplinary actions taken against a number of OIG employees from January 2000 through January 2001. We examined this information; however, it reflected only a portion of the time frame we were examining (January 1997-May 2001) and was insufficiently detailed to determine whether it included any additional allegations against HUD special agents engaged in Operation Safe Home activities. We therefore made no changes to our statement that we could not precisely determine the number and disposition of complaints filed against HUD OIG special agents engaged in Operation Safe Home activities. 18. We agree that on June 4, 2001, the HUD OIG fully implemented a system for reporting, documenting, and addressing allegations against OIG special agents by completing the implementation of recently established policies and procedures pertaining to employee misconduct. We therefore deleted our proposed recommendation in our draft report and have revised the report to reflect this action. 19. The draft report did not suggest that the HUD OIG was required to centralize and segregate disciplinary files concerning complaints filed against OIG special agents engaged in Operation Safe Home activities. As stated in comment 17, based on information that no centralized system existed, we worked with OIG officials to construct a record of allegations filed against OIG special agents engaged in Operation Safe Home activities since 1997. However, we disagree that the OIG erred on the side of inclusion when providing us with information we requested. In fact, during the course of our review, the OIG did not provide us any of the files maintained by the Bureau of Public Debt and the OIG’s Legal Counsel’s office regarding the misconduct of OIG special agents. 20. We disagree that the reason we were not able to precisely determine the number of complaints lodged against OIG special agents engaged in Operation Safe activities was the difficulty of attributing allegations of misconduct to special agents engaged in Operation Safe Home activities versus other OIG activities. Rather, we were not able to precisely determine the number of complaints lodged against OIG special agents engaged in Operation Safe Home activities because— according to the Assistant Inspector General for Investigations and other OIG officials—the OIG did not have a centralized system for reporting, documenting, and addressing allegations. Further, as discussed in comment 17, the new information provided by the OIG was insufficient to determine whether it included any additional allegations against special agents engaged in Operation Safe Home activities. 21. We agree that the information concerning these cases would be enhanced by discussing the number of HUD OIG special agents involved in Operation Safe Home activities, and we modified the report to include this information. However, we did not compare the number of complaints lodged against OIG special agents with complaints lodged against employees of other law enforcement entities because we were not requested to do so; therefore, such a comparison was outside the scope of our review. In addition, the OIG’s statement that the draft report did not provide the period of time the complaints were received is not correct. Both the draft report and final report stated that the complaints were received from January 1997 through May 2001. 22. We do not believe that the Congress has made any definitive statement in law or legislative history regarding Operation Safe Home and the HUD OIG’s audit and investigative independence. The OIG is relying on the fact that the Congress has not enacted a provision addressing its involvement in Operation Safe Home as evidence that the Congress found these concerns to be without merit. However, it is inappropriate for the OIG to rely upon the absence of such a provision in a bill or proposed amendment to infer approval. Unless there is an explanation in the legislative history or the reason is indisputably clear from the context, the effect of such an omission or deletion is simply inconclusive. Fox v. Standard Oil Co., 294 U.S. 87, 967 (1935); See, 1 Principles of Federal Appropriations law (PFAL), 2-71 – 2-72 (2nd ed. 1991) and other cases cited therein. Therefore, we made no change to our proposed matter for congressional consideration. In addition to those named above, Anne A. Cangi, Thomas Armstrong, Edda Emmanuelli-Perez, John McGrail, Barbara Johnson, and John Shumann made key contributions to this report. | This report reviews the Department of Housing and Urban Development's (HUD) efforts to combat violent crime and drug trafficking in public housing through Operation Safe Home. GAO found that Operation Safe Home lacks the necessary information systems and management controls to ensure that HUD's Office of Inspector General (OIG) can readily monitor the obligation and expenditure of funds and track the numbers of arrests and convictions. As a result, the OIG cannot reliably allocate program resources or accurately estimate its funding needs. Furthermore, in the absence of complete, consistent, or accurate information, the OIG cannot Congress with reliable and supportable information on Operation Safe Home's accomplishments. The OIG recognizes the need for more effective management controls within Operation Safe Home and has begun to address the problem. These actions, once implemented, should help the OIG to allocate resources more effectively, better estimate future funding needs, and more accurately measure and report the program's accomplishments. However, GAO remains concerned about OIG's long-term involvement in Operation Safe Home. The OIG cannot independently and impartially audit or investigate Operation Safe Home, and may not be perceived as impartial when auditing other similar HUD programs. For these reasons, Operation Safe Home raises questions about the OIG's ability to independently audit and investigate HUD programs designed to reduce violent and drug-related crime in public and assisted housing. |
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In fiscal year 2000, VA’s Veterans Health Administration (VHA) provided primary and specialty medical care to approximately 3.2 million veterans at a cost of about $18 billion. VA’s pharmacy benefit cost approximately $2 billion—about 12 percent of the total VHA budget—and provided approximately 86 million prescriptions. In contrast, 10 years ago VA’s pharmacy benefit represented about 6 percent of VA’s total health care budget. Health care organizations’ efforts to control pharmacy costs and improve quality of care include (1) implementing formularies that limit the number of drug choices available; (2) establishing financial incentives, such as variable copayments, to encourage the use of formulary drugs; (3) using compliance programs, such as prior authorization, that encourage or require physicians to prescribe formulary drugs; and (4) developing clinical guidelines for prescribing drugs. VA does not have authority to use financial incentives to encourage compliance with its formulary. VA provides outpatient pharmacy services free to veterans receiving medications for treatment of service-connected conditions and to low-income veterans whose incomes do not exceed a threshold amount. Other veterans who have prescriptions filled by VA may be charged $2 for each 30-day supply of medication. In 1995, VA began transforming its delivery and management of health care to expand access to care and increase efficiency. As part of this transformation, VA decentralized decision-making and budgeting authority to 22 VISNs, which became responsible for managing all VA health care. VISNs were given substantial operational autonomy. Although VISN and medical center directors are held accountable in annual performance agreements for meeting certain national and local goals, attaining formulary goals has not been part of their performance standards. VA medical centers began using formularies as early as 1955 to manage their pharmacy inventories. Because of the geographic mobility of VA patients, VA officials believed that a national formulary would improve veterans’ continuity of care. In September 1995, VA established a centralized group to manage its pharmacy benefit on a nationwide basis. In November 1995, VISNs were established, and the Under Secretary for Health directed each VISN to develop and implement a VISN-wide formulary. To develop their formularies, the VISNs generally combined existing medical center formularies and eliminated rarely prescribed drugs. VISN formularies became effective on April 30, 1996. Also in 1996, the Congress required VA to improve veterans’ access to care regardless of the region of the United States in which they live. As part of its response, VA implemented a national drug formulary on June 1, 1997, by combining the core set of drugs common to the newly developed VISN formularies. In addition to the national and VISN formularies, a few medical centers retained their own formularies. VA’s Pharmacy Benefits Management Strategic Healthcare Group (PBM) is responsible for managing the national formulary list, maintaining databases that reflect drug use, and monitoring the use of certain drugs. VISN directors are responsible for implementing and monitoring compliance with the national formulary, ensuring that VISN restrictions placed on national formulary products are appropriate, and ensuring that a nonformulary drug approval process is functioning in all of their medical centers. As all formularies do, VA’s national formulary limits the number of drug choices available to health care providers. VA’s formulary lists more than 1,100 unique drugs that are assigned to 1 of 254 drug classes—groups of drugs similar in chemistry, method of action, or purpose of use. After performing reviews of drug classes representing the highest costs and volume of prescriptions, VA decided that some drugs in 4 of its 254 drug classes were therapeutically interchangeable—that is, essentially equivalent in terms of efficacy, safety, and outcomes—and therefore had the same therapeutic effect. This determination allowed VA to select one or more of these drugs for its formulary to seek better prices through competitively bid committed-use contracts. Other therapeutically equivalent drugs in these classes were then excluded from the formulary. These four classes are known as “closed” classes. VA has not made clinical decisions regarding therapeutic interchange in the remaining 250 drug classes, and it does not limit the number of drugs that can be added to these classes. These are known as “open” classes. In some cases, drugs listed on the national formulary may be restricted. Restrictions are generally placed on the use of drugs if they have the potential to be used inappropriately. For example, restrictions are placed on drugs with potentially serious side effects, such as interferon, which is used to treat such conditions as hepatitis C. VA has also adopted guidelines to assist practitioners in making decisions about the diagnosis, treatment, and management of specific clinical conditions, such as congestive heart failure. In addition, VA has adopted criteria to help standardize treatment, improve the quality of patient care, and promote cost-effective drug prescriptions. Finally, VA limits prescribing privileges for some drugs to specially trained physicians and requires consultation with a specialist before certain drugs can be prescribed. VA has made significant progress in establishing a national formulary, with most drugs being prescribed from the formulary list. Nevertheless, VA’s oversight has not been sufficient to ensure that it is fully achieving its national formulary goal of standardizing its drug benefit nationwide. We found that some facilities have omitted required national formulary drugs. In addition, the extent to which VISNs add drugs to supplement the national formulary has the potential for conflicting with VA’s ability to achieve standardization if not closely managed. Also, we found that some facilities, contrary to policy, have modified the list of drugs available in closed classes. Almost 3 years after VA facilities were directed to make available locally all national formulary drugs, two of the three medical centers we visited did not list all national formulary drugs in the formularies used by their prescribers. VHA’s national formulary policy directive states that items listed on the national formulary shall be made available throughout the VA health care system and must be available in all VA facilities. While a physical supply of all national formulary drugs is not required to be maintained at all facilities, if a clinical need for a particular formulary drug arises in the course of treating a patient, it must be made available to the patient. Many drugs listed on the national formulary were not available as formulary choices in two of the three medical centers we visited. In the first, about 25 percent (286 drugs) of the national formulary drugs were not available as formulary choices. These included drugs used to treat high blood pressure and mental disorders, as well as drugs used to treat the unique medical needs of women. At the second medical center, about 13 percent (147 drugs) of the national formulary drugs were omitted, including drugs used to treat certain types of cancer and others used to treat stomach conditions. Health care providers at these two medical centers were required to seek nonformulary drug approvals for over 22,000 prescriptions of national formulary drugs from October 1999 through March 2000. If the national formulary had been properly implemented at these medical centers, prescribers would not have had to use extra time to request and obtain nonformulary drug approvals for these drugs, and patients could have started treatment earlier. Our analysis showed that over 14,000 prescriptions were filled as nonformulary drugs for 91 of the 286 drugs at the first center. No prescriptions were filled for the remaining 195 drugs. At the other medical center, over 8,000 prescriptions for 23 of the 147 drugs were filled as nonformulary drugs. No prescriptions were filled for the remaining 124 drugs. VA’s policy allowing VISNs to supplement the national formulary locally has the potential for conflicting with VA’s ability to achieve standardization if not closely managed. From June 1997 through March 2000, VISNs added 244 unique drugs to supplement the list of drugs on the national formulary. The number of drugs added by each VISN varies widely, ranging from as many as 63 by VISN 20 (Portland) to as few as 5 by VISN 8 (Bay Pines). (Fig. 1 shows the number of drugs added by each VISN.) Adding drugs to supplement the national formulary is intended to allow VISNs to be responsive to the unique needs of their patients and to allow quicker formulary designation of new FDA-approved drugs. However, the wide variation in the number of drugs added by the VISNs to supplement the national formulary raises concern that this practice, if not appropriately monitored, could result in unacceptable decreases in formulary standardization. VA officials have acknowledged that this variation affects standardization and told us they plan to address it. For example, the PBM plans to review new drugs when approved by the FDA to determine if they will be added to the national formulary or if VISNs may continue to add them to their formularies to supplement the national formulary. The medical centers we visited also inappropriately modified the national formulary list of drugs in the closed classes. Contrary to VA formulary policy, two of three medical centers added two different drugs to two of the four closed classes, and one facility did not make a drug available (see fig. 2). While our analysis was performed at the medical center level, the IOM found similar nonconformity at the VISN level. Specifically, IOM reported that 16 of the 22 VISNs modified the list of national formulary drugs for the closed classes. From October 1999 through March 2000, 90 percent of VA outpatient prescriptions were written for national formulary drugs. The percentage of national formulary drug prescriptions filled by individual VISNs varied slightly, from 89 percent to 92 percent. We found wider variation among medical centers within VISNs—84 percent to 96 percent (see table 1). The remaining 10 percent of prescriptions filled systemwide were for drugs VISNs and medical centers added to supplement the national formulary or for nonformulary drugs. VA’s PBM and IOM estimate that drugs added to supplement the national formulary probably account for about 7 percent of all prescriptions filled and nonformulary drugs account for approximately 3 percent of all prescriptions filled. However, at the time of our review, VA’s nationwide data could identify a filled prescription only as either a national formulary drug or not. Without specific information, VA does not know if the additions are resulting in an appropriate balance between local needs and national formulary standardization. VA officials told us that they are modifying the database to enable it to identify which drugs are added to supplement the national formulary and which are nonformulary. Medical center approval processes for nonformulary drugs are not always timely, and the amount of time needed to obtain such approvals varied widely across medical centers. In addition, some VISNs have not established processes to collect and analyze data on nonformulary requests. As a result, VA does not know if approved requests met its established criteria or if denied requests were appropriate. Although the national formulary directive requires certain criteria for approval of nonformulary drugs, it does not dictate a specific nonformulary approval process. As a result, the processes health care providers must follow to obtain nonformulary drugs differ among VA facilities regarding how requests are made, who receives them, who approves them, and how long it takes. In addition, IOM documented wide variations in the nonformulary drug approval process. Figure 3 shows the steps prescribers must generally follow to obtain nonformulary and formulary drugs. The person who first receives a nonformulary drug approval request may not be the person who approves it. For example, 61 percent of prescribers reported that nonformulary drug requests must first be submitted to a facility pharmacist, 14 percent said they must first be submitted to facility pharmacy and therapeutics (P&T) committees, and 8 percent said they must first be sent to service chiefs. In contrast, 31 percent of prescribers reported that it is a facility pharmacist who approves nonformulary drug requests, 26 percent said that the facility P&T committee approves them, and 15 percent told us that the facility chief of staff approves them. The remaining 28 percent reported that various other facility officials or members of the medical staff approve nonformulary drug requests. The time required to obtain approval for use of a nonformulary drug varied greatly depending on the local approval processes. The majority of prescribers (60 percent) we surveyed reported that it took an average of 9 days to obtain approval for use of nonformulary drugs. But many prescribers also reported that it took only a few hours (18 percent) or minutes (22 percent) to obtain such approvals. During our medical center visits, we observed that some medical center approval processes are less convenient than others. For example, to obtain approval to use a nonformulary drug in one facility we visited, prescribers were required to submit a request in writing to the P&T committee for its review and approval. Because the P&T committee met only once a month, the final approval to use the requested drug was sometimes delayed as long as 30 days. The requesting prescriber, however, could write a prescription for an immediate 30-day supply if the medication need was urgent. In contrast, in another medical center we visited, a clinical pharmacist was assigned to work directly with health care providers to help with drug selection, establish dose levels, and facilitate the approval of nonformulary drugs. In that facility, clinical pharmacists were allowed to approve the use of nonformulary drugs. If a health care provider believed that a patient should be prescribed a nonformulary drug, the physician and pharmacist could consult at the point of care and make a final decision with virtually no delay. Prescribers in our survey were almost equally divided on the ease or difficulty of getting nonformulary drug requests approved (see table 2). Regardless of whether the nonformulary drug approval process was perceived as easy or difficult, the vast majority of prescribers told us such requests were generally approved. According to our survey results, 65 percent of prescribers sought approval for a nonformulary drug in 1999. These prescribers reported that they made, on average, 25 such requests (the median was 10 requests). We estimated that 84 percent of all prescribers’ nonformulary requests were approved. When a nonformulary drug request was disapproved, 60 percent of prescribers reported that they switched to a formulary drug. However, more than one-quarter of the prescribers who had nonformulary drug requests disapproved resubmitted their requests with additional information. The majority of prescribers we surveyed told us they were more likely to convert VA patients who were on nonformulary drugs obtained at another VA facility to formulary drugs than to request a nonformulary drug (see table 3). Consequently, patients who move from one area of the country to another or temporarily seek care in a different VA facility are likely to be switched from a nonformulary drug to a formulary drug. VA’s national formulary policy requires that a request to use a nonformulary drug be based on at least one of six criteria: (1) the formulary agent is contraindicated, (2) the patient has had an adverse reaction to the formulary agent, (3) all formulary alternatives have failed therapeutically, (4) no formulary alternative exists, (5) the patient has previously responded to the nonformulary agent and risk is associated with changing to the formulary agent, and (6) other circumstances involving compelling evidence-based reasons exist. Each VISN is responsible for establishing a process to collect and analyze data concerning nonformulary drug requests. Contrary to the national formulary policy, not all VISNs have established a process to collect and analyze nonformulary request data at the VISN and local levels. Twelve of VA’s 22 VISNs reported that they do not collect information on approved and denied nonformulary drug requests. Three VISNs reported that they collect information only on approved nonformulary drug requests, and seven reported that they collect information for both approved and denied requests. Consequently, data that could help VISNs, medical centers, and the PBM offices are not always collected and analyzed for trends in a systematic manner. Such information could help VA at all levels to determine the extent to which nonformulary drugs are being requested and whether medical center processes for approving these requests meet established criteria. In its report, IOM noted that inadequate documentation could diminish confidence in the nonformulary process. Seventy percent of VA prescribers in our survey reported that the formulary they use contains the drugs their patients need either to a “great extent” or to a “very great extent.” Twenty-seven percent reported that the formulary meets their patients’ needs to a “moderate extent,” with 4 percent reporting that it meets their patients’ needs to “some extent.” No VA prescribers reported that the formulary meets their patients’ needs to a “very little or no extent.” This is consistent with IOM’s conclusion that the VA formulary “is not overly restrictive.” Overall, two and one-half times as many prescribers indicated that the formulary they currently use “helps” or “greatly helps” their ability to prescribe drugs as those who said it “hinders” or “greatly hinders” them (see table 4). Some prescribers reported that the formulary they use helps them keep current with new drugs and helps remove some of the pressures created by direct-to-consumer advertising. Other prescribers reported that newly approved drugs are not made available on the national formulary as soon as they would like, and some reported their frustration with delays experienced when certain formulary drugs must be approved by specially trained physicians before they can be prescribed. Prescribers we surveyed reported they were generally satisfied with the national formulary. We asked prescribers who said that they had worked for VA before the national formulary was established whether the current formulary does a better job of keeping the list of drugs in the drug classes from which they most frequently prescribe up to date, as compared with the formulary they used to use. Three-quarters told us that they had worked for VA before the national formulary was implemented in June 1997. Thirty- eight percent of these prescribers reported that the national formulary was “better” or “considerably better” than previous formularies. About half (48 percent) indicated that the current formulary was “about the same” as the one it replaced. Seven percent reported that it was “worse” or “considerably worse” than previous formularies. Few veterans have complained about not being able to obtain the drugs they believe they need. At the VA medical centers we visited, patient advocates told us that veterans made very few complaints concerning their prescriptions. In its analysis of the patient advocates’ complaint databases, IOM found that less than one-half of one percent of veterans’ complaints were related to drug access. IOM further reported that complaints involving specific identifiable drugs often involved drugs that are marketed directly to consumers, such as sildenafil (Viagra), which is used to treat erectile dysfunction. Fifty-one percent of the prescribers in our survey reported that over the past 3 years, an increasing number of their patients have requested a drug they have seen or heard advertised in the media. Our review also indicated that the few prescription complaints made were often related to veterans’ trying to obtain “lifestyle” drugs or refusals by VA physicians and pharmacists to fill prescriptions written by non-VA health care providers. VA officials told us that VA does not fill prescriptions written by non-VA-authorized prescribers, in part to ensure that one practitioner manages a patient’s care. Over the past 3½ years, VA has made significant progress in establishing its national formulary, which has generally met with prescriber acceptance. Prescribers reported that veterans are generally receiving the drugs they need and that veterans rarely register complaints concerning prescription drugs. VA has not provided sufficient oversight, however, to ensure that VISNs and medical centers comply with formulary policies and that the flexibility given to them does not unduly compromise VA’s goal of formulary standardization. Contrary to VA formulary policy, some facilities omitted national formulary drugs or modified the closed drug classes. While adding a limited number of drugs to supplement the national formulary is permitted, as more drugs are added by VISNs, formulary differences among facilities are likely to become more pronounced, decreasing formulary standardization. While VA recognizes the trade-off between local flexibility and standardization, it lacks criteria for determining the appropriateness of adding drugs to supplement the national formulary. Consequently, VA cannot determine whether the resulting decrease in standardization is acceptable. Not all VISN directors have met their responsibilities for implementing national formulary policy. Inefficiencies that exist in the nonformulary drug approval processes across the system can cause delays in making final treatment decisions. In addition, the processes require health care provider time and energy that might be better used for direct patient care. We believe a more efficient nonformulary drug approval process could enable facilities to benefit from lessons learned in other locations. Finally, VISNs lack the data needed to analyze nonformulary drug requests to determine whether all approved requests met approval criteria and all denied requests were appropriate. In order to ensure more effective management of the national formulary, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following actions: Establish a mechanism to ensure that VISN directors comply with national formulary policy. Establish criteria that VISNs should use to determine the appropriateness of adding drugs to supplement the national formulary and monitor the VISNs’ application of these criteria. Establish a nonformulary drug approval process for medical centers that ensures appropriate and timely decisions and provides that veterans for whom a nonformulary drug has been approved will have continued access to that drug, when appropriate, across VA’s health care system. Enforce existing requirements that VISNs collect and analyze the data needed to determine that nonformulary drug approval processes are implemented appropriately and effectively in their medical centers, including tracking both approved and denied requests. In commenting on a draft of this report, VA agreed with our findings and concurred with our recommendations. VA highlighted key improvements planned or already in progress that should further enhance the process. VA’s actions to address our recommendations are summarized below. VA plans to improve oversight at all organizational levels to help facilitate consistent compliance with national formulary policy. In its comments, VA discussed important components of improving compliance with the national formulary, including examining data to identify outliers. However, VA did not articulate a mechanism for ensuring that its oversight results in consistent compliance, which may reduce the effectiveness of its planned actions. VA plans to establish criteria for VISNs to use to determine the appropriateness of adding drugs to supplement the national formulary. VA plans to establish steps for its nonformulary drug approval process that all medical centers and VISNs must follow. However, in its comments, VA did not specifically address how veterans would have continued access to previously approved nonformulary drugs across VA’s health care system. We believe such access is important. VA plans to establish steps for reporting its nonformulary approval activities. In its comments, VA did not explicitly include tracking of denied requests as part of the nonformulary approval activities. We expect that its nonformulary approval activities will include tracking denied requests, as well as approved nonformulary drug requests, to determine the appropriateness of all medical center prescribing decisions. VA plans to implement these corrective actions by June 2001. Its comments are included in appendix II. We are sending copies of this report to the Honorable Anthony J. Principi, Secretary of Veterans Affairs; appropriate congressional committees; and other interested parties. We will also make copies available to others upon request. Please call me at (202) 512-7101 if you or your staff have questions about this report or need additional assistance. Another contact and staff acknowledgments are listed in appendix III. To obtain policies and procedures from the 22 Veterans Integrated Service Networks (VISN), we mailed a questionnaire to each of the 22 VISN formulary leaders—pharmacists or physicians who serve on the Department of Veterans Affairs’ (VA) Pharmacy Benefits Management advisory board. To determine the extent to which VA health care providers write prescriptions for national formulary drugs, we analyzed data from VA’s national outpatient prescription database. To assess the implementation of the national formulary and obtain firsthand opinions about it, we interviewed medical and administrative staff at three VA medical centers located in three different VISNs. To obtain VA health care providers’ views on VA’s formulary, including whether or not it is restrictive, we mailed a questionnaire to a nationally representative sample of 2,000 VA health care prescribers. We also used information contained in the Institute of Medicine’s Description and Analysis of the VA National Formulary, issued in June 2000. To obtain policies and procedures from the 22 VISNs, we mailed a questionnaire to VISN formulary leaders. We asked if there were VISN- wide policies for several areas, including adding drugs to the VISN formulary, requesting nonformulary drugs, converting patients from one drug to another, and tracking requests for nonformulary drugs. In addition, we sought information on the number of drugs added to and dropped from the VISN formulary, the number of requests for nonformulary drugs, and the number of requests that were approved and denied. All 22 VISN formulary leaders completed and returned questionnaires. VA’s national database on outpatient prescriptions contains information for each outpatient prescription filled at each VA medical center, including the drug prescribed, date of the prescription, patient and prescriber identifiers, medical center responsible for filling the prescription, and whether the prescribed drug is a national formulary drug. We used this database to develop a sample of VA health care providers who wrote prescriptions, determine the total number of outpatient prescriptions filled at VISNs and VA medical centers, determine the number of filled outpatient prescriptions written for national formulary drugs within a certain time frame, and determine how many VISN formulary drug prescriptions were filled in the three VISNs where we performed site visits. We interviewed PBM headquarters officials who had either oversight or maintenance responsibility for the database to help assess the validity and reliability of the outpatient prescription data. We also performed our own analytic checks of the data. We found that data critical to our analysis—the data field indicating whether a prescription had been written for a national formulary drug—contained errors. We worked with PBM officials to correct the data, and they implemented a monthly routine to detect and correct these errors in the future. We reran our data checks, verified that the database had been corrected, and concluded that the data were acceptable for the purposes of our work. To assess formulary implementation at the local level, we interviewed medical and administrative staff at three different VA medical centers—one located in Biloxi, Mississippi (VISN 16); one in Gainesville, Florida (VISN 8); and one in Omaha, Nebraska (VISN 14). We selected these VISNs and medical centers on the basis of formulary drug use from October through December 1999, the period for which the most recent and complete data were available at the time we did our work. For example, VISN 8 had the highest percentage of prescriptions for national formulary drugs (93 percent), VISN 16’s percentage of national formulary drug prescriptions was at the national average (90 percent), and VISN 14 had the lowest percentage of prescriptions filled using national formulary drugs (88 percent). We mailed questionnaires to a representative sample of 2,000 VA health care prescribers whose prescriptions had been dispensed from October 1 through December 31, 1999, to obtain their opinions and experiential data on various aspects of VA’s national formulary. We drew this random sample from VA’s most recent national outpatient prescription database—a data file that contains information, including a prescriber identifier, on all outpatient prescriptions filled in the VA health care system. We mailed questionnaires to the entire sample of prescribers on April 17, 2000, with follow-up mailings on May 17 and June 21 to those who had not responded by those dates. We accepted returned questionnaires through September 1, 2000. Some prescribers’ responses indicated that they did not write prescriptions for drugs; their prescription privileges were limited to medical and surgical supplies, such as diabetic strips and food supplements. Other returned questionnaires indicated that the addressee had either left or retired from VA. These providers were thus considered ineligible for our purposes and were removed from the sample. Approximately 11 percent of the questionnaires were returned as undeliverable, and we received no response from approximately 16 percent of those to whom we mailed questionnaires. After adjusting the sample accordingly, we determined the number of useable returned questionnaires to be 1,217—a response rate of about 69 percent. (See table 5.) Because this was a simple random sample, we believe that our results are projectable to all of VA’s health care providers who have outpatient drug prescribing privileges. Surveys based on a sample are subject to sampling errors. Sampling error represents the extent to which a survey’s results differ from what would have been obtained had everyone in the universe of interest received and returned the same questionnaire—in this case, all VA health care providers who have outpatient drug prescribing privileges. Sampling errors have two elements: the width of the confidence interval around the estimate (sometimes referred to as the precision of the estimate) and the confidence level at which the confidence interval is computed. The confidence interval reflects the fact that estimates actually encompass a range of possible values, not just a single value, or a “point estimate.” The interval is expressed as a point, plus or minus some value. For example, in our questionnaire, we asked prescribers, “To what extent does your VA formulary contain the drugs you believe your patients need?” The percentage of respondents who reported a “great extent” or “very great extent” was 69.1. This particular question had a confidence interval of plus or minus 2.6 percentage points. Thus, the “true” answer for this question may or may not be 69.1 percent, but it has a high probability of falling between 66.5 and 71.7 percent (69.1-percent point estimate, plus or minus 2.6 percentage points). Confidence intervals vary for individual questions (depending upon how many of the individuals who could have answered a question actually did so), but, unless otherwise noted, all percentages presented in this report are within a range of plus or minus 3.5 percentage points. The confidence level is a measure of how certain we are that the “true” answer lies within a confidence interval. We used a 95-percent confidence level, which means that if we repeatedly took new samples of prescribers from the October through December prescription database and performed the same analysis of their responses each time, 95 percent of these samples would yield estimates that would fall within the confidence interval stated. In the previous example, this means that we are 95-percent certain that between 66.5 and 71.7 percent of prescribers believe that the VA formulary contains to a “great extent” or “very great extent” the drugs they believe their patients need. Surveys can also be subject to other types of systematic error or bias that can affect results, known as nonsampling errors. One potential source of nonsampling error can be the questionnaire itself. To ensure that questions were clear and unbiased, we consulted with subject matter and questionnaire experts within GAO and obtained comments from individuals representing VA’s PBM and medical advisory panel, a working group of 11 practicing VA physicians and 1 practicing Department of Defense physician who help manage VA’s national formulary, as well as individuals representing the Institute of Medicine. Finally, the questionnaire was tested with 14 VA prescribers in VA medical centers in four locations: Phoenix, Arizona; Washington, D.C.; Hampton, Virginia; and Cincinnati, Ohio. Prescribers were asked to provide demographic and VA employment information as well as opinions about the relevance and usefulness of VA’s formulary. On average, VA prescribers in our sample have worked for VA for 11 years, with most of those years at their current medical facility. Physicians and nurses constitute the largest groups of prescribers (65 and 15 percent, respectively), followed by physician assistants (7 percent) and other allied health professionals, such as dentists (14 percent). Most of the prescribers’ time working in VA is spent treating patients—on average, 26 hours each week. According to the national prescription file from which we drew our sample, VA prescribers who completed our questionnaire averaged 849 prescription fills from October through December 1999, the 3- month period we chose as the basis of our survey. The median number of filled prescriptions was relatively low—252—because a few prescribers had a large number of prescriptions filled during the period, while many prescribers had only a few prescriptions filled. George Poindexter, Stuart Fleishman, Mike O’Dell, and Kathie Kendrick made key contributions to this report. State Pharmacy Programs: Assistance Designed to Target Coverage and Stretch Budgets (GAO/HEHS-00-162, Sept. 6, 2000). Prescription Drug Benefits: Applying Private Sector Management Methods to Medicare (GAO/T-HEHS-00-84, Mar. 22, 2000). VA Health Care: VA’s Management of Drugs on Its National Formulary (GAO/HEHS-00-34, Dec. 14, 1999). Prescription Drug Benefits: Implications for Beneficiaries of Medicare HMO Use of Formularies (GAO/HEHS-99-166, July 20, 1999). Defense Health Care: Fully Integrated Pharmacy System Would Improve Service and Cost-Effectiveness (GAO/HEHS-98-176, June 12, 1998). 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) | During the last three years, the Department of Veterans Affairs (VA) has made significant progress in establishing its national drug formulary, which has generally met with the prescriber acceptance. Most veterans are receiving the drugs the need and rarely register complaints about prescription drugs. However, VA has not been sufficient to ensure that the Veterans Integrated Service Networks (VISN) and medical centers comply with formulary policies and that the flexibility given to them does not compromise VA's goal of formulary standardization. Contrary to VA formulary policy, some facilities omitted national formulary drugs or modified the closest drug classes. Although a limited number of drugs to supplement the national formulary is permitted, formulary differences among facilities are likely to become more pronounced, as more drugs are added by VISNs, decreasing formulary standardization. VA recognizes the trade-off between local flexibility and standardization, but it lacks criteria for determining the appropriateness of adding drugs to supplement the national formulary and therefore may not be able to determine whether the decrease in standardization is acceptable. |
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The West Bank and Gaza cover about 2,400 square miles and have a combined population of about 4.6 million people. The West Bank has a land area of 2,263 square miles and a population of about 2.8 million. Gaza has a land area of 139 square miles and a population of about 1.8 million. The Palestinian Authority and Israel administer areas in the West Bank, and the Hamas-controlled de facto authorities control Gaza (see fig. 1). Since Hamas’ takeover of control in Gaza in June 2007, USAID has adjusted U.S. assistance to Gaza to take into account this factional and geographical split between Fatah and Hamas and to comply with U.S. law and policy. The U.S. government’s foreign assistance program in the West Bank and Gaza is designed, among other things, to support development assistance, provide critical infrastructure programming, and improve security conditions on the ground while reinforcing Palestinian respect for the rule of law. USAID’s role is to assist in building institutions for an eventual Palestinian state that result from a comprehensive peace agreement to promote a viable economy and to improve everyday lives of Palestinians, according to USAID. In September 2015, we reported on the five development sectors administered by the USAID mission from fiscal years 2012–2014. Our analysis from that report indicated the following information by sector: Water resources and infrastructure. The primary objective of USAID’s largest project in this sector is to focus on the rehabilitation and construction of roads, schools, water, and wastewater projects. Health and humanitarian assistance. The primary objective of USAID’s largest project in this sector is to focus on food security, including meeting food needs, enhancing food consumption, and increasing the dietary diversity of the most vulnerable and food- insecure non-refugee population. Democracy and governance. The primary objective of the largest project in this sector is to address infrastructure recovery needs through improvements in community infrastructure and housing, economic recovery, and development through the creation of income generation and business development opportunities. Private enterprise. The primary objective of USAID’s largest project in this sector is to strengthen the competitiveness and export potential of at least four sectors: agriculture and agribusiness, stone and marble, tourism, and information technology. Education. The primary goal of USAID’s largest program in this sector is to improve access to quality education and mitigate challenges to youth development in marginalized areas of the West Bank. According to USAID, since September 2015, the USAID mission has reorganized its work along three new lines: (1) governance and civic engagement; (2) water, energy, and trade; and (3) social services and humanitarian assistance. In March 2006, the USAID West Bank and Gaza mission approved and issued various antiterrorism policies and procedures for program assistance for the West Bank and Gaza in a document known as Mission Order 21, which it last updated in October 2007. In 2008, the USAID mission developed a key compliance review process to monitor compliance with antiterrorism policies and procedures. This process is reflected in formal mission notices. In response to federal laws and executive orders prohibiting assistance to entities or individuals associated with terrorism, in March 2006, the USAID mission adopted a key administrative policy document known as Mission Order 21. The stated purpose of Mission Order 21, last amended in 2007, is to describe policies and procedures to ensure that the mission’s program assistance does not inadvertently provide support to entities or individuals associated with terrorism. Such procedures include (1) vetting, (2) obtaining antiterrorism certifications, and (3) including specific mandatory provisions in award documents. Mission Order 21 is intended to balance development efforts in the West Bank and Gaza with ensuring that the assistance does not benefit entities or individuals who engage in terrorist activity, according to a senior USAID official. The vetting requirements in Mission Order 21 apply to certain contractors and subcontractors, recipients of grants and cooperative agreements, trainees / students, and recipients of cash or in-kind assistance, with some exceptions. All program awards are required to have a reference to Mission Order 21, according to USAID. Mission Order 21 requires that certain individuals and non-U.S. organizations undergo vetting, which involves checking their names and other identifying information against databases and other sources to determine if they have any identified links to terrorism. Non-U.S. organizations are cleared by vetting their key individuals regardless of nationality, including U.S. citizens. The vetting process provides reasonable assurance that program assistance is “not provided to or through any individual, private or government entity, or educational institution that is believed to advocate, plan, sponsor, engage in, or has engaged in, terrorist activity.” Applicable vetting is required before an award is made or assistance is provided. Appendix II provides more detailed information on USAID’s vetting process. Mission Order 21 Vetting Requirements Mission Order 21 requires USAID’s West Bank and Gaza mission to vet the following: All non-U.S. prime awardee and subawardee organizations or individuals proposed for a contract or subcontract above $25,000. The $25,000 threshold is cumulative for multiple awards to the same organization or individual within a rolling 12-month period. All non-U.S. prime awardee and subawardee organizations or individuals (other than public international organizations) proposed to receive cash or in-kind assistance under a cooperative agreement, grant, or subgrant, regardless of the dollar amount. All non-U.S. individuals who receive USAID-financed training, study tours, or invitational travel in the United States or third countries, regardless of the duration; or who receive training in the West Bank and Gaza lasting more than 5 consecutive work days. All entities or specifically identified persons who directly receive other forms of cash or in-kind assistance, with the following exceptions (these thresholds apply to assistance per occasion): individuals who receive jobs under employment generation activities, individuals who receive cash or in-kind assistance of $1,000 or less, organizations that receive cash or in-kind assistance of $2,500 or less, households that receive micro-enterprise loans or cash or in-kind assistance of $5,000 or less, and, vendors of goods or services acquired by USAID contractors and grantees in the ordinary course of business for their own use. Non-U.S. organizations are cleared by vetting their key individuals regardless of nationality, including U.S. citizens. In addition, Mission Order 21 also provides that even if vetting would not otherwise be required under these rules, vetting will be conducted whenever there is reason to believe that the beneficiary of assistance or the vendor of goods or services commits, attempts to commit, advocates, facilitates, or participates in terrorist acts, or has done so in the past. Mission Order 21 provides specific details on how vetting procedures will be operationalized and the information implementing partners need to provide to specific entities within the USAID mission. Attachments to Mission Order 21 include a form that prime awardees must use to provide the particular details necessary to conduct vetting of an individual or entity as well as required language that must be incorporated in USAID-funded awards for the West Bank and Gaza program. Mission Order 21 requires that all U.S. and non-U.S. organizations sign an antiterrorism certification before being awarded a grant or cooperative agreement to attest that the organization does not provide material support or resources for terrorism. The antiterrorism certification is generally an attachment to the award documentation that certifies, in part, that the “recipient did not provide…and will take all reasonable steps to ensure that it does not and will not knowingly provide material support or resources to any individual or entity that commits, attempts to commit, advocates, facilitates, or participates in terrorist acts.” Mission Order 21 requires that all prime awards and subawards for contracts, grants, and cooperative agreements contain two mandatory provisions (which are included as clauses in award documents): a provision prohibiting support for terrorism and a provision restricting funding to facilities that recognize or honor an individual or entity that commits or has committed terrorism. These two mandatory provisions inform awardees of their legal duty to (1) “prohibit transactions with, and the provisions of resources and support to, individuals and organizations associated with terrorism” (antiterrorism clause) and (2) restrict “assistance for any school, community center, or other facility named after any person or group of persons that has advocated, sponsored, or committed acts of terrorism” (facility naming clause). Both mandatory clauses must be incorporated in agreements at the time of signature. In July 2008, the USAID mission established a post-award compliance review function under the Office of Contracts Management to assess implementing partners’ compliance with the requirements of the antiterrorism procedures contained in Mission Order 21 when making subawards. This function was detailed to implementing partners in a July 2008 notice issued by the USAID mission. In 2009, we reported that USAID had enhanced its Mission Order 21 oversight efforts by hiring a compliance specialist and implementing a new compliance review process that provides additional assurance over contract and grant management. These recurring, detailed reviews were developed specifically to examine implementing partners’ subaward compliance with Mission Order 21 in USAID’s program assistance for the West Bank and Gaza. Since 2009, the internal compliance review process has been an essential control function that allows USAID to provide reasonable assurance that all prime awardees are in compliance with all applicable requirements when making subawards and providing funding for trainees. The compliance specialist uses a checklist to assess implementing partners’ subaward compliance in four categories: (1) the proper vetting of subawardees and beneficiaries, (2) the timely incorporation of the antiterrorism certificate, (3) the timely incorporation of applicable mandatory provisions, and (4) monthly subaward reporting. To conduct these compliance reviews, the compliance specialist assesses policies, procedures, and program activities associated with an awardee, interviews relevant implementing partners’ staff, conducts periodic site visits, and inspects subaward documentation. The compliance specialist produces an official compliance review report and provides feedback to the prime awardee regarding any weaknesses in compliance identified during the review. According to these reports, throughout the review process the compliance specialist educates relevant prime awardee staff members about the Mission Order 21 requirements and informally shares best practices and suggestions with the prime awardee to help improve compliance in the future. In addition to identifying weaknesses in compliance, the reports also include a general observations section documenting noncritical, compliance-related issues identified during the review process. These observations are organized into three categories: (1) subaward reporting, (2) internal control over compliance with Mission Order 21, and (3) the cross-referencing of incorporated special mandatory provisions. This general observations section includes recommendations on how prime awardees can improve their policies and procedures to strengthen their compliance environment and avoid compliance-related issues in the future. Implementing partners are granted 2 weeks following receipt of the compliance review report to provide a written response to explain the reasons for any identified weaknesses in compliance and to outline the corrective actions the prime awardee will take to mitigate them, according to USAID. The compliance specialist follows up with the implementing partner to ensure that responses to address any identified weaknesses in compliance are submitted on time and to check on the sufficiency of the corrective actions stated by the implementing partner, according to USAID. USAID officials told us that following up to ensure that all weaknesses in compliance have been sufficiently resolved is a key aspect of the overall compliance review process. Failure to comply with vetting, as outlined in Mission Order 21, may lead to disallowance of costs incurred by the prime awardee if the organization or individual in question is found to be ineligible to receive USAID funds, according to USAID. The compliance specialist, the acquisition supervisor, and the director of the Office of Contracts Management meet with senior USAID mission officials annually to present the outputs, analysis, and notable findings of the compliance review cycle, according to USAID. In addition, common issues identified during the compliance reviews are shared with the mission’s Program Support Unit and the Resident Legal Officer so that they can address such issues in future Mission Order 21 training sessions for prime awardees. The compliance review function is a key control in the mission’s assistance program because it assesses the quality of the mission’s antiterrorism oversight over time. The compliance review process and procedures are described in a series of stand-alone documents, such as notices issued by the mission to implementing partners involved in assistance programs (see fig. 2). For example, in December 2012 the mission issued a notice to implementing partners detailing new compliance review protocols that expand the scope of the compliance reviews to include a better understanding of the implementing partner’s internal controls in addition to Mission Order 21 compliance. This and other pertinent formal notices are posted on USAID’s West Bank and Gaza website. According to officials in the mission, the contents of the notices and compliance with Mission Order 21 are discussed in each program award orientation meeting with implementing partners. No new formal notices related to the compliance review have been issued since the end of 2012 because the latest guidance remains effective and there have been no changes to the process since the issuance of the latest notice, according to USAID. USAID officials told us that they anticipate updating Mission Order 21 at some point in the future to reflect lessons learned from implementation of a joint USAID and State Partner Vetting System Pilot Program that vets both U.S. and non-U.S. persons, as well as lessons learned from ongoing vetting programs for the West Bank and Gaza, Afghanistan, and Syria assistance. One purpose of the pilot program is to help assess the extent to which partner vetting adds value as a risk mitigation tool, and if so, under what circumstances vetting should occur, according to USAID. Under the pilot program, USAID will test vetting policies and procedures, evaluate the resources required for vetting, and seek input from implementing partners, Congress, and other stakeholders about the impact of vetting on USAID-funded delivery of foreign assistance. USAID currently is implementing the pilot program in Guatemala, Kenya, Lebanon, the Philippines, and Ukraine. GAO reviewed USAID’s compliance reviews, the official reporting documents created during the compliance review function described above. That review and GAO’s examination of prime awards and a generalizable sample of subawards from fiscal years 2012–2014 found that USAID generally complied with requirements for vetting as well as inclusion of required antiterrorism certification and mandatory provisions in awards. Our review was based on the following documentation relating to prime awards and subawards: USAID’s internal compliance reviews of 24 prime awardees and the more than 14,000 subawards that they made. The compliance review reports USAID provided to us identified some weaknesses in prime awardees’ compliance with all aspects of Mission Order 21 requirements when making subawards and providing funding for trainees, including vetting, antiterrorism certification, and mandatory provisions. However, according to USAID officials, all noncompliance weaknesses identified in the compliance review reports for active awards were addressed as part of the overall compliance review process. According to USAID, prime awardees are required to amend applicable subaward documentation to incorporate the mandatory provisions if the subawards are ongoing and active. Prime awardees are not required to amend documentation for subawards that have already expired and are no longer active. GAO’s review of 48 prime awards and a random generalizable sample of 158 subawards associated with these prime awards, covering the period of fiscal years 2012–2014. We found that USAID complied with the three applicable Mission Order 21 requirements for all prime awards we reviewed. In addition, we found that 155 of the 158 subawards reviewed in our random generalizable sample complied with applicable Mission Order 21 requirements. Below, we discuss in more detail the findings of each set of documentation, in terms of vetting and inclusion of required antiterrorism certification and mandatory provisions in awards. In addition, we discuss an instance where the USAID mission during the course of our review self-reported an error in vetting that was subsequently resolved. USAID’s internal compliance review reports identified instances of noncompliance with applicable vetting. In the universe of 14,436 subawards assessed by the compliance review reports provided by USAID, 1 prime awardee failed to vet a subawardee. In addition, 4 prime awardees collectively failed to vet a total of 18 non-U.S. individuals taking part in USAID-funded trainings in the West Bank (see table 1). Specifically, one of these prime awardees did not obtain valid vetting approval for 15 students participating in a U.S.- funded academic program. These prime awardees were required to address all noncompliance weaknesses and obtain the proper vetting approvals for the subawardee and all applicable trainees, according to USAID. The compliance review reports also identified 11 prime awardees that obtained late vetting approval, after the subawards were signed, across 23 subawards. In addition, 3 prime awardees conducted similar late vetting for 219 USAID-funded trainees. Most of these instances of late vetting for trainees occurred when a single prime awardee failed to obtain valid vetting approval for 167 non-U.S. individuals prior to the start date of their USAID-funded academic program. USAID’s compliance review reports identified one prime awardee that obtained late vetting approval targeting 4 beneficiaries of direct cash or in-kind assistance. According to USAID, all noncompliance weaknesses in vetting procedures identified in the compliance review reports provided to GAO have been resolved, and there were no instances of USAID providing funding to any individual or entity that ultimately did not pass vetting. GAO’s review found that prime awards were in compliance and subawards were generally in compliance with vetting requirements. We found that 11 of the 48 prime awards we reviewed required vetting according to Mission Order 21 because they were with non-U.S. organizations and, if contracts, had a value of more than $25,000. Our review of vetting information provided by USAID found that the vetting was conducted for all 11 of these prime awardees, and eligibility decisions were made prior to the signing of the awards, consistent with Mission Order 21. We also found that 29 of the 91 subawards (in our universe of 158 subawards) that went to non-U.S. organizations had a contract value or a time and cost amendment value of more than $25,000 and thus required vetting. Based on vetting information provided by USAID, vetting was conducted and eligibility decisions were made prior to the signing of the award in 28 out of the 29 instances, in compliance with Mission Order 21. However, vetting was obtained in 1 instance after the award was signed. USAID’s internal compliance review reports identified one instance of noncompliance with antiterrorism certification requirements. The compliance review reports identified a single instance where a prime awardee failed to obtain an antiterrorism certificate from a subawardee. According to USAID officials, this prime awardee was required to amend the subaward paperwork to include the antiterrorism certificate. GAO’s review found that prime awards and subawards were in compliance with antiterrorism certification requirements. We found that 16 of the 48 prime awards were grants or cooperative agreements and thus required a signed antiterrorism certification. All 16 prime awards contained a signed antiterrorism certification that was signed in advance of the award. We found that 4 of the 158 subawards were grants or cooperative agreements and therefore required an antiterrorism certification. All 4 subawards contained a signed antiterrorism certification that was signed in advance of the award. USAID’s internal compliance review reports identified noncompliance with the two mandatory provision requirements. The reports identified 9 prime awardees that collectively made a total of 449 subawards without the two mandatory provisions included. Specifically, the majority of these instances were the result of a single prime awardee failing to include the mandatory provisions in 378 of its subawards. According to USAID officials, the 9 prime awardees were required to amend the subaward paperwork to include the mandatory provisions if the awards were still active. GAO’s review found that prime awards were in compliance with the two mandatory provisions requirements and the subawards were generally in compliance. All 48 prime awards made by USAID contained the mandatory provision antiterrorism clause and the facility naming clause in the award documents. Of the 48 prime awards, 2 were made to the United Nations, which is defined as a public international organization, and contained differently worded clauses than for nongovernmental organizations. We found that 155 of the 158 subawards, or 98 percent, included the mandatory antiterrorism clause and facility naming clause. Specifically, based on the subaward documents provided by USAID, we found one instance where the antiterrorism clause and facility naming clause were not present in the award documentation. We also found two instances where the facility naming clause was not included in the award documentation. We estimate that there are 100 errors in our overall subaward universe population of 8,744 as it relates to whether mandatory clauses are present in the subawards. During the course of our review, the USAID mission contacted us after identifying an instance in which USAID erroneously provided funds to an organization that did not pass vetting, but subsequently determined that there was no indication of misuse of funds. According to the mission, the vetting error involved a previously cleared subawardee that had a change in a key individual in September 2014. A USAID official in the Program Support Unit entered the new individual’s information manually into the Partner Vetting System and in the process of cross-referencing records, the official mistook the new key individual for a previously vetted and cleared key individual of the organization, as these two individuals had similar names. As a result, the vetting package submitted to the USAID Office of Security’s Counterterrorism Branch erroneously included the formerly cleared individual and not the new individual. In June 2015 the subawardee resubmitted information to USAID for vetting because of another change in key individuals. The Program Support Unit compiled the vetting package and submitted it to the USAID Office of Security’s Counterterrorism Branch, which then sent back an ineligibility recommendation for one of the key individuals listed for the subawardee. According to USAID, a review of the Partner Vetting System audit trail led to the conclusion that in 2014 this key individual was mistaken for a former key individual with a similar name. According to the mission, it immediately communicated the ineligibility decision to the prime awardee, who communicated this information to the subawardee and accordingly did not proceed with the proposed award extension. According to mission officials, once they became aware of the error in vetting, the mission performed a financial assessment to determine if there was any misuse of the U.S. government funds, which had been provided to the subawardee, totaling about $77,000. The review concluded that adequate supporting documents were presented for the payments, both the prime awardee and subawardee had adhered to the terms and conditions of the subawards when making disbursements of funds, and therefore there was no indication of misuse. According to USAID, the mission promptly implemented a new policy to prevent such human error from recurring and also promptly notified both GAO and USAID’s Regional Inspector General of the error. We provided a draft of this report to State and USAID for comment. State provided no comments, and USAID provided technical comments that were incorporated, as appropriate. We are sending copies of this report to appropriate congressional committees, the Administrator of USAID, and the Secretary of State. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to the report are listed in appendix IV. This report examines the extent to which (1) the U.S. Agency for International Development (USAID) has established antiterrorism policies and procedures for program assistance for the West Bank and Gaza and (2) USAID complied with requirements for vetting, antiterrorism certification, and mandatory provisions for program assistance for fiscal years 2012–2014. To examine the extent to which USAID has established antiterrorism policies and procedures for program assistance for the West Bank and Gaza, we identified and reviewed relevant legal requirements as well as USAID policies and procedures to comply with those requirements. These legal and other requirements are contained in U.S. federal laws and executive orders. Mission Order 21 is the primary document that details the procedures to comply with applicable laws and executive orders to help ensure that assistance does not provide support to entities or individuals associated with terrorism. The effective date of the most recent version of Mission Order 21 is October 3, 2007, and it has not been updated since then, according to USAID officials. We also reviewed memorandums and notices issued by the USAID West Bank and Gaza mission that pertain to USAID’s antiterrorism compliance review process and reminders about Mission Order 21 updates. To examine the extent to which USAID complied with its antiterrorism policies and procedures for program assistance for the West Bank and Gaza, we interviewed officials from USAID’s Office of Inspector General regarding its oversight requirements, and results of audits of West Bank and Gaza assistance programs against Mission Order 21 requirements. We examined documentation on USAID’s policies and procedures for monitoring prime awardees’ compliance with Mission Order 21 when making subawards and reviewed USAID’s formal compliance review process. We looked at 23 audit reports conducted under the direction of USAID’s Regional Inspector General and covering all prime awardees that received fiscal year 2012, 2013, or 2014 Economic Support Fund (ESF) assistance. We also reviewed and analyzed all 47 compliance review reports provided to us that were conducted by USAID’s compliance specialist on 24 prime awardees during fiscal years 2012, 2013, and 2014. We analyzed these antiterrorism compliance review reports to assess and compile all noncompliance weaknesses with Mission Order 21 identified by USAID in four categories: (1) the proper vetting of subawardees and beneficiaries, (2) the timely incorporation of the antiterrorism certificate, (3) the timely incorporation of applicable mandatory provisions, and (4) subaward reporting. We also followed up with relevant USAID officials regarding these identified noncompliance weaknesses and the policies and practices USAID had in place to ensure that such weaknesses were addressed. To determine the extent to which the USAID West Bank and Gaza mission complied–at the prime and subaward levels–with its vetting requirements as well as inclusion of antiterrorism certification and mandatory provisions for program assistance to provide reasonable assurance that its programs do not provide support to entities or individuals associated with terrorism, we reviewed key legal and other requirements as well as USAID’s policies and procedures for ensuring compliance with Mission Order 21. We discussed the USAID mission’s implementation of Mission Order 21 with the USAID Deputy Mission Director, senior staff, the regional legal advisor, program staff, and other officials responsible for managing assistance projects and overseeing contracts, grants, and cooperative agreements at the USAID mission in Tel Aviv, Israel, and the U.S. Consulate in Jerusalem. We also interviewed several of USAID’s implementing partners that had received relatively large dollar contracts from USAID. In addition, we interviewed State, USAID, and other officials involved in vetting USAID award recipients. We focused our review on the mission’s prime award contracts, grants, and cooperative agreements that were made using Economic Support Fund (ESF) programming for fiscal years 2012–2014 as well as applicable subawards made by the prime awards during this time period. We selected this time period because it covers the last fiscal year that we reported on in our 2012 report and also represents the most recently available data. The mission provided us with copies of all 48 prime awards issued during this time frame and the relevant documentation to support proof of vetting of key individuals and the presence of antiterrorism certifications and mandatory provisions in awards. To determine whether subawards complied with relevant Mission Order 21 requirements, we examined a final random generalizable sample of 91 subawards made to non-U.S. organizations and 67 subawards made to U.S. organizations for a total of 158 subawards. Initially, we selected a random sample of 174 subawards. However, the random sample decreased to 158 subawards because of various issues such as missing data, duplicates of awards, and errors identified by the mission in subaward reporting by the prime awardee. We selected these random generalizable samples from a universe of 8,744 subawards for fiscal years 2012 through 2014 identified by the mission based on subaward activity reported to the mission by prime awardees. The universe included 8,521 non-U.S. organizations and 223 U.S. organizations. The mission developed the universe by taking the 48 prime awards that we had received and reviewed and identifying the corresponding subaward reports made by each prime award. Some of the prime awards did not make any subawards during the time frame that we examined. In total, the mission identified 37 of the 48 prime awards that had subawards reported. According to the mission, the subaward reports track the subaward awarded in a certain period of time and have no association with the fiscal year funding it received. Further, according to the mission, their main objective in developing the subaward universe for us was to track the vetting threshold by including all the individual subawards as well as their cost and time modifications that could trigger the vetting requirement per Mission Order 21. As a result, our subaward sample included several cost modifications and time extensions to awards. We reviewed vetting information provided by USAID for all 11 prime awards made to non-U.S. organizations and a sample of 29 subawards made to non-U.S. organizations. The remaining 37 prime awards and 129 subawards were made to U.S. organizations, and were therefore not subject to vetting. We compared the vetting date to the award date to determine if the mission vetted the appropriate non-U.S. organizations prior to the date of award. We found that of the 91 subawards in our sample, 29 subawards went to non-U.S. organizations that had a contract value or a time and cost amendment value of more than $25,000 and thus required vetting. Based on vetting information provided by USAID, vetting was conducted and eligibility decisions were made prior to the signing of the award in 28 out of the 29 instances, in compliance with Mission Order 21. However, vetting was conducted in 1 instance after the award was signed. To understand USAID’s vetting process, we interviewed various mission officials, including the head of the Program Support Unit, which is the division responsible for the vetting process. We also reviewed snapshots of the Partner Vetting System (PVS), the system in which partner information is inputted, as well as training material related to the PVS to understand the vetting process. To determine whether required antiterrorism certifications were obtained, we reviewed applicable documentation provided by USAID for 16 prime awards and 4 subawards that were grants or cooperative agreements to determine if antiterrorism certifications were included in the award and signed prior to the date of the award. We determined that the16 prime awards and the 4 subawards contained a signed antiterrorism certification that was signed in advance of the award. To determine whether the prime awards and subawards contained mandatory provisions, specifically two mandatory clauses, we reviewed applicable documentation for each award to determine if the clauses were present. We reviewed 48 prime awards to determine if both the antiterrorism and facility naming clauses were present in the award before it was signed. We determined that all 48 prime awards had the mandatory clauses in the award before it was signed. For the subawards, we reviewed all 158 subawards to determine if mandatory clauses were present in the awards before it was signed. We used electronic searches to identify copies of the two clauses as efficiently as possible. We obtained the award documents from USAID in the form of scanned PDF files and used Adobe Acrobat Pro XI to convert them into machine- readable text. This conversion was generally reliable but sometimes introduced misspellings or other anomalies. We wrote Python code that performed keyword searches on each of the 260 PDF files for apparent instances of the two clauses. Each time the program found a potential match, it computed the edit distance between the clause the search identified and the actual boilerplate clause. We then identified the candidate match for each award with the shortest edit distance from each clause and produced a document listing the best potential match for each clause in each award and a link to the PDF page from which we extracted each potential match. The search program treated all of the PDFs associated with a single award as a group and identified candidate matches, for example very likely matches, for both clauses in almost all of the awards. A GAO analyst manually reviewed each potential match on the original PDF and either confirmed that it was the required clause or not. If the computer did not find a match, we reviewed the entire award document to determine whether the required clause was present. Based on our review, we found three instances where mandatory clauses were missing from the award. We conducted this performance audit from July 2015 to April 2016, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. This appendix provides information on the vetting process for awards to non-U.S. implementing partners (awardees) receiving U.S. government funding, including contracts, grants, cooperative agreements, and training, based on USAID documents and information from officials. A typical vetting process starts with the implementing partner, or prime awardee, submitting through an online portal, the Partner Vetting System (PVS), a completed Partner Information Form that has the names and identifying information of the organization’s key individuals, according to the USAID mission. The prime awardee has access to the online portal to submit the Partner Information Form and also collects and submits the needed vetting data from proposed recipients of subawards. Figure 3 provides details of the steps in the vetting process for awards. In a small number of cases, the implementing partner, or prime awardee, does not have access to the online portal, and hard copy forms are sent directly to USAID’s vetting team, known as the Programs Support Unit (PSU), which inputs the information into the PVS. The information submitted online or on hard copy is checked by vetting assistants at the USAID mission to ensure that it is complete and is a valid request. The information is compiled for a vetting package that is submitted through the portal to the USAID Office of Security’s Counterterrorism Branch (SEC/CT) at the Terrorist Screening Center in the United States. Until August 2015 the vetting package to be submitted to the SEC/CT was compiled by one member of the PSU team. In response to a vetting error identified in July 2015, the USAID mission implemented a new policy that requires an additional check of vetting packages submitted to the SEC/CT. The new process requires that a separate member of the PSU team verify that packages submitted to the SEC/CT include all key individuals listed in the Partner Information Form. If the organization or individual submitted for vetting is found to have no derogatory information by the SEC/CT, analysts at the SEC/CT enter an eligible determination into PVS. If the proposed award is a contract or training, the PVS generates an automatic notification to the Contracting/Agreement Officer’s Representative (C/AOR) and the vetting is a one-step process. The C/AOR notifies the awardee of the results. If the proposed award is a cash grant or in-kind assistance, following an eligible recommendation from the SEC/CT, the request is then sent to the Consulate General for a second vetting step. If the organization vetted by the Consulate General is also deemed eligible, results are entered into PVS, and an automatic notification is sent to the C/AOR who notifies the awardee of the results. If the SEC/CT finds derogatory information related to an organization or individual submitted for vetting, the SEC/CT analyzes the information to determine if an ineligible recommendation is warranted. If an ineligible recommendation is warranted, the SEC/CT, drafts an assessment of the derogatory information to the Supervisory Program Support Specialist, according to the USAID mission. The Consulate General follows a similar notification process if an organization submitted for vetting results in an ineligible recommendation. In both cases, the Supervisory Program Support Specialist reviews the derogatory information and consults with key mission vetting officials who have been granted the appropriate security clearance and have a need- to-know. The C/AOR may also be asked to provide an impact assessment to evaluate the potential consequences for the implementation of the program should a particular prospective implementing partner be found ineligible. If the mission would like to consider an award notwithstanding an ineligible finding by the SEC/CT, the mission refers the case to the Vetting Working Group, located in the U.S. Consulate General in Jerusalem. The Vetting Working Group is a multiagency group, responsible for reconciling derogatory vetting information obtained by U.S. agencies implementing programs in the West Bank and Gaza, according to the mission. The group meets on an ad-hoc basis and recommends eligibility or ineligibility based on consensus, with the final decision made by the Consul General. For cases that are not referred to the Vetting Working Group, the Deputy Mission Director has the authority to make final ineligibility decisions, according to the mission. Once a final determination is made by either the Consulate General or the Deputy Mission Director, the Supervisory Program Support Specialist enters this determination into PVS and an automatic notification is sent to the C/AOR. The Contracting/Agreement Officer Representative notifies the awardee of the results. If a program awardee has been approved through the vetting process, the approval generally remains valid for that particular award for up to 3 years from the date of the award. However, new vetting is required in several circumstances. First, vetting is required if there is a change in the awardee’s key individuals. Key individuals include principal officers of the organization’s governing body, the principal officer and deputy principal officer of the organization, the program manager or chief of party, and any other persons with significant responsibility for administration of USAID- financed activities or resources. Second, new vetting is also required for any new awards or extensions of existing awards if more than 12 months have passed since the awardee was last approved. Third, new vetting is required for cost extension of awards when the total cost of the subaward including with the additional cost exceeds $25,000. USAID may rescind vetting approval if the agency obtains information that an awardee or any of the key individuals is or has been involved in terrorist activity, according to USAID. In addition to the contact named above, Judy McCloskey (Assistant Director), Andrea Riba Miller (Analyst-in-Charge), Bryan Bourgault, and Ria Bailey-Galvis made key contributions to this report. Ashley Alley, Martin de Alteriis, Justin Fisher, Jeffrey Isaacs, Debbie Chung, Brian Egger, Robert Letzler, and Oziel Trevino provided additional assistance. Foreign Aid: U.S. Assistance for the West Bank and Gaza for Fiscal Years 2012–2014. GAO-15-823. Washington, D.C.: September 22, 2015. Foreign Assistance: U.S. Assistance to the West Bank and Gaza for Fiscal Years 2010 and 2011. GAO-12-817R. Washington, D.C.: July 13, 2012. Foreign Assistance: U.S. Assistance to the West Bank and Gaza for Fiscal Years 2008 and 2009. GAO-10-623R. Washington, D.C.: May 14, 2010. Foreign Assistance: Measures to Prevent Inadvertent Payments to Terrorists under Palestinian Aid Programs Have Been Strengthened, but Some Weaknesses Remain. GAO-09-622. Washington, D.C.: May 19, 2009. Foreign Assistance: U.S. Assistance to the West Bank and Gaza for Fiscal Years 2005 and 2006. GAO-07-443R. Washington, D.C.: March 5, 2007. Foreign Assistance: Recent Improvements Made, but USAID Should Do More to Help Ensure Aid Is Not Provided for Terrorist Activities in West Bank and Gaza. GAO-06-1062R. Washington, D.C.: September 29, 2006. | Since 1993, the U.S. government has committed more than $5 billion in bilateral assistance to the Palestinians in the West Bank and Gaza. Program assistance for development is a key part of the United States' commitment to a negotiated two-state solution to promote peace in the Middle East, and program funding is primarily administered by USAID. Congress included a provision in the law for GAO to conduct an audit of all funds provided for programs in the West Bank and Gaza, including the extent to which programs comply with certain antiterrorism requirements. This report examines the extent to which (1) USAID has established antiterrorism policies and procedures for program assistance for the West Bank and Gaza and (2) USAID complied with requirements for vetting, antiterrorism certification, and mandatory provisions for program assistance for fiscal years 2012–2014. GAO reviewed antiterrorism laws, policies, procedures, and USAID documents that pertain to assistance programs and interviewed USAID and State officials. GAO also assessed a random generalizable sample of 158 awards to USAID's implementing partners using funds provided in fiscal years 2012–2014 from the Economic Support Fund account to determine the extent to which the awards were granted in compliance with antiterrorism policies and procedures. In 2006, the U.S. Agency for International Development (USAID) issued key antiterrorism policies and procedures—known as Mission Order 21 (the order)—to help ensure that program assistance for the West Bank and Gaza would not inadvertently provide support to entities or individuals associated with terrorism. The order, updated in 2007, outlines requirements and procedures for (1) vetting, or investigating a person or entity for links to terrorism; (2) obtaining an antiterrorism certification from awardees; and (3) including in awards two mandatory provisions that prohibit support for terrorism and restrict funding to facilities named after terrorists. In 2008, USAID West Bank and Gaza established a post-award compliance review process to identify weaknesses in compliance with applicable requirements in the order, which USAID works to resolve. This process is a key function that allows USAID to provide reasonable assurance that all prime awards and subawards are in compliance with the order. The compliance review process is described in notices issued by the mission from 2008 to 2012. For the purposes of this report, a prime awardee is an organization that directly receives USAID funding to implement projects, while a subawardee is an organization that receives funding from prime awardees. USAID's compliance reviews and GAO's examination of prime awards and subawards for fiscal years 2012-2014 found that USAID generally complied with requirements for vetting and inclusion of antiterrorism certification and mandatory provisions in awards. Regarding vetting, the compliance review reports—which covered more than 14,000 subawards—found, for example, one subawardee and 18 trainees for which no vetting was conducted. According to USAID, the subawardee and trainees were subsequently vetted and found eligible for program assistance. GAO's review of a random generalizable sample of 158 subawards found that 157 had applicable vetting conducted before the award. Regarding antiterrorism certification requirements, the compliance reviews identified one instance where a prime awardee failed to obtain an antiterrorism certification from a subawardee. GAO's review found that both prime awards and subawards were in compliance with antiterrorism certification requirements. Regarding mandatory provisions, the compliance reviews identified nine prime awardees that made a total of 449 subawards without including the two provisions. GAO's review found that 155 subawards (98 percent) had included the provisions in the award documentation. USAID required noncompliant awardees to provide antiterrorism certification and mandatory provisions for active awards, according to USAID. GAO is not making any recommendations in this report. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
Because large numbers of Americans lack knowledge about basic personal economics and financial planning, U.S. policymakers and others have been focusing on financial literacy, i.e., the ability to make informed judgments and to take effective actions regarding the current and future use and management of money. While informed consumers can choose appropriate financial investments, products, and services, those who exercise poor money management and financial decision making can lower their family’s standard of living and interfere with crucial long-term goals. One vehicle for promoting the financial literacy of Americans is the congressionally created Financial Literacy and Education Commission. Created in 2003, the Commission is charged with (1) developing a national strategy to promote financial literacy and education for all Americans; (2) coordinating financial education efforts among federal agencies and among the federal government, state and local governments, non-profit organizations, and private enterprises; and (3) identifying areas of overlap and duplication among federal financial literacy activities. To minimize financial burdens on servicemembers, DOD has requested and Congress has increased cash compensation for active duty military personnel over the last 5 years. For example, the average increases in military basic pay have exceeded the average increases in private-sector wages for each of the past 5 years. Also, DOD has a plan to totally eliminate out-of-pocket expenses that servicemembers pay when living in private-sector housing from 19 percent in fiscal year 2000 to zero in fiscal year 2005. Furthermore, in April 2003, Congress increased the family separation allowance from $100 to $250 per month and hostile fire/imminent danger pay from $150 to $225 per month for eligible deployed servicemembers. The family separation allowance is designed to provide compensation for servicemembers with dependents for the added expenses incurred because of involuntary separations such as deployments in support of contingency operations like Operation Iraqi Freedom. The expenses include extra childcare costs, automobile maintenance, or home repairs the deployed servicemember would normally do while home. Hostile fire/imminent danger pay provides special pay for “duty subject to hostile fire or imminent danger” and is designed to compensate servicemembers for physical danger. Iraq, Afghanistan, Kuwait, Saudi Arabia, and many other nearby countries have been declared imminent danger zones. In addition to these special pays, some or all income that active duty servicemembers earn in a combat zone is tax free. Since at least the 1980s, the military services have offered PFM programs to help servicemembers address their financial conditions. Among other things, the PFM programs provide financial literacy training to servicemembers, particularly to junior enlisted personnel during their first months in the military. The group-provided financial literacy training is supplemented with other types of financial management assistance, often on a one-on-one basis. For example, servicemembers might obtain one-on- one counseling from staff in their unit or legal assistance attorneys at the installation. In May 2003, the Office of the Under Secretary of Defense for Personnel and Readiness, DOD’s policy office for the PFM programs, established its Financial Readiness Campaign, with objectives that include increasing personal readiness by, among other things, (1) increasing financial awareness and abilities and (2) increasing savings and reducing dependence on credit. The Campaign attempts to accomplish these objectives largely by providing on-installation PFM program providers with access to national-level programs, products, and support through links from DOD’s Web site (www.dodpfm.org) to other Web sites, tools, and contacts. Figure 1 illustrates some of the major types of financial management training and assistance available to servicemembers (see app. III for additional details). For instance, most active duty military installations have an on-site manager who implements the service’s PFM programs. Among other things, PFM program managers and others teach classes and offer counseling on financial issues, ranging from basic budgeting and checkbook management to purchasing a car. In addition, the PFM program managers might work closely with the services’ relief/aid societies. The relief/aid societies offer grants or no interest loans for emergency situations. Figure 1 also shows that servicemembers may choose to use non-DOD resources if, for example, they do not want the command to be aware of their financial conditions or they need products or support not offered through DOD, the services, or the installation. DOD-wide survey data suggest that the financial conditions of deployed and non-deployed personnel are similar, but problems were found with the administration of a special pay to deployed personnel, as well as the ability of deployed servicemembers to communicate with creditors. Servicemembers who were deployed for at least 30 days reported similar levels of financial health or problems as those who had not deployed when they responded to a 2003 DOD-wide survey. However, some deployed servicemembers are not obtaining their family separation allowance on a monthly basis while they are deployed and separated from the families. And, problems communicating with creditors—caused by limited Internet access, few telephones and high fees, and delays in receiving ground mail— can affect deployed servicemembers’ abilities to resolve financial issues. Data from DOD suggest that the financial conditions for deployed and non- deployed servicemembers and their families are similar. Figure 2 shows estimates of servicemembers’ financial conditions based on their responses to a 2003 DOD-wide survey. For each of the five response options, the findings for servicemembers who were on a deployment for at least 30 days were very similar to those of servicemembers who had not deployed during that time. An additional analysis of the responses for only junior enlisted personnel showed similar responses for the two groups. For example, 3 percent of the deployed group and 2 percent of the non-deployed group indicated that they were in “over their heads” financially; and 13 percent of the deployed group and 15 percent of non-deployed group responded that they found it “tough to make ends meet but keeping your head above water” financially. These responses are consistent with the findings that we obtained in a survey of all PFM program managers and during our 13 site visits. In the survey of PFM program managers, about 21 percent indicated that they believed servicemembers are better off financially after a deployment; about 54 percent indicated that the servicemembers are about the same financially after a deployment; and about 25 percent believed the servicemembers are worse off financially after a deployment. Also, 90 percent of the 232 recently deployed servicemembers surveyed in our focus groups said that their financial situations either improved or remained about the same after a deployment. The special pays and allowances that some servicemembers receive when deployed, particularly to dangerous locations, may be one reason for the similar findings for the deployed and non-deployed groups. The hypothetical situations shown in table 1 demonstrate that deployment- related special pays and allowances can increase servicemembers’ total cash compensation by hundreds of dollars per month. Moreover, as we noted previously in the Background section of this report, some or all income that servicemembers earn while serving in a combat zone is tax free. The 2003 DOD survey also asked servicemembers whether they had experienced various types of negative financial events. The differences in percentages were small between the deployed and non-deployed groups. As figure 3 shows, the largest of the three differences was 4 percentage points and pertained to falling behind in paying bills. Based on DOD data for January 2005, almost 6,000 of 71,000 deployed servicemembers who have dependents did not obtain their family separation allowance in a timely manner. The family separation allowance of $250 per month is designed to compensate servicemembers for extra expenses that result when they are involuntarily separated from their families. Servicemembers in our focus groups told us that the family separation allowance helps their families with added costs encountered during their absence such as childcare costs, automobile maintenance, and home repairs. Delays in obtaining family separation allowances could cause undue hardship for some families faced with such extra expenses. Table 2 shows the amount of family separation allowance received in January 2005 by servicemembers who were deployed and receiving hostile fire pay. No Marines received more than the prescribed $250 monthly allowance for January, but approximately 10 percent of the Army and Navy servicemembers and nearly 5 percent of the Air Force personnel who were entitled to the $250 monthly allowance received more than that prescribed amount. This indicates that servicemembers for three of the services had not received the $250 allowance on a monthly basis and were given catch- up, lump sum payments. In total, almost 6,000 servicemembers received more than the prescribed $250 monthly allowance, with 11 servicemembers (1.5 percent) receiving a $3,000 catch-up, lump sum payment—the equivalent of 12 months of family separation pay. We have previously reported similar findings for the administration of family separation allowance to Army Reserve soldiers and recommended that the Secretary of the Army, in conjunction with the DOD Comptroller, clarify and simplify procedures and forms for implementing the family separation allowance entitlement policy. The services have different procedures that servicemembers must perform to obtain the family separation allowance, and some of these procedures are confusing and are not always followed. For example, an Army regulation states that soldiers must file a DD Form 1561 (Statement to Substantiate Payment of Family Separation Allowance) to substantiate eligibility to receive the allowance, along with a copy of the travel voucher to indicate the period of entitlement—which implies family separation allowance is received after deployment because substantiating documents are generally provided upon completion of travel with a voucher. The Army’s pay manual, however, states that only a DD Form 1561 is required to receive family separation allowance. Officials at the Defense Finance and Accounting Service and Army Finance Office stated that, although they were following this regulation, they were requiring the DD Form 1561 prior to departure so soldiers could receive family separation allowance during deployment, which is contrary to the Army regulation. In contrast, Defense Finance and Accounting Service procedures for Air Force servicemembers state that servicemembers may substantiate eligibility to receive family separation allowance prior to departure, using the travel order and the DD Form 1561. By using the travel order, Air Force servicemembers can receive family separation allowance during deployment. However, elsewhere in the Defense Finance and Accounting procedures, it notes that most Air Force members are paid family separation allowance upon returning from deployment. In April 2003, Air Force officials attempted to clear up any confusion over how Air Force personnel should initiate payments of family separation allowance, by sending a message to a Defense Finance and Accounting official stating that family separation allowance paperwork should be filed before servicemembers depart for deployment. Despite this subsequent change, Air Force servicemembers in our June 2004 focus group noted that they had not received the family separation allowance during their deployments. An August 2004 message from the Defense Finance and Accounting Service reminded Air Force finance officials of this policy change. DOD officials suggested many factors other than policy-implementation differences to explain why some eligible servicemembers are not receiving their family separation allowance on a monthly basis. Officials at the Defense Finance and Accounting Service and at service finance offices suggested that servicemembers might not obtain the allowance monthly because they are not aware of the benefit, they do not file the required eligibility form, they file incorrect documentation, or errors or delays occur when the unit enters the information into the pay system. Others noted that servicemembers may elect to receive the allowance as a one-time lump sum payment. Servicemembers may experience financial difficulties as a result of communication constraints while deployed. In our March 2004 testimony, we documented some of the problems associated with mail delivery to deployed troops. With regard to deployed servicemembers’ financial management, our focus group participants, surveyed PFM program managers, and interviewed installation officials noted that delays in receiving correspondence from creditors have resulted in late payments and possibly longer-term problems for servicemembers. The longer-term problems might include negative information about the late payments being entered in one’s financial credit report, which could make it more difficult or expensive for servicemembers to obtain credit in the future. Similarly, limited access to telephones or Internet can have negative financial effects such as (1) delaying or preventing contact with a creditor when a financial issue arises, (2) making it impossible to electronically transfer money from a financial institution to a creditor, and (3) incurring overdraft expenses because the spouse could not be informed in a timely manner about a cash advance that the servicemember requested. Individuals in our focus groups suggested that the access to Internet and telephones may not be the same across the pay grades and services. For example, some servicemembers noted that deployed junior enlisted personnel sometimes had less access to Internet than did senior deployed personnel, making it difficult for the former to keep up with their bills. In addition, some Army servicemembers told us that they (1) could not call stateside toll-free numbers because the numbers were inaccessible from overseas or (2) incurred substantial costs—sometimes $1 per minute—to call stateside creditors. In contrast, Air Force servicemembers in Germany said that the cost of calls to stateside creditors from Iraq or Afghanistan was not an issue for them because the Air Force had provided telephone calling cards that could be used to make such calls free of charge. Failure to avoid or promptly correct financial problems can result in negative consequences for servicemembers. This includes increased debt for servicemembers, bad credit histories, and poor performance of their duties when distracted by financial problems. In addition, servicemembers who cannot stay on top of their finances, while deployed, may require assistance from officials in their chain of command to address financial problems, which takes those officials from their normal military duties. This can translate into adverse effects on a unit’s readiness and morale. DOD lacks the results-oriented, departmentwide data needed to assess the effectiveness of its PFM programs and provide the necessary oversight. The principles of the Government Performance and Results Act of 1993 offer federal agencies a methodology to establish a results-oriented framework that includes strategic plans for program activities that identifies, among other things, program goals, performance measures, and reporting on the degree to which goals are met. These principles would assist DOD in shifting the focus of accountability for its PFM program from outputs, such as the number of training classes provided, to outcomes, such as impact of training on servicemembers’ financial behavior. The November 2004 DOD instruction that provides guidance to the services on servicemembers’ financial management does not address program evaluation or the reports that services should supply to DOD for its oversight role. However, an earlier draft of the instruction included these requirements. In our 2003 report, we noted that the earlier draft instruction emphasized evaluating the programs and cited metrics such as the number of delinquent government credit cards, servicemembers with wages garnished, and administrative actions for financial indebtedness and irresponsibility taken under the Uniform Code of Military Justice. When asked what caused the evaluation and oversight reporting requirements to be dropped from the finalized instruction, DOD officials said that they were eliminated because of objections voiced by the services. The DOD officials told us that the services did not want the additional reporting requirements. DOD’s 2002 Social Compact noted that the impact of efforts to improve financial literacy cannot be determined without effective evaluation. The Social Compact also stated that a systematic approach to measuring PFM programs is needed to identify best practices and improved program performance. Currently, the only DOD-wide evaluative data available for assessing the PFM programs and servicemembers’ financial conditions are obtained from a general-purpose annual survey that focuses on the financial conditions of servicemembers as well as a range of other non- related issues. The data are limited because DOD policy officials for the PFM programs can only include a few financial related items to this general-purpose survey. Additionally, a response rate of 35 percent on the March 2003 active duty survey leads to questions about the generalizability of the findings. Furthermore, DOD has no means for confirming the self- reported information for survey items that ask about objective events such as filing for bankruptcy. Without a policy requiring common evaluation DOD-wide and reporting relationships among DOD and the services, DOD will continue to have limited oversight to make improvements in the PFM programs and limited ability to achieve a standardized evaluation system. In addition, Congress will not have the visibility or oversight it needs to address issues related to DOD’s financial management training and assistance to servicemembers. Currently, service-specific efforts to assess the PFM programs are largely in their early stages. The services told us that they are developing outcome measures for evaluating their PFM programs, but none was operational at the time of our review. In Spring 2005, the Navy plans to develop and refine Navy-wide metrics such as the number of sailors performing good and poor financial behaviors, e.g., participating in the government’s retirement plan, filing for bankruptcy, and bouncing checks. Similarly, in the third quarter of fiscal year 2005, Army officials said they expect to implement outcome measures for assessing programs such as Financial Readiness, Family Advocacy, and Relocation Readiness. The Marine Corps and Air Force did not provide details for their plans to develop results-oriented data or indicate when evaluation systems would be operational. Additionally, our visits to 13 installations in the United States and Germany revealed much variability with regard to the use of performance metrics. The installations that provided us with their metrics often used output measures such as the number of people trained, rather than results-oriented outcome measures. Some junior enlisted servicemembers are not receiving the required PFM training. While each of the services implements PFM training differently, all of the services have policies requiring that PFM training must be provided to junior enlisted servicemembers. At the time of our review, the services’ policies varied on where and when the initial training should occur. For example, the Army, Marine Corps, and Air Force regulations required the training at the servicemembers’ first duty station; however, the Navy guidance required such training prior to the servicemembers’ first duty station. Despite having these policies, some servicemembers have not received the required training, but the extent to which the training is not received is unknown because servicewide totals are not always collected. Table 3 shows how each service monitors PFM training. The Marine Corps, for example, only tracks PFM training at the unit level and does not tabulate these data for a servicewide total. As shown in the table, the Army was the only service that collected installation-level PFM data and could provide a rough servicewide estimate of PFM training completed by junior enlisted servicemembers. Overall, the Army estimates that about 82 percent of its junior enlisted soldiers completed PFM training in fiscal year 2003, leaving 18 percent who did not receive training. PFM program staff at five of the six Army installations we visited told us that required PFM training was not being provided to all first-term soldiers. Some of the senior Army officers at these installations acknowledged the need to provide the PFM training to junior enlisted servicemembers but also noted that current deployment schedules limited the time available to prepare soldiers for their warfighting mission. The officers said they believed that improving servicemembers’ ability to perform duties related to their mission (e.g., firing a weapon) was more important than improving their personal financial literacy. In addition to how the services monitor servicemembers’ completion of PFM training, table 3 also shows that the services’ requirements for PFM training for junior enlisted personnel differ on three other characteristics: where the requirements are documented, the length of training, and when the training is administered. The Navy is the only service that specifies in servicewide regulations the number of hours of PFM training that junior enlisted servicemembers must complete. The oversight office for the Army identified the number of hours of required PFM training for first-term soldiers in a 1998 memorandum to the Army Chief of Staff. The Air Force and Marine Corps do not specify the number of hours in servicewide regulations or other documents. The Navy’s required length of PFM training for junior enlisted servicemembers is 4 hours longer than the Army requirement. The Air Force and Marine Corps have no minimum requirement pertaining to the length of the PFM training provided on its installations. The services use different schedules for identifying when PFM training is to be administered. PFM managers noted that these schedules take into account service-specific constraints, such as the length of time available for PFM training at servicemembers’ first duty station. Top-level DOD officials have stated repeatedly that financial issues have a direct effect on servicemembers’ mission readiness and that the lack of basic consumer skills and training in finances sets the stage for financial difficulties. For example, we reported in 2003 that a 2002 Navy report to Congress had identified $250 million in productivity and salary losses due to poor personal financial management by servicemembers. Therefore, units whose servicemembers do not receive required PFM training risk jeopardizing their ability to meet mission requirements. Some services are taking steps to improve their monitoring of PFM training. During the second quarter of 2005, the Army officials said they hope to implement Army’s Client Tracking System that will allow the service as well as current and future installations to track the financial counseling and training that servicemembers receive. The Marine Corps is updating its order on personal services and developing a system to track financial management training. While such steps may improve the monitoring of PFM training completion—an important output—they still do not address the larger issues of training outcomes such as whether or not PFM training helps servicemembers to manage their finances better. Although DOD-wide data show that the financial conditions for deployed and non-deployed servicemembers and their families are similar, some deployed servicemembers experience delays in obtaining their monthly family separation allowance. Not receiving this compensation each month to help defray extra household costs incurred when the servicemembers are deployed can result in financial hardship for the servicemembers’ family. Without changes to the administration of the family separation allowance, DOD risks placing a further financial strain on servicemembers. In addition, problems communicating with creditors during deployment can cause financial difficulties for servicemembers. Limited Internet access, delays in ground mail, and the high cost of calling from overseas often prevent servicemembers from promptly contacting creditors when financial issues arise. Delays in responding to creditors can result in serious consequences, including bad credit ratings for the servicemembers and adverse effects on unit readiness and morale. While DOD states in its Social Compact that a standardized evaluation system to measure the effectiveness of the PFM programs is a desired goal, the department does not have an oversight framework that includes the performance measures and reporting requirements needed to fully measure results from its programs. In addition, the absence of evaluation and reporting requirements in DOD’s newly issued instruction on personnel financial management suggests that DOD will continue to have limited visibility and oversight over the PFM programs and little ability to require standardized assessments of the PFM programs. These deficiencies, in turn, will limit Congress’ ability to address issues related to DOD’s PFM programs. While DOD and service officials have acknowledged that the lack of PFM training sets the stage for servicemembers having financial difficulties later, high deployment levels limit the time available for some servicemembers to take the PFM training. The absence of servicewide systems for monitoring the completion of this required training could result in some servicemembers never being provided such training if they are unable to take it at the prescribed time. Moreover, the lack of a monitoring system also will hamper efforts to improve PFM training since it will be impossible to establish a measurable relationship between whether or not someone completed training and how well they subsequently managed their finances. To address issues related to servicemembers’ financial management, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to take the following four actions: Take the necessary steps, in conjunction with the Defense Finance and Accounting Service and the services, to ensure servicemembers receive family separation allowances on a monthly basis during deployments. These steps might include those recommended in our prior review of Army Reserve pay, such as clarifying and simplifying procedures and forms implementing family separation allowance entitlements or having DOD and the operational components of the services work together to ensure family separation allowance entitlement eligibility form is received by the Defense Finance and Accounting Service to start the allowance when the servicemember is entitled to it. Identify and implement, with the services, steps that can be taken to allow deployed servicemembers better communications with creditors. These steps may include increasing Internet access and providing toll- free telephone access for deployed servicemembers when they need to address personal financial issues. Develop and implement, in conjunction with the services, a DOD-wide oversight framework with a results-oriented evaluation plan for the PFM programs and formalize DOD’s oversight role by including evaluation and reporting requirements in the PFM instruction. Require the services to develop and implement a tactical plan with time- based milestones to show how the appropriate service policy office will monitor financial management training and thereby ensure that junior enlisted servicemembers receive the required training. On March 17, 2005, we provided a draft of this report to DOD for review and comment. As of the time this report went to final printing, DOD had not provided comments as requested. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time we will provide copies of this report to interested congressional committees and the Secretary of Defense. We will also make copies available to others upon request. This report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-5559 ([email protected]) or Jack E. Edwards at (202) 512- 8246 ([email protected]). Other staff members who made key contributions to this report are listed in appendix IV. In addressing the objectives of our engagement, we limited our scope to active duty servicemembers because we have previously issued a number of reports on the compensation, benefits, and pay-related problems of reservists. Emphasis was placed on servicemembers who had returned from a deployment within the last year because these individuals were most likely to have recent personal knowledge of deployment-related financial issues, as well as familiarity with financial issues of servicemembers serving on installations in the United States. During the course of our work, we visited 13 installations with high deployment levels, as identified by service officials (see table 4). During these site visits to installations in the United States and Germany, special emphasis was given to ascertaining the financial conditions of junior enlisted servicemembers because DOD and service officials have reported that this subgroup is more likely to encounter financial problems. To address the extent to which there is a financial impact of deployment on active duty servicemembers and their families, we reviewed and analyzed laws, policies, and directives governing military pay, such as the Servicemembers Civil Relief Act and DOD’s Financial Management Regulation 7000.14R, Volume 7A, as well as documents related to the tax treatment of military pay, including the Internal Revenue Service Armed Forces’ Tax Guide: For Use in Preparing 2003 Returns. We also reviewed and analyzed GAO reports on military compensation and deployment and reports from other agencies, including DOD, the Congressional Research Service, and the Congressional Budget Office. We contacted the Federal Trade Commission to ascertain what data were available through Military Sentinel on servicemembers’ financial conditions and complaints. We conducted focus groups and surveyed servicemembers and spouses and held individual interviews with PFM program managers, non- commissioned officers, and legal assistance attorneys at installations we visited to obtain their perspectives on the impact of deployment on servicemembers. We also compared and contrasted results of our survey of servicemembers and spouses with data obtained through DOD-wide active duty surveys from 2003 for face validity and to identify trends and other indicators of financial impact. We assessed the reliability of survey data that DOD uses to obtain information on the financial conditions of servicemembers and their families. The March 2003 survey had a response rate of 35 percent. DOD has conducted and reported on research to assess the impact of this response rate on overall estimates. They found that, among other characteristics, junior enlisted personnel (E1 to E4), servicemembers who do not have a college degree, and members in services other than the Air Force were more likely to be non-respondents. We have no reason to believe that potential non-response bias not otherwise accounted for by DOD’s research is substantial for the variables we studied in this report. Therefore, we concluded the data to be sufficiently reliable to address our objectives. Additional perspectives regarding the financial impact of deployment were obtained in interviews with DOD and service policy officials. Still other perspectives were obtained from installation officials using the structured interviews and an e-mail survey to all PFM program managers. This information was supplemented with information obtained from three group discussions with a total of 50 personnel affiliated with the PFM programs while they attended a November 2004 conference. We also reviewed family separation allowance data from the Defense Finance and Accounting Service for servicemembers who were deployed and receiving imminent danger pay in January 2005. To facilitate the data gathering process for all three questions, we developed and pre-tested four types of data collection instruments. The content of the instruments was identified through review of policies, reports, and other materials, and from interviews with DOD and service officials. Structured questionnaires and focus group protocols were used to increase the likelihood that the questions were asked and procedures were conducted in a standardized manner, regardless of which GAO analyst conducted the interviews and focus groups during the 13 site visits. While the interviews and focus groups provided valuable qualitative data to illustrate important issues, the findings were not generalizeable to the population of all active duty servicemembers because of the small non-random samples of personnel who participated in the data collection sessions. Separate structured interview protocols were created for seven types of officials: installation commanders, PFM program managers, senior non-commissioned officers (E8 to E9), legal assistance attorneys, chaplains, command financial specialists, and officials representing service relief/aid societies. While some of the questions were the same or very similar for some issues, the content of the structured interviews was tailored to the type of official interviewed. A single focus group protocol, with seven central questions and follow-up questions, was used to solicit information from each of the four types of homogeneous groups: junior enlisted servicemembers (E1 to E4), non-commissioned officers (E5 to E9), company-grade officers (O1 to O3), and spouses of servicemembers who had recently returned from deployments. An anonymous survey was administered at the beginning of each focus group to obtain specific, sensitive (e.g., financial difficulties experienced by the servicemembers and their families) information that focus group participants might not feel comfortable discussing with other servicemembers present. Administering the survey before the focus group questions were asked allowed us to quantify participants’ perspectives and situations, without the servicemembers being influenced by the subsequent discussions. An e-mail survey was administered to the DOD-wide population of 225 PFM program managers identified by service officials. The response rate for the survey was 74 percent. Because we surveyed the population of PFM program managers and obtained a sufficiently high response rate, the findings from this survey are generalizeable to the population of all PFM managers. To assess the adequacy of DOD’s oversight framework for evaluating military programs that assist both deployed and non-deployed servicemembers in managing their personal finances, we reviewed DOD’s, the services’, and selected installations’ PFM program policies, along with DOD’s strategic and tactical plans for implementing the PFM programs. In addition, we reviewed DOD’s 2002 report on Personal and Family Financial Management Programs submitted to the House of Representatives Armed Services Committee. The Government Performance and Results Act of 1993 and Standards for Internal Control in the Federal Government provided model criteria for determining the adequacy of the oversight framework. We gathered perspectives about the outcome measures to evaluate the PFM programs from DOD and service-level officials, along with responses from the previously mentioned discussion groups at the November 2004 conference and the DOD-wide survey of PFM managers. We reviewed and analyzed data related to the effectiveness of the PFM programs from DOD-wide active duty survey conducted in 2003. We also reviewed accreditation reports for installation PFM programs, where available, and other materials documenting the use or effectiveness of PFM programs. Finally, we attended a GAO-sponsored forum in November 2004, in which a select group of individuals with expertise in financial literacy and education developed recommendations on the role of the federal government in improving financial literacy among consumers. To assess the extent to which DOD and the services provide PFM training to junior enlisted servicemembers, we examined the regulations and other materials that document PFM training requirements such as the number of hours of training provided and when the training should occur. We reviewed DOD’s, the services’, and selected installations’ PFM training materials, and procedures for monitoring completion of the training. We also reviewed reports issued by GAO, DOD, and other organizations that addressed the PFM programs or the content and delivery of similar programs designed to either increase financial literacy or address financial problems. Additionally, we interviewed service headquarters, as well as installation PFM officials about required training for junior enlisted servicemembers and how it is administered and monitored. The e-mail survey that was administered by GAO to the DOD-wide population of 225 PFM program managers is not subject to sampling error since it was sent to the universe of PFM program managers. With a response rate for the survey of 74 percent and no clear differences between respondents and non-respondents, the findings from this survey are generalizeable to the population of all PFM managers. Our PFM survey had differential response rates that were as low as 65 percent for the Air Force and as high as 89 percent for the Navy. The questionnaire provided to focus group participants was to gather supplemental information only and is not generalizable to DOD, but rather to those who participated in our focus groups only. Because DOD surveyed a sample of servicemembers in its 2003 active duty survey, their results are estimates and are subject to sampling errors. However, the practical difficulties in conducting surveys of this type may introduce other types of errors, commonly known as non-sampling errors. Non-sampling errors can include problem(s) with the list from which the sample was selected, non-response in obtaining data from sample members, and/or inadequacies in obtaining correct data from respondents. These errors are in addition to the sampling errors. In this survey, the response rate was 35 percent. The estimates obtained from the respondents will differ from the population value to the extent that values for non-respondents are different, in the aggregate, from values for respondents. We conducted in-depth pre-testing of the PFM program manager survey, as well as the questionnaire disseminated to focus group participants, to minimize measurement error. However, the practical difficulties in conducting surveys of this type may introduce other types of errors, commonly known as non-sampling errors. For example, measurement errors can be introduced if (1) respondents have difficulty interpreting a particular question, (2) respondents have access to different amounts of information in answering a question, or (3) those entering raw survey data make key-entry errors. We took extensive steps to minimize such errors in developing the questionnaire, collecting the data, and editing and analyzing the information. For example, we edited all surveys for consistency before sending them for key-entry. All questionnaire responses were double key- entered into our database (that is, the entries were 100 percent verified), and a random sample of the questionnaires was further verified for completeness and accuracy. In addition, we performed computer analyses to identify inconsistencies and other indicators of errors. DOD also pre-tested its questionnaire to minimize measurement error and performed analysis to assess non-response error. We performed our work from March 2004 through February 2005 in accordance with generally accepted government auditing standards. We held focus group sessions at the 13 military installations we visited during the course of this engagement to obtain servicemembers’ perspectives on a broad range of topics, including the impact of deployment on servicemembers’ finances and the types of lenders military families use, along with the PFM training and assistance provided to servicemembers by DOD and service programs (see app. I for a list of installations visited). Servicemembers who participated in the focus groups were divided into three types of groups: junior enlisted personnel (E1 to E4), mid-grade and senior enlisted personnel (E5 to E9), and junior officers (O1 to O3). Although we requested to meet with servicemembers who had returned from a deployment within the last 12 months, some servicemembers who had not yet deployed also participated in the focus groups. At some installations, we also held separate focus groups with spouses of servicemembers. Typically, focus groups consisted of 6 to 12 participants. We developed a standard protocol, with seven central questions and several follow-up questions, to assist the GAO moderator in leading the focus group discussions. The protocol was pre-tested during our first installation visit and was used at the remaining 12 installations. During each focus group session, the GAO moderator posed questions to participants who, in turn, provided their perspectives on the topics presented. We essentially used the same questions for each focus group, with some slight variations to questions posed to the spouse groups. We sorted the 2,090 summary statements resulting from the 60 focus groups into categories of themes through a systematic content analysis. First, our staff reviewed the responses and agreed on response categories. Then, two staff members independently placed responses into the appropriate response categories. A third staff member resolved any discrepancies. Below, we have identified the seven questions and sample responses/statements associated with each question. The themes and the number of installations for which a statement about a theme was cited are provided in italics. Also, two examples of the statements categorized in the theme are provided. Only those themes cited at a minimum of three installations are presented. The number of installations—rather than the number of statements—is provided because (1) the focus of this engagement was on DOD-wide issues and (2) a lengthy discussion in a single focus group may have generated numerous comments. 1. How has deployment affected military families financially in your unit? 1.a. Other reason deployment affects families financially (N=13) Example: Financial problems stem from relationship problems. Many Marines file for divorce when they return from a deployment. Example: Another sailor said they have to buy a lot of supplies, such as stocks of deodorant and other toiletries, to take on the deployment. The government does not pay for those supplies. 1.b. Better financially – increased income (N=13) Example: A soldier stated that his family was barely making ends meet when he left for a deployment. However, when he returned, his wife had paid off all of the bills and saved some of the money. He and his wife look forward to deployments as a way to catch up on expenses and savings. Example: Some cited receiving additional hazardous/combat duty pay and attendant tax exemptions during deployment as reasons for the financial benefits. In addition, some servicemembers mentioned that they no longer had to pay rent and incur related household expenses such as food and other household goods while deployed. The additional money allowed families to pay off debts and outstanding bills. 1.c. Worse financially – increased needs (e.g., childcare and transportation) (N=12) Example: Deployment worsens some servicemembers’ finances because childcare expenses increased. In many instances, to avoid having childcare expenses, one parent will work during the day and one during the night. When the servicemember deploys, the remaining spouse must find suitable daycare for the children. This is an added expense the deployment forces on the family. Example: During a deployment there are more expenses because the spouse has to pay for things that the servicemember would usually do personally, like house and car repairs. 1.d. Worse financially – other (N=11) Example: The military encourages soldiers to obtain a power of attorney before they deploy, but the power of attorney gives the spouse access to all of the soldier’s finances. In many cases, the spouse has used this power to spend all of the soldier’s money. One soldier returned from his deployment to find that he only had $80 left in his bank account. Example: One unmarried soldier said he was 5 months behind in paying his bills because he’s single and did not have anyone to help him while he was deployed. 1.e. No change financially because of deployment (N=11) Example: Overall, servicemembers are not really making more money when they are deployed. The additional pay and allowances make up for the increased spending that a family must do when the servicemember is not at home. Example: Another servicemember stated that she was a single parent and had to send her child back to the west coast with her parents. She stated she came out about even financially because the extra money she made was spent on the additional expenses to care for her son. 1.f. Effect issue – servicemember has dependents (N=11) Example: Single parents face an entirely different set of issues during a deployment. For example, in many cases, the member will be the only parent for a child; therefore, when that member is deployed long-term childcare must be arranged. In most situations, the member will arrange for an immediate or extended family member to assume the childcare responsibilities. Example: Some Navy servicemembers said that the status of personal finances during a deployment will vary based on the marital status of the sailor. For example, sailors with dependents will collect more entitlements than those who are single. 1.g. Worse financially – increased wants (N=11) Example: Some soldiers were buying expensive cars with their deployment pays. However, when the servicemembers returned from deployment to their regular pay they were not able to afford their deployment standards of living because the increase in income and tax free status no longer applied. Example: The spouse may be depressed during the deployment and spend the money the soldier is being paid. In these cases, they have no one around telling them to save it or to pay the bills. They shop to fight the depression and to make themselves feel better. 1.h. Better financially – other (N=10) Example: In some cases, the family’s finances actually improve because the spouse takes control of the bills during the deployment. Example: Another participant stated that she and her husband are more financially responsible now compared to when they were younger. Thus, they are able to benefit more from the monetary benefits of deployment. 1.i. Effect issue – personal ability to manage money (N=9) Example: Poor post-deployment spending habits (e.g., buying a new expensive car) of some single servicemembers caused them to lose extra income earned during deployment. This left them with more debt than before they left for the deployment. Example: In many cases, it is when the soldier returns from the deployment that families will get into financial troubles. During the deployment, there is a significant increase in pay and an increase in spending. After the deployment, the servicemember’s pay returns to normal and the family may have trouble dealing with the loss of income, which can encourage increased debt. 1.j. Effect issue – servicemember does not have dependents (N=7) Example: Single servicemembers seemed to fare better financially because they do not incur the same expenses as married couples, such as childcare and transportation costs. The single member is more likely to be living with roommates and when deployed, he/she only has a small amount to pay for rent. The married servicemember, on the other hand, still has a mortgage to pay back home, along with the additional expenses previously mentioned. Example: Single servicemembers are better off financially because they only have to take care of themselves financially. 1.k. Effect issue – where deployed (N=6) Example: The effect on finances depends on the location to which a servicemember is deployed. The pay and allowances that a soldier receives vary from location to location. In some places, soldiers can make a lot of money; in others, they will not. Example: The financial impact of deployment depends on where an officer was deployed. In South Korea, servicemembers pay taxes and do not receive extra pay, as did those who served in combat zones. In addition, individuals deployed to South Korea lost their Basic Allowance for Housing, even though they needed it while deployed. The officer needed to live off base because of a lack of housing on base there. This meant paying for two households, one on deployment and one for the spouse and children at home. 1.l. Worse financially – loss of income (N=5) Example: Some spouses mentioned that they know of some soldiers that had to give up their second jobs when they left on the deployment and the loss of this income had a big impact on the family’s finances. Example: While at their home station, sailors collect commuted rations, also referred to as comrats. Commuted rations are a pay allowance given to sailors to cover the cost of meals incurred off base when they are not serving on and eating aboard the ship. When a sailor goes out to sea, the commuted rations payments are stopped and sea pay is started. Also, a sailor is entitled to Career Sea special pay, or sea pay, at a monthly rate of up to $750. The actual amount of sea pay varies based on the sailor’s rank and number of years served and can range from $70 to $750 a month. However, younger sailors do not have enough time accrued on their sea pay clock to make up for the loss of commuted rations pay. Therefore, some families will actually lose money during the deployment. 1.m. Better financially – decreased expenses (N=5) Example: At some deployment locations, there is nowhere to spend the extra income. There are no bars, no daily expenses like gasoline, and no phone bills. Yet the Marines are being paid the additional entitlements and pay. Example: One participant said she thought her family’s finances were in better shape during her husband’s deployment because he was not able to spend the extra money he earned and the family was able to save more money while he was deployed. 2. Could you tell me about servicemembers you know who have gone through any financial difficulties such as declaring bankruptcy, falling behind on bills, or having a car or appliance repossessed? 2.a. Overspending/bad money management (N=13) Example: There were servicemembers who ran into severe financial problems after they returned from deployment due to overspending and overextending themselves financially while they were deployed. Example: Another participant said that he knew of a few junior enlisted servicemembers who spent all their money on expensive cars and other things, once they returned from deployment. They did not save any of the extra money they received. 2.b. Other experiences with financial difficulties (N=13) Example: One airman experienced a situation in which a creditor would not accept the automatic money transfer that was set up before the deployment. Example: One soldier’s ex-wife took him to court while he was deployed in an attempt to obtain additional child support money. Because of the additional entitlements and pay that the soldier was collecting, the court increased the payments to match. The soldier was unable to return home or communicate to prevent the action or mediate in the situation. 2.c. Defense Finance and Accounting Service errors (N=11) Example: One of the airmen had a series of late payments during a deployment because Defense Finance and Accounting Service did not process an allotment correctly and the money was not getting sent to the correct place. Example: Almost all of the airmen knew someone who did not have their pay entitlements stopped after returning from the deployment. In most instances, Defense Finance and Accounting Service was continuing to pay the entitlement for several months; unfortunately, once the problem was resolved, Defense Finance and Accounting Service took back the amount owed in one lump sum. This left the airmen with paychecks amounting to zero dollars. 2.d. Communication problems (lack of Internet/e-mail/mail/phone) (N=10) Example: A servicemember stated that a major issue with deployment was not being able to pay bills on time because the infrastructure down range (combat zone) was not immediately set up to deliver/send mail. Example: During deployments, the junior enlisted personnel do not have as much access to the Internet as the senior Marines. This can have a negative impact on their ability to access their checking and other financial accounts, thereby impacting their ability to manage their finances. 2.e. Difficulty maintaining checkbook/finances (N=10) Example: Many servicemembers have the mentality that because they earn the money it is theirs to manage. When the soldier is at home, he or she controls the finances; and when the soldier leaves, the spouse does not know how to handle the bills, finances, or budget. Example: In many situations, single sailors may not have someone back home to take care of their bills or manage their finances. 2.f. Car repossessed (N=9) Example: Some soldiers spent their money quickly after they returned from the deployment and bought expensive cars. In a few instances, these cars were repossessed because the soldiers could not make the monthly payments. Example: A soldier stated that some servicemembers’ allotments were not processed, which resulted in their cars being repossessed. This also left the servicemembers with a bad credit rating. 2.g. Did not experience financial difficulties during deployment (N=6) Example: A participant stated he knew of very few soldiers who were negatively affected financially because of deployment. Example: Those who fared well with their finances had relationships with helpful people/spouses who were able to manage their finances for the servicemembers while they were deployed. 2.h. Fell behind in bills (N=6) Example: A servicemember said that he and his spouse had fallen behind on paying their bills. Example: A soldier said that a servicemember’s phone was disconnected because his spouse went to another state to visit relatives for 2 months and the phone bill was not paid. 2.i. Bankruptcy (N=5) Example: Participants stated that they had heard of very few servicemembers who had to file for bankruptcy as a result of deployment. Example: One of the officers was aware of a sergeant who had to file bankruptcy upon returning from deployment. During the deployment, the sergeant’s spouse spent all of the extra money and took out “a ton” of additional debt. 2.j. Problems with government credit card (N=4) Example: The government travel card causes more problems than other cards. Sailors are traveling back to back with several deployments and take out back to back debts. The Travel Processing Center may not process the travel claims in 10 days like they are supposed to, so people are running up debt on the government travel card that they cannot pay off. Example: Sometimes servicemembers have had to pay (their government travel card bill) with their own money while waiting for funds to be provided/reimbursed by the government. This takes money out of their household and can affect their credit rating. It can take up to 2 months to get their money from the Defense Finance and Accounting Service. 3. During your deployment, how did servicemembers in your unit handle situations when there were financial problems at home? 3.a. Used in-theatre resources (chain of command, e-mail, Internet) (N=10) Example: Soldiers had to go through their chain of command to take care of some of their financial situations and the issues were resolved with the assistance of the chain of command. Example: Most of the other participants said they had a non- commissioned officer log them onto the Internet to check on their bills, and this helped them. 3.b. Used resources at home (family support center, family readiness officer) (N=8) Example: There are many people on base that help spouses during the deployment. The key volunteers group that meets once or twice a week is a good resource for the families to use if they need assistance during the deployment. Example: On Air Force bases, there is an abundance of assistance for servicemembers with financial problems. Information is provided through: First Term Airman Center, Personal Financial Counseling, Air Force Aid Society, Air Force Assistance Fund, First Sergeants, Finance, and the Judge Advocate General. These are some of the resources available to servicemembers for finance-related issues. 3.c. Other financial problems on homefront (N=5) Example: Sometimes a single servicemember will leave advance rent checks for the landlord of the apartment and the landlord will deposit all of the checks at once, which results in overdrafts for the servicemember. Example: There are many instances of spouses back home that spend all of the additional income that the Marine is making during the deployment. When the Marine returns, he or she will find all of their money gone and nothing to show for it. 3.d. Waited until they got home (N=5) Example: Some participants said they just waited to handle the problems until after they returned home if they do not have anyone to help them and the situation had not been brought to the command’s attention. They did not want the command involved in their finances. Example: In instances where the servicemember’s spouse spends all of the money, the member normally is not able to do anything until he or she returns from the deployment. 4. What kind of financial assistance does your service or the military need to take care of financial problems when people are deployed? 4.a. Pre-deployment briefs (more information or briefs before deployment notice received) (N=11) Example: More financial awareness training prior to the deployment would have helped alleviate many problems that individuals experienced. The current 2-minute brief is not enough. Example: Even though the base legal office offers a will and power of attorney class every Tuesday, some Marines are unable to attend. The information in the classes needs to be incorporated into the pre- deployment briefings. 4.b. Other kinds of financial assistance needed (N=9) Example: Small groups, such as married servicemembers with children or single servicemembers, should be given specific attention or focus when information on finances is distributed because the different groups have different needs when it comes to finances. Example: The First Term Airmen Center should give out warnings to new airmen about which lenders around base are good to work with and which ones are not so good. 4.c. Sustained training (provided throughout career) (N=7) Example: Financial training should occur upfront and be proactive— not be reactive, like it is now. Currently, classes are required only if the soldier has written bad checks. Example: More overall financial education is needed. One soldier was enlisted for 5 years before he got any formal financial management training, and that was only because he got in trouble. Education is the key in improving financial management. 4.d. Early training (boot camp, Advanced Individual Training) (N=6) Example: The military needs to provide more financial training in basic/boot camp to include in-depth discussions of allotments, deductions, and leave and earnings statements. One soldier said he did not know what a leave and earnings statement was until he came to his unit. Example: Financial training courses should be incorporated into basic training or technical school. By conducting this training early, DOD may have an impact on initial purchase decisions made by servicemembers. 5. What kinds of experiences have your fellow servicemembers or subordinates had with predatory lenders? 5.a.Other issues regarding experiences with predatory lenders (N=13) Example: Business representatives will tell young Marines that they can buy an item for a certain amount each month. They keep the Marine focused on the low monthly payments and not on the interest rate or the term of the loan. Example: Some Marines feel that a business would not take advantage of them because they are in the military. This leads them to be more trusting of the local businesses than they should be, which in turn, leads the businesses to take advantage of them. 5.b. Predatory lender used – car dealers (N=11) Example: Most of the participants stated that the car dealerships around the base were the worst predatory lenders because they charge high interest rates and often provide cars that are “lemons.” They said that most of the sales people at the dealerships are former military who know how to talk to servicemembers to obtain the members’ trust. The servicemember does not expect this. Example: One captain had a Marine in his unit who signed a contract with a car dealer for a loan with 26 percent interest rate. The captain took the Marine to the Marine Credit Union and got him a new loan with 9.5 percent interest rate. 5.c. Predatory lender used – payday lenders (N=10) Example: A master sergeant got caught in the check-cashing cycle. He would write a check at one payday lender in order to cover a check written at another lender during a previous week. Example: One participant told us that when he was a younger Marine he got caught up with a payday lender. The problem did not resolve itself until he deployed and was not able to go to the lender anymore. 5.d. Reason for using predatory lender – get fast cash and no hassle (N=10) Example: People use payday lenders because they are quick and easy. All the soldiers have to do is to provide their leave and earnings statement and they get the money. Example: Most of the participants say they know people who have used a payday lender, and those soldiers use them because they have bad credit and can get quick cash. 5.e. Predatory lender targeting – close proximity and clustering around bases (N=9) Example: It is almost impossible to be unaware of lenders and dealerships because many are clustered in close proximity to the installation. They also distribute flyers and use pervasive advertising in local and installation papers. Example: The stores and car lots near the installation use signs that say “E1 and up approved” or “all military approved” to get the attention of the military servicemembers. 5.f. Command role when contacted by creditors (N=8) Example: The non-commissioned officers offer to go with the junior enlisted to places like car dealers; but the young soldiers do not take them up on these offers. Example: One participant said that debt collectors do call his house and the command. He noted that one lender called him nine times in one day and his Chief Petty Officer eventually asked the lender to stop harassing his sailor. 5.g. Predatory lender targeting – advertising in installation/local newspaper (N=7) Example: Soldiers are being targeted by predatory lenders in a variety of ways; for example, flyers are left on parked cars at the barracks, advertising is done at installation functions, and words such as “military” are used on every piece of advertising to make the servicemember believe that the company is part of or supported by the military. The servicemember would normally trust lenders associated with the military. Example: Most predatory lenders have signs that say “military approved” or have commercials that say the same thing or “E1 and above approved.” 5.h. Reason for using predatory lender – urgent need (N=6) Example: Many soldiers use payday lenders because they are in a bind for money and they know these lenders can provide quick cash. Example: Soldiers will use a payday lender because they need money for a child, the kids, the house payment, etc. In many cases, it does not matter why they need it; they just need it. So, they go where they can get cash the fastest and the easiest way possible. 5.i. Predatory lender used – furniture/rent-to-own (N=6) Example: One of the participants stated that he had obtained a loan to purchase a new washer and dryer. The loan had a 55 percent interest rate and the appliances cost a lot more than they should have. Example: Rent-to-own businesses are widely used by soldiers. One soldier paid $3,000 for an $800 washer and dryer set. 5.j. No problem with predatory lenders (N=5) Example: There have not been any problems with predatory lenders lately. The state of Florida has been using legislation to shut them down. Example: The participants said that they had never encountered an officer that had to use payday lenders or predatory lenders. Most of the officers’ problems come when they have a bitter divorce. 5.k. Reason for using predatory lender – other reasons (N=5) Example: One soldier stated that his credit was so bad that he had no other option but to use high interest rate lenders. He stated that, “I have bad credit and I will always get bad credit.” Example: One participant said he has several friends that use payday lenders because they are E1s or E2s and don’t make much money. 5.l. Predatory lender targeting – employing former military members (N=4) Example: The people running and working for the predatory businesses are usually former military servicemembers. They will use their knowledge of the system to take advantage of Marines. Example: Many times the predatory lenders are veterans, former Marines, or retirees. The participant said that by using these types of people, it gives the younger Marines a false sense of trust and then the lenders will take advantage of the servicemember or “stab them in the back.” 5.m. Reason for using predatory lender – command will not know financial conditions (N=3) Example: When a soldier needs money, a payday loan can be used without notifying the chain of command. Any of the Army forms of assistance require a soldier to obtain approval from “a dozen people” before they can get any money. Example: The most significant reason that people use payday lenders is privacy. The spouses stated that if you try to obtain assistance through the Air Force, you must use the chain of command to obtain approval. By doing so, everyone in the unit will know your business. 6. What types of financial services have fellow servicemembers and/or subordinates in your unit used? 6.a. Service relief/aid societies (N=13) Example: Servicemembers are often reluctant to approach Army Emergency Relief Society because they have to complete too much paperwork. Some have concerns that their superiors will find out that they used these services and superiors may think this is a sign of weakness or failure on the part of the servicemember. Example: One soldier stated that he used the Army Emergency Relief Society because he did not have good credit and needed $1,400 as a security deposit. He said they gave him a loan and that he is paying them back at $60 per month. 6.b. Other types of services used/aware of (N=13) Example: Assistance is available for Marines with financial problems. For example, there is a Key Volunteers Network made up of enlisted and officers’ wives. Example: One of the sailors was having financial problems and did not want the command to know, so he sought help from the Federal Credit Union. The credit union was able to help with the $50,000 he had accumulated in debt. They contacted the lenders for him and told them not to contact anyone in the command about the problem. The debt was re-organized and repayment began. All of this was accomplished without the help of the Navy. 6.c. Community service center/family support center’s personal financial managers (N=13) Example: Some servicemembers who have problems have received help from Army Community Services. Army Community Services does not provide money or loans but does give some household items such as pots and pans and these items do provide some help to those in financial trouble. Example: When supervisors recognize a subordinate is having financial problems, most of them will refer the subordinate to the family support center for counseling, budget planning, and basic personal finance skills like balancing a checkbook. 6.d. DOD Financial Readiness Campaign/services’ Internet resources (N=11) Example: None of the participants had heard of the Financial Readiness Campaign. Example: Only one of the 11 participants was aware of the Financial Readiness Campaign. The servicemember that did know about it said that the information was difficult to sort through and may not be helpful to those without a basic knowledge of finances. 6.e. Servicemembers Civil Relief Act (N=9) Example: One airman said that he used the Servicemembers Civil Relief Act to reduce his total indebtedness during his deployment. In fact, after returning from the deployment, the credit companies kept the interest rates at 6 percent or less. Example: One of the participants talked about how he used the Servicemembers Civil Relief Act to get out of a lease prior to deployment. 6.f. No services used or not aware that any service was used (N=7) Example: One participant said that there are financial services available but because they are not very well advertised, many servicemembers do not know about them. Example: The spouse stated she was not aware of any available assistance programs because information about programs does not get communicated well at the installation. 6.g. Legal office (N=6) Example: There is a legal office that can review purchase contracts while the sailor is at home and a legal assistance attorney onboard ship who can provide assistance. Example: Sometimes the family at home cannot take care of financial issues, even if they have power of attorney. The best solution is to obtain help from the on base legal office. 6.h. Command financial specialists (N=5) Example: Soldiers have used the command financial specialist within their units to receive counseling, training, and information. Example: Most of the participants said that they had a command financial specialist in their unit but did not use these individuals, primarily because of a lack of trust. They said that if a servicemember talked about financial problems with these people, it would end up through the chain of command. If someone were to see a servicemember in the command financial specialist’s office, then they would know/assume the servicemember had a financial problem. 7. Is there additional assistance that could be provided to servicemembers or subordinates by the chain of command or DOD to improve the financial condition of military families? 7.a. Additional financial management training at installation and throughout career (N=13) Example: Some of the participants said the briefings provided to soldiers during base “in processing” are too quick. They normally last about 10 minutes and that is not enough time to discuss financial matters. Example: There should be financial management training points throughout a sailor’s career. For example, basic training, Advanced Individual Training, reenlistment, and then annual recurring training. 7.b. Other additional assistance (N=12) Example: A soldier stated that the offices that provide finance information are closed when the servicemembers get off work. Their hours should be longer because the soldiers’ unit will not allow them time off to go to the finance centers just to browse and acquire general financial information. Example: The military credit unions should be combined into one institution. No more Marine, Navy, or Army Federal Credit Unions, just one large credit union. This would lead to more lending power and better interest rates. 7.c. More money (N=10) Example: All military members should get pay raises. The pay increase should be significant and not just a few dollars every paycheck. People are dying every day for their country, so they should get paid well. Example: Servicemembers, particularly in the junior enlisted ranks, should be given more pay. 7.d. Improve timeliness/accuracy of Defense Finance and Accounting Service (N=7) Example: Make the finance office provide more timely reimbursement for vouchers. One soldier just got back from Iraq and said that currently, it takes the Defense Finance and Accounting Service about 6 months to pay the voucher. Example: The deployment actually messes up the servicemember’s paychecks. When starting the deployment, the addition of certain pay and allowances and the subtraction of other allowances are never done quickly and efficiently. Defense Finance and Accounting Service is always either overpaying or underpaying the Marine. When they overpay, they take the money back in one shot, not over a period of time. 7.e. Armed Forces Disciplinary Control Board/off-limits list (N=7) Example: When the Armed Forces Disciplinary Control Board does put a business on the off-limits list, the word is not put out and it is never enforced. Example: The Navy needs to blacklist places that practice predatory lending. One participant, who is a legal officer in her unit, does provide a list of places to avoid to her sailors when they check in even though she is not allowed to do this. She does not understand why the Navy is allowed to tell sailors not to go to a porn shop, but is not supposed to tell them not to go to predatory lenders. The Navy needs some type of list of businesses that have done questionable things. It does not necessarily have to be an “off-limits” list. 7.f. Care packages (N=6) Example: It is common for spouses to send care packages to soldiers during a deployment. The expense of shipping these packages is significant. In addition, they generally include items for friends of soldiers who do not have spouses or families sending items. Example: Care packages can be expensive for the family, especially when they have to send equipment that is not supplied by the military. 7.g. Improve Internet access during deployment (N=5) Example: Navy should have better Internet access on the ships. They could provide Internet access in the library. Right now the junior enlisted have to ask officers to log them on. Example: The Navy needs to increase the number of computers on ships and the access to the Internet. It is not beneficial to have Internet-based resources if no one can access the Internet during a deployment. Furthermore, when the sailors are at home station, the work computers are used for work and not for personal use. Therefore, the sailors still cannot access information on the Financial Readiness Campaign. Several resources exist to assist servicemembers with financial issues. These include military-sponsored PFM training, DOD’s Financial Readiness Campaign, individual service resources, such as command financial specialists and personal financial managers, and resources outside of DOD such as those provided through on- and off-installation banks and credit unions. All four military services require PFM training for servicemembers, and the timing and location of the training varies by service. The Army begins this training at initial military, or basic, where soldiers receive 2 hours of PFM training. Training continues at Advanced Individual Training schools, where soldiers receive an additional 2 hours of training and at the soldiers’ first duty station, where they are to receive an additional 8 hours of PFM training. In contrast, Navy personnel receive 16 hours of PFM training during Advanced Individual Training. The Marine Corps and the Air Force, on the other hand, begin training servicemembers on financial issues at their first duty stations. Events, such as deployment or a permanent change of station, can trigger additional financial management training for servicemembers. The length of this additional training and the topics covered can vary by installation and command. Also, unit leadership may refer servicemembers for financial management training or counseling if the unit command is made aware of an individual’s financial problems. For example, the Army requires refresher financial training for personnel who have abused check- cashing privileges. DOD’s Financial Readiness Campaign, which was launched in May 2003, supplements PFM programs offered by the individual services. The Under Secretary of Defense for Personnel and Readiness stated that the department initiated the campaign to improve the financial management available to servicemembers and their families and to stimulate a culture that values financial health and savings. The campaign allows installation- level providers of PFM programs to access national programs and services developed by federal agencies and non-profit organizations. The primary components of the campaign are the Web-based resources and partnerships with federal agencies and non-profit organizations. The primary tool of the Financial Readiness Campaign is a Web site designed to assist PFM program managers in developing installation-level campaigns to meet the financial management needs of their local military community. This Web site, which is also available to the public, contains important documents for the campaign as well as links to partners’ Web sites. For example, the DOD Web site contains the original memorandum announcing the start of the campaign, overall campaign objectives, as well as the names of, agreements with, and links to the campaign’s 27 partner organizations. DOD’s May 2004 assessment of the campaign noted, however, that installation-level PFM staffs have made minimal use of the campaign’s Web site. DOD campaign officials stated that it was early in implementation of campaign efforts and that they have been brainstorming ideas to repackage information given to PFM program managers, as well as servicemembers and their families. For example, officials are considering distributing financial information to servicemembers and military families at off-installation locations, as well as implementing “financial fairs” and “road shows” at military communities to increase awareness and encourage financial education. DOD has partnered with 27 organizations that have pledged to support DOD in implementing its Financial Readiness Campaign. For example, the Association of Military Banks of America is a not-for-profit association of banks that operate (1) on military installations, (2) off military installations but serving military customers, and (3) within military banking facilities designated by the U.S. Treasury. That association is supporting the Financial Readiness Campaign by encouraging member banks to provide, participate in, and assist DOD with financial training events. Another partner, the InCharge Institute of America, is producing a quarterly periodical called Military Money. The periodical is aimed at promoting financial awareness among the spouses of servicemembers. Each military service has several resources available at the installation level to assist servicemembers with financial issues. These include command financial specialists, the PFM program managers and staff, legal services, and service relief/aid societies. Command financial specialists are senior enlisted personnel (usually E6 and above) who are trained by PFM program managers to assist servicemembers at the unit level, by providing financial education and counseling. These non-commissioned officers may perform the role of the command financial specialist as a collateral duty in some units or as a full- time duty in others. The Navy, Marine Corps, and Army use command financial specialists to provide unit assistance to servicemembers in financial difficulties; the Air Force does not use command financial specialists within the unit, but has the squadron First Sergeant provide first-level counseling. Individual servicemembers who require counseling beyond the capability of the command financial specialists or First Sergeant in the Air Force can see the installation’s PFM program manager or PFM staff. The PFM program manager is a professional staff member designated and trained to organize and execute financial planning and counseling programs for the military community. PFM program managers and staff offer individual financial counseling as well as group classes on financial issues. Army, Navy, and Marine Corps regulations state that each installation should have a manager for PFM issues. The Air Force no longer designates one staff member as the PFM program manager, but it uses “work life consultants” in its family support centers to provide PFM training and counseling. The DOD’s November 2004 PFM instruction places certain requirements on staff who provide PFM training and counseling. For example, it states that the one staff member within a family support center shall be designated and trained to organize and execute financial planning and counseling programs for the military community. In addition, that staff member must receive continuing education on PFM annually and maintain professional certification. Individual installation legal offices also offer financial services to servicemembers. For example, the legal assistance attorneys may review purchase contracts for large items such as homes and cars. In addition, the legal assistance attorneys offer classes on varying financial issues including powers of attorney, wills, and divorces. Each service has a relief or aid society designed to provide financial assistance to servicemembers. The Army Emergency Relief, Navy-Marine Corps Relief Society, and the Air Force Aid Society are all private, non- profit organizations. These societies provide counseling and education as well as financial relief through grants or no-interest loans to eligible servicemembers experiencing emergencies. Emergencies include funds needed to attend the funeral of a family member, repair of a primary vehicle, or funds for food. For example, in 2003, the Navy-Marine Corps Relief Society provided $26.6 million in interest-free loans and $4.8 million in grants to servicemembers who needed the loans for emergencies. Servicemembers may utilize financial resources outside of DOD, which are available to the general public. These can include banks or credit unions for competitive rates on home or automobile loans, commercial Web sites for interest rate quotes on other consumer loans, consumer counseling for debt restructuring, and financial planners for advice on issues such as retirement planning. In addition to the individual named above, Leslie C. Bharadwaja; Alissa H. Czyz; Marion A. Gatling; Gregg J. Justice, III; David A. Mayfield; Brian D. Pegram; Terry L. Richardson; Minette D. Richardson; and Allen D. Westheimer made key contributions to this report. Military Personnel: DOD Tools for Curbing the Use and Effects of Predatory Lending Not Fully Utilized. GAO-05-349. Washington, D.C.: April 26, 2005. Credit Reporting Literacy: Consumers Understood the Basics but Could Benefit from Targeted Educational Efforts. GAO-05-223. Washington, D.C.: March 16, 2005. DOD Systems Modernization: Management of Integrated Military Human Capital Program Needs Additional Improvements. GAO-05-189. Washington, D.C.: February 11, 2005. Highlights of a GAO Forum: The Federal Government’s Role in Improving Financial Literacy. GAO-05-93SP. Washington, D.C.: November 15, 2004. Military Personnel: DOD Needs More Data Before It Can Determine if Costly Changes to the Reserve Retirement System Are Warranted. GAO-04- 1005. Washington, D.C.: September 15, 2004. Military Pay: Army Reserve Soldiers Mobilized to Active Duty Experienced Significant Pay Problems. GAO-04-911. Washington, D.C.: August 20, 2004. Military Pay: Army Reserve Soldiers Mobilized to Active Duty Experienced Significant Pay Problems. GAO-04-990T. Washington, D.C.: July 20, 2004. Military Personnel: Survivor Benefits for Servicemembers and Federal, State, and City Government Employees. GAO-04-814. Washington, D.C.: July 15, 2004. Military Personnel: DOD Has Not Implemented the High Deployment Allowance That Could Compensate Servicemembers Deployed Frequently for Short Periods. GAO-04-805. Washington, D.C.: June 25, 2004. Military Personnel: Active Duty Compensation and Its Tax Treatment. GAO-04-721R. Washington, D.C.: May 7, 2004. Military Personnel: Observations Related to Reserve Compensation, Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops. GAO-04-582T. Washington, D.C.: March 24, 2004. Military Personnel: Bankruptcy Filings among Active Duty Service Members. GAO-04-465R. Washington, D.C.: February 27, 2004. Military Pay: Army National Guard Personnel Mobilized to Active Duty Experienced Significant Pay Problems. GAO-04-413T. Washington, D.C.: January 28, 2004. Military Personnel: DOD Needs More Effective Controls to Better Assess the Progress of the Selective Reenlistment Bonus Program. GAO-04-86. Washington, D.C.: November 13, 2003. Military Pay: Army National Guard Personnel Mobilized to Active Duty Experienced Significant Pay Problems. GAO-04-89. Washington, D.C.: November 13, 2003. Military Personnel: DFAS Has Not Met All Information Technology Requirements for Its New Pay System. GAO-04-149R. Washington, D.C.: October 20, 2003. Military Personnel: DOD Needs More Data to Address Financial and Health Care Issues Affecting Reservists. GAO-03-1004. Washington, D.C.: September 10, 2003. Military Personnel: DOD Needs to Assess Certain Factors in Determining Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions. GAO-03-554. Washington, D.C.: April 29, 2003. Military Personnel: Management and Oversight of Selective Reenlistment Bonus Program Needs Improvement. GAO-03-149. Washington, D.C.: November 25, 2002. Military Personnel: Active Duty Benefits Reflect Changing Demographics, but Opportunities Exist to Improve. GAO-02-935. Washington, D.C.: September 18, 2002. | Congress and the Department of Defense (DOD) are concerned about the financial conditions of servicemembers and their families, particularly in light of recent deployments to Iraq and Afghanistan. Serious financial issues can negatively affect unit readiness. According to DOD, servicemembers with severe financial problems risk losing security clearances, incurring administrative or criminal penalties or, in some cases, face discharge. Despite increases in compensation and DOD programs on personal financial management (PFM), studies show that servicemembers, particularly junior enlisted personnel, continue to report financial difficulties. GAO assessed (1) the extent deployment impacts the financial condition of active duty servicemembers and their families, (2) whether DOD has an oversight framework for evaluating military programs designed to assist deployed and non-deployed servicemembers in managing their finances, and (3) the extent junior enlisted servicemembers receive required PFM training. The financial conditions of deployed and non-deployed servicemembers and their families are similar, but deployed servicemembers and their families may face additional financial problems related to pay. In both a 2003 DOD-wide survey and non-generalizable focus groups that GAO conducted on 13 military installations in the United States and Germany, servicemembers who were deployed reported similar financial conditions as those who were not deployed. Some of GAO's focus group participants also noted that they--like Army Reservists in GAO's 2004 report, Military Pay: Army Reserve Soldiers Mobilized to Active Duty Experienced Significant Pay Problems--had not received their $250 family separation allowance each month during their deployment. Pay record data showed that almost 6,000 deployed servicemembers had received more than the prescribed $250 in January 2005, and 11 of them received a $3,000 catch-up, lump sum payment--the equivalent of 12 months of the allowance. This pay problem was due, in part, to service procedures being confusing and not always followed. Families who do not receive this allowance each month may experience financial strain caused by additional expenses such as extra childcare. DOD lacks an oversight framework--with results-oriented performance measures and reporting requirements--for evaluating the effectiveness of PFM programs across the services. DOD's 2002 human capital strategic plan stated that a standardized evaluation system for PFM programs is a desired goal; however, DOD does not currently have such a system. In 2003, GAO reported that DOD had included evaluative reporting measures in a draft of its PFM instruction to the services. However, the final PFM instruction issued by DOD in 2004 did not address outcome measures or contain a requirement that the services report program results to DOD because the services objected to these additional reporting requirements. Without a policy requiring evaluation and a reporting relationship between DOD and the services, DOD and Congress do not have the visibility or oversight needed to address issues related to the PFM programs. Some junior enlisted servicemembers are not receiving PFM training that is required in service regulations. While each of the services implements PFM training differently, all of the services have policies requiring that PFM training be provided to junior enlisted servicemembers. Moreover, the extent to which the PFM training is not received is unknown because most of the services do not track the completion of PFM training at the service level. Only the Army collected installation-level data and could provide a service-wide estimate of PFM training completed by junior enlisted servicemembers. Senior Army officers said PFM training had not been a priority given the need to prepare for current operations. Top-level DOD officials have repeatedly stated that financial issues directly affect servicemembers' mission readiness and should be addressed. Therefore, units whose servicemembers do not receive required PFM training risk jeopardizing their ability to meet mission requirements. |
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FDA is responsible for regulating the marketing of medical devices to provide reasonable assurance of their safety and effectiveness for human use. As part of its regulatory responsibility, FDA reviews applications from manufacturers that wish to market their medical devices in the United States. Prior to marketing new devices, manufacturers must apply for FDA marketing approval through either the premarket notification (also referred to as 510(k)) process, or the premarket approval (PMA) process, a more rigorous regulatory review. New devices are subject to PMA, unless they are substantially equivalent to an already marketed device, in which case they need to comply only with the premarket notification requirements. Applications for premarket notification are generally reviewed more quickly than applications for PMA and do not usually require clinical data. Medical devices are regulated using a three-part classification system and are subject to different levels of control based upon their classifications as class I, II, or III devices. Class I devices are generally those with the lowest risk for use by humans and require the least regulatory oversight. These devices are subject to general controls, which include standards for good manufacturing practices, and requirements related to manufacturer registration, maintenance of records, and reporting. Examples of class I devices are patient examination gloves, canes, and crutches. Class II devices are generally of higher risk and are also subject to general controls; however, FDA can establish special controls for these devices, such as development and dissemination of guidance documents, mandatory performance standards, and postmarket surveillance. Examples of class II devices are blood glucose test systems and infusion pumps. Class III devices typically pose the greatest risk and thus have the highest level of regulation. This classification includes most devices that support or sustain human life, are of substantial importance in preventing impairment of human health, or present a potential unreasonable risk of illness or injury. Because general and special controls may not be sufficient to ensure safety and effectiveness, these devices, with limited exceptions, must obtain PMA. To obtain PMA, the manufacturer must provide FDA with sufficient valid scientific evidence providing reasonable assurance that the device is safe and effective for its intended use. Once approved, changes to the device affecting safety or effectiveness require the submission and approval of a supplement to its PMA. Examples of class III devices include automatic external defibrillators and implantable infusion pumps used to administer medication. Some class III devices are provided as part of a hospital visit; Medicare pays for these devices through the hospital inpatient or outpatient prospective payment systems. Five categories of class III devices, however, can be provided in physicians’ offices or prescribed by physicians for use in the home; Medicare pays for these devices through the DME fee schedule. In 2004, Medicare payments for class III devices under the DME fee schedule were $53.2 million, which represented less than 1 percent of total DME payments. The Medicare DME fee schedule payment rate for a device is based on either the manufacturer’s retail price or historic reasonable Medicare charges, which CMS considers equivalent measures. MMA provided for a 0 percent annual update for most Medicare DME fee schedule payment rates from 2004 through 2008. However, under MMA, class III devices were excluded from the 0 percent update and received payment updates equal to the annual percentage increase in the CPI-U in 2004, 2005, and 2006. For these devices, MMA provides, in 2007 for a payment update as determined by the Secretary of Health and Human Services, and in 2008, for a payment update equal to the annual percentage increase in the CPI-U. We found that with limited exceptions, manufacturers of class III devices have higher premarketing costs than do manufacturers of class II devices. Manufacturers of class III devices pay higher FDA user fees for review of their devices, because of the more complex FDA review required prior to marketing, than do manufacturers of class II devices. According to FDA data, compared to class II manufacturers, class III manufacturers have a longer period before approval during the FDA application process, which lengthens the time before they can market their devices and begin receiving revenue. FDA requires that manufacturers submit clinical data for class III devices, but only occasionally requires the same for class II devices. In addition, class III manufacturers stated they incur higher premarketing costs for other research and development than do manufacturers of class II devices. However, class II manufacturers also stated that they incur substantial premarketing costs related to other research and development. Because we did not evaluate proprietary data on other premarketing research and development costs, we could not determine whether a difference in other premarketing research and development costs exists between class III and class II manufacturers. Manufacturers of class III devices pay higher FDA user fees for review of their devices, because of the more complex FDA review required prior to marketing, than do manufacturers of class II devices. Specifically, manufacturers of class III devices subject to this review pay the FDA user fee for PMA, which in 2005 was $239,237 for each PMA. Most PMA supplements, which must be filed when a manufacturer makes a change to a class III device that affects its safety or effectiveness, also require payment of a fee, which ranged from $6,546 to $239,237. Manufacturers of class II devices pay the FDA user fee for each premarket notification, which in 2005 was $3,502. When a manufacturer makes a change to a class II device, a new premarket notification application must be filed; there is no supplement process for these devices. Manufacturers of class III devices have a longer period before approval during the FDA application process, which they stated delays the marketing of their devices and the receipt of revenue. According to ODE’s 2004 Annual Report, in 2004, the average time for PMA review was 503 days while the average time for premarket notification review was 100 days. These average times include the total time a PMA or premarket notification was under review by FDA and the time the manufacturer used in responding to any FDA requests for additional information. FDA requires that class III manufacturers submit clinical data, for which manufacturers incur costs. FDA only occasionally requires the submission of clinical data for class II devices. Specifically, FDA requires manufacturers of class III devices to submit clinical data as part of the PMA process to provide reasonable assurance that the devices are safe and effective for their intended uses. During its review of a device’s PMA application, FDA may require that the manufacturer provide additional information, which may require submission of additional clinical data. Manufacturers of class III devices stated that to collect clinical data, they conducted costly animal studies, human preclinical studies, and human clinical trials. Manufacturers of class II devices must satisfy premarket notification requirements; that is, they must submit documentation that a device is substantially equivalent to a legally marketed device. An FDA official stated that manufacturers of class II devices may be required to provide clinical data. They may be required to provide these data, for example, to demonstrate that modifications they have made to a device would not significantly affect its safety or effectiveness, or if a device is to be marketed for a new or different indication. According to FDA, 10 to 15 percent of premarket notification applications include clinical data. Manufacturers of class III devices we spoke with stated that in addition to collecting clinical data, they incur higher premarketing costs related to other research and development, such as labor costs and manufacturing supplies related to designing a device, than do manufacturers of other classes of devices. They stated that class III devices are highly innovative, complex products that require costly premarketing research and development to produce. One class III manufacturer we spoke with stated that approximately 10 percent of its revenue between 2002 and 2005 was invested in premarketing research and development. Another class III manufacturer stated that approximately 4 percent of its operating budget is spent on premarketing research and development. However, manufacturers of class II devices we spoke with also stated that they incur substantial premarketing costs related to research and development. Specifically, we spoke with a manufacturer of an insulin pump and two manufacturers of continuous positive airway pressure devices, each of which stated it incurs substantial research and development costs. One class II manufacturer stated that 10 to 15 percent of a device’s total cost was attributable to research and development. Another class II manufacturer stated that approximately 7 to 10 percent of its revenue is spent on research and development. Because we did not evaluate proprietary data for other premarketing research and development costs, we were unable to determine whether a difference in other premarketing research and development costs exists between class III and class II manufacturers. The CMS rate-setting methodology for Medicare’s DME fee schedule accounts for the premarketing costs of class II and class III devices in a consistent manner. The fee schedule payment rate for an item of DME, regardless of device classification, is based on either historic Medicare charges or the manufacturer’s retail price, which CMS has determined are equivalent measures. Manufacturers of both class II and class III devices we spoke with stated that when setting their retail prices, they take into account all premarketing costs necessary to bring the device to market. CMS has two DME fee schedule rate-setting methodologies: one method is for items that belong to a payment category covered by Medicare at the time the DME fee schedule was implemented in 1989, and one method is for items added to the DME fee schedule after 1989 that are not covered by an existing payment category. Regardless of its classification as a class I, II, or III device, the payment rate for an item of DME covered by Medicare when the DME fee schedule was implemented in 1989 is based on its average reasonable Medicare charge from July 1, 1986, through June 30, 1987, for some items, and July 1, 1986, through December 31, 1986, for other items (both referred to as the base year). Historically, these payment rates have been updated by a uniform, statutorily set, percentage, which is usually based on the annual percentage increase in the CPI-U. Generally, for items added to the fee schedule after 1989 that are not covered by an existing payment category, CMS does not have historic Medicare charges upon which to base the payment rate. CMS has determined that in these cases, the manufacturer’s retail price is a sufficient substitute to calculate the fee schedule payment amount, and CMS considers the payment amount that results from this methodology to be equivalent to historic reasonable Medicare charges. To determine the payment rate, CMS obtains the manufacturer’s retail price for the new item and uses a formula based on the cumulative annual percentage increase in the CPI-U to deflate the price to what it would have been in the base year. Using a formula based on the statutory DME fee schedule payment updates since the base year, CMS then inflates the base year price to the year in which the item was added to the fee schedule. In succeeding years, the item is updated by the applicable DME fee schedule update. The cumulative updates applied to DME are lower than the corresponding CPI-U increases because, in certain years, the statutory update was less than the CPI-U increase. Therefore, the payment rate of a device is generally lower than its retail price. Manufacturers of class III devices we spoke with, whose devices accounted for over 96 percent of class III DME payments in 2004, stated that when setting their retail prices, they take into account the premarketing costs of complying with federal agencies’ requirements, including the costs of collecting clinical data, and the costs of research and development. Manufacturers of class II devices similarly stated that they take into account the premarketing costs of complying with federal agencies’ requirements and of research and development, including any clinical data they may be required to collect. From 2004 through 2006, MMA provided for a payment update to the DME fee schedule for class III devices equal to the annual percentage increase in the CPI-U. In addition, for these devices, for 2007, MMA provided for a payment update to be determined by the Secretary of Health and Human Services, and for 2008, a payment update equal to the annual percentage increase in the CPI-U. From 2004 through 2008, for class II devices, however, MMA provided for a 0 percent payment update. Manufacturers of class III devices, with limited exceptions, have higher premarketing costs than manufacturers of class II devices, specifically, higher costs related to FDA user fees and submission of clinical data. However, class III and class II manufacturers we spoke with stated they take these premarketing costs, as well as premarketing research and development costs, into account when setting their retail prices. Because the initial payment rates for all classes of devices on the Medicare DME fee schedule are based on these retail prices or an equivalent measure, they account for the costs of class III and similar class II devices in a consistent manner. Distinct updates for two different classes of devices are unwarranted. The Congress should consider establishing a uniform payment update to the DME fee schedule for 2008 for class II and class III devices. We recommend that the Secretary of Health and Human Services establish a uniform payment update to the DME fee schedule for 2007 for class II and class III devices. We received written comments on a draft of this report from HHS (see app. II). We also received oral comments from six external reviewers representing industry organizations. The external reviewers were the Advanced Medical Technology Association (AdvaMed), which represents manufacturers of medical devices, and representatives from five class III device manufacturers—the four manufacturers of osteogenesis stimulators and one manufacturer of both implantable infusion pumps and automatic external defibrillators. In commenting on a draft of this report, HHS agreed with our recommendation to establish a uniform payment update to the DME fee schedule for 2007 for class II and class III devices. The agency did not comment on whether the Congress should consider establishing a uniform payment update to the DME fee schedule for 2008 for these devices. HHS agreed with our finding that the costs of class II and class III DME have been factored into the fee schedule amounts for these devices, noting that CMS is committed to effectively and efficiently implementing DME payment rules. It stated that our report did a thorough job of reviewing Medicare payment rules associated with the costs of furnishing class III devices. HHS also provided technical comments, which we incorporated where appropriate. Industry representatives who reviewed a draft of this report did not agree or disagree with our matter for congressional consideration or our recommendation for executive action. They did, however, express concern that we did not recommend a specific update percentage for class III devices. Our report recommends a uniform payment update to the DME fee schedule for class II and class III devices; we believe that this recommendation satisfies the requirement in MMA to make recommendations on the appropriate update percentage for class III devices. Two manufacturers of class III devices commented on the class II device manufacturers we interviewed. One manufacturer stated that it would have been more appropriate to interview manufacturers of class II devices that are not similar to class III devices in terms of complexity. The other manufacturer expressed concern that we did not speak with more class II manufacturers. The four osteogenesis stimulator manufacturers expressed concern that we did not examine costs they incur after they market a device. Specifically, several stated that they incur labor costs for services provided to beneficiaries and physicians, research and development costs related to FDA-required surveillance on osteogenesis stimulators’ safety, and research and development costs to improve or find new uses for a device. In addition, one manufacturer stated that it conducts costly research and development for some products that never come to market. Concerning comments about the class II manufacturers we interviewed, as noted in the draft report, our conclusion that class III devices have higher premarketing costs than do manufacturers of class II devices is based on FDA requirements and FDA data that apply to class III and class II manufacturers and not on information obtained from class III and class II manufacturers. According to FDA data, manufacturers of class III devices pay higher FDA user fees and have a longer period of time before approval during the FDA application process. FDA also requires that all class III manufacturers submit clinical data, for which manufacturers incur costs, and only occasionally requires the submission of clinical data for class II devices. Regarding manufacturers’ concerns that we did not examine all of their device-related costs, we included these costs in our analysis, where appropriate. With respect to labor costs for services provided to beneficiaries and physicians, to the extent that suppliers do perform these services, the costs are known prior to marketing the device and can be taken into account when setting their retail price. Two class III manufacturers we spoke with volunteered that they take these labor costs into account when setting retail prices prior to the device going to market. Regarding research and development costs for FDA-required surveillance, both class III and class II devices may be subject to surveillance on a case- by-case basis; prior to marketing, FDA notifies manufacturers that a device will be subject to postmarket surveillance. Also prior to marketing the device, manufacturers must submit, for FDA approval, a plan to conduct the required surveillance. As noted in the draft report, both class III and class II device manufacturers stated, that when setting their retail prices, they take into account the premarketing costs of complying with federal agencies’ requirements. With respect to research and development costs to improve or find new uses for a device after it is marketed, these are costs incurred to modify an existing device or develop a new device. Costs incurred for a future device are premarketing costs related to that device and not costs related to marketing the existing device. Finally, we did not examine research and development costs for products that do not come to market because these costs do not directly relate to items on the Medicare DME fee schedule; therefore, it would be inappropriate to consider them when reporting on the appropriate update percentage to items on the fee schedule. Industry representatives raised several issues that went beyond the scope of our report. These issues included the appropriateness of the DME rate- setting methodology, payment incentives that may lead providers to use one site of service over another, and incentives for manufacturers to bring new devices to the market. Reviewers also made technical comments, which we incorporated where appropriate. We are sending copies of this report to the Secretary of Health and Human Services, the Administrators of CMS and FDA, and appropriate congressional committees. We will also make copies available to others on request. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions, please contact me at (202) 512- 7119 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To address our objectives, we interviewed officials from the Centers for Medicare & Medicaid Services (CMS); the Food and Drug Administration (FDA); two of the four durable medical equipment (DME) regional carriers, the contractors responsible for processing DME claims; and the Statistical Analysis DME Regional Carrier, the contractor that provides data analysis support to CMS. To examine the premarketing costs of devices, we obtained the fees that FDA charges for device review, known as user fees, which are published on the FDA Web site. We also reviewed the FDA device approval process, and data on device review times from FDA’s Office of Device Evaluation’s 2004 Annual Report. We interviewed the four manufacturers of osteogenesis stimulators and one manufacturer of both implantable infusion pumps and automatic external defibrillators, all class III medical devices, about the types of costs they incur in producing the devices, including FDA fees for device review and the costs of research and development, both for any clinical data the manufacturer is required to submit and for other research and development costs, such as labor costs related to designing a device. These class III manufacturers’ devices accounted for over 96 percent of class III Medicare DME payments in 2004. We also spoke with a manufacturer of insulin pumps and two manufacturers of continuous positive airway pressure devices, class II devices on the DME fee schedule that CMS identified as similar to the class III devices on the schedule in terms of complexity. We did not evaluate proprietary data to determine whether a difference in other premarketing research and development costs exists between the two types of manufacturers. To determine how the DME fee schedule accounts for premarketing costs, we interviewed CMS officials and reviewed CMS documents on the DME fee schedule rate-setting methodology. We interviewed representatives from the Advanced Medical Technology Association; the American Academy of Orthopedic Surgeons; the American Society of Interventional Pain Physicians; and two private insurance companies. We conducted our work from December 2004 through February 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, Nancy A. Edwards, Assistant Director; Joanna L. Hiatt; and Andrea E. Richardson made key contributions to this report. | Medicare fee schedule payments for durable medical equipment (DME) that the Food and Drug Administration (FDA) regulates as class III devices, those that pose the greatest potential risk, increased by 215 percent from 2001 through 2004. From 2004 through 2006, and for 2008, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) provided for a payment update for class III DME equal to the increase in the consumer price index for all urban consumers (CPI-U). For 2007, MMA requires the Secretary of Health and Human Services to determine the payment update. MMA also requires that other DME receive a 0 percent update from 2004 through 2008. MMA directed GAO to report on an appropriate payment update for 2007 and 2008 for class III DME. In this report, GAO (1) examined whether class III devices have unique premarketing costs and (2) determined how the fee schedule rate-setting methodology accounts for the premarketing costs of such devices. GAO found that manufacturers of class III devices, with limited exceptions, have higher premarketing costs than do manufacturers of class II devices that are similar to class III devices. Premarketing costs consist of FDA user fees and research and development costs, both for any clinical data the manufacturer is required to submit and for other research and development costs. Manufacturers of class III devices pay higher FDA user fees, because of the more complex FDA review required prior to marketing, than do manufacturers of class II devices. Specifically, the user fee for class III devices subject to this review in 2005 was $239,237, while the fee for class II devices in 2005 was $3,502. The FDA application and approval process takes longer for class III manufacturers, which lengthens the time it takes before they can market their devices and begin receiving revenue. FDA requires that manufacturers submit clinical data for class III devices, but only occasionally requires the same for class II devices. In interviews with GAO, class III manufacturers stated that they incur higher premarketing costs for other research and development, such as labor costs related to designing a device, compared to manufacturers of class II devices. Class II manufacturers also told GAO that they incur substantial costs related to other research and development. GAO did not evaluate proprietary data to determine whether a difference in other premarketing research and development costs exists between the two types of manufacturers. GAO found that the Medicare DME fee schedule rate-setting methodology accounts for the respective premarketing costs of class II and class III devices in a consistent manner. Regardless of device classification, the Medicare DME fee schedule payment rate for a device is based on either the manufacturer's retail price or historic reasonable Medicare charges, which the Centers for Medicare & Medicaid Services considers equivalent measures. In interviews with GAO, manufacturers of class III devices stated that when setting their retail prices, they take into account the premarketing costs of complying with federal regulatory requirements, including the costs of required clinical data collection and other research and development. These manufacturers accounted for over 96 percent of class III DME payments in 2004. Manufacturers of class II devices also stated that they take into account these costs when setting retail prices. |
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Approximately 88,000 miles in length, the nation’s marine coastline is composed of a variety of coastal ecosystem types (see fig. 1). The potential effects of climate change on these ecosystems are complex and often difficult to predict, according to the 2014 National Climate Assessment. For example, climate scientists have indicated high confidence that climate change will increase the frequency and intensity of coastal storms, but the exact location and timing of these events is unknown. Similarly, the effects of sea level rise are expected to vary considerably from region to region and over a range of temporal scales, according to the assessment. The 2014 National Climate Assessment further indicated that marine coastal ecosystems are dynamic and sensitive to small changes in the environment, including warming air and ocean temperatures and sea- level rise. Climate change may cause shifts in species’ distributions and ranges along coasts that may impact ecosystem character and functioning, according to the assessment. For example, eel grass, one type of submerged vegetation that provides coastal protection from storm surges, may die if water temperatures exceed its maximum tolerance level. Ecosystems along the coast are also vulnerable to climate change because many have been altered by human stresses, and climate change will likely result in further reduction or loss of the services that these ecosystems provide, according to the assessment. The federal government has a limited role in project-level planning central to helping increase the resiliency of marine coastal ecosystems to climate change because state and local governments are primarily responsible for managing their coastlines. However, the federal government plays a critical role in supporting state government efforts to increase resiliency to climate change, according to the President’s State, Local, and Tribal Leaders Task Force on Climate Preparedness and Resilience. The federal role includes ensuring that federal policies and programs factor in potential risks from climate change, providing financial incentives for enhancing resilience, and providing information and assistance to help states and others better understand and prepare for climate risks. NOAA, as a key federal agency whose mission is, in part, to manage and conserve marine coastal ecosystems, has identified enhancing ecosystem resilience as an important part of its broader goal of building community resilience. NOAA works toward this goal, in part, through its administration of the CZMA. Specifically, NOAA’s Office for Coastal Management administers the National Coastal Zone Management Program. To participate, states are to submit comprehensive descriptions of their coastal zone management programs—approved by states’ governors—to NOAA for review and approval. As specified in the act, states are to meet the following requirements, among others, to receive NOAA’s approval for their state programs: designate coastal zone boundaries that will be subject to state define what constitutes permissible land and water use in coastal propose an organizational structure for implementing the state program, including the responsibilities of and relationships among local, state, regional, and interstate agencies; and demonstrate sufficient legal authorities for the management of the coastal zone in accordance with the program, which includes administering land and water use regulations to control development to ensure compliance with the program and resolve conflicts among competing uses in coastal zones. The act provides the states flexibility to design programs that best address states’ unique coastal challenges, laws, and regulations, and participating states have taken various approaches to developing and carrying out their programs. States’ specific activities also vary, with some states focusing on permitting, mitigation, and enforcement activities, and other states focusing on providing technical and financial assistance to local governments and nonprofits for local coastal protection and management projects. If states make changes to their programs, such as changes to their coastal zone boundaries, enforceable policies, or organizational structures, states are to submit those changes to NOAA for review and approval. NOAA officials are responsible for, among other things, approving state programs and any program changes; administering federal funding to the states; and providing technical assistance to states, such as on the development of 5-year coastal zone enhancement assessment and strategy reports that identify states’ priority needs and projects. One primary incentive to encourage states to develop coastal zone management programs and participate in the National Coastal Zone Management Program is states’ eligibility to receive federal grants from NOAA to support the implementation and management of their programs. Specifically, NOAA provides two primary types of National Coastal Zone Management Program grants to participating states: Coastal zone management grants support the administration and management of state programs and require states to match federal contributions. Coastal zone enhancement grants support improvements in state programs in specified enhancement areas. Coastal zone enhancement grants do not require state matching funds and include both formula and competitive grants for projects of special merit. To be eligible for coastal zone enhancement grants, state coastal zone management programs are to develop an assessment of each of nine enhancement areas for their state every 5 years, including those areas that are a priority for the state. In conjunction with the assessment, state programs are to also develop a strategy for addressing the high priority needs for program enhancement within one or more enhancement area(s). NOAA reviews and approves this “assessment and strategy” document for each state and, if approved, states are eligible for formula grants and may also apply annually for competitive grants. In fiscal year 2016, a total of almost $50 million was allocated to the 22 participating marine coastal states for these two types of grants. By statute, a maximum of $10 million of the amount appropriated for CZMA management grants may be used for the coastal zone enhancement formula and competitive grants. States received a maximum of approximately $0.9 to $2.7 million per state for the two types of grants under the National Coastal Zone Management Program in fiscal year 2016. In addition, the CZMA authorizes NOAA to provide technical assistance, including by entering into financial agreements, to support the development and implementation of state coastal zone management program enhancements. The CZMA also established the National Estuarine Research Reserve System—a network of 28 coastal estuary reserves (25 of which are located in marine coastal states) managed through a state-federal partnership between NOAA and coastal states. NOAA provides financial assistance, coordination, national guidance for program implementation, and technical assistance, and coastal states are responsible for managing reserve resources and staff, providing matching funds, and implementing programs locally. The reserve system was established on the principle that long-term protection of representative estuaries provides stable platforms for research and education and the application of management practices that will benefit the nation’s estuaries and coasts, according to its 2011-16 strategic plan. State coastal zone managers may take various actions to manage marine coastal ecosystems and help increase their resilience to the potential effects of climate change. For example, managers may target land acquisition and conservation activities to areas of higher ground adjacent to coastal wetlands, mangroves, and other natural habitats to allow the habitats to migrate so they do not disappear if sea levels rise. In addition, state coastal zone managers may remove physical barriers, such as concrete structures, that prevent beach migration over time in favor of installing living shorelines along areas with a low impact from waves. Living shorelines are natural habitats, or a combination of natural habitat and manmade elements, put in place along coastal shorelines to reduce shoreline erosion. Management decisions about what actions may be appropriate for a specific area often depend upon detailed information about the current and expected future conditions of the area in question, such as shoreline elevation data, expected rates of sea level rise, and how the ecosystem may be expected to respond to future environmental changes. As we concluded in our 2009 report on climate change and strategic federal planning, new approaches may be needed to match new realities, and old ways of doing business—such as making decisions based on the assumed continuation of past climate conditions—may not work in a world affected by climate change. NOAA is taking a variety of actions under the CZMA to support states’ efforts to make their marine coastal ecosystems more resilient to climate change, and states generally view NOAA’s actions as positive steps. According to NOAA officials, the agency’s actions are largely embedded in its broader efforts to build community resilience, and through these efforts NOAA has emphasized the importance of healthy ecosystems, as there is increasing recognition of the critical role that ecosystems play in supporting resilient communities. The CZMA provides a foundation for managing marine coastal ecosystems and partnering with states to work towards the agency’s goals of achieving resilient coastal communities and healthy coastal ecosystems, according to the officials. Within this context, NOAA is taking such actions as providing financial incentives and technical assistance and supporting research through the National Estuarine Research Reserve System to help coastal states understand the potential effects of climate change and plan or implement projects to respond to these effects and enhance marine coastal resilience. We found that state coastal zone managers generally had positive views of the actions NOAA is taking. NOAA has targeted some of the financial incentives it provides to states under the CZMA for activities aimed at addressing the impacts of climate change and enhancing marine coastal resilience. For example, within the National Coastal Zone Management Program for fiscal years 2016 to 2020, NOAA designated coastal hazards—physical threats to life and property, such as sea level rise—as an enhancement area of national importance. In so doing, NOAA indicated that coastal zone enhancement competitive grants would be focused on projects that will further support approved state strategies related to this enhancement area. NOAA also increased the total amount available for these competitive grants from $1 million in fiscal years 2014 and 2015 to $1.5 million for fiscal year 2016. NOAA officials said that many of the applications they received in 2015 and 2016 were for projects that were intended to directly or indirectly address climate risks and enhance the resilience of states’ coastal ecosystems. For example, in 2015, NOAA awarded one grant for about $200,000 to a state to undertake a mapping study to identify vulnerable habitats along its coastline and use the results of the study to prioritize those habitats considered most vulnerable to climate change for the state’s restoration and resilience efforts. In addition, starting in fiscal year 2015, NOAA initiated a Regional Coastal Resilience Grant Program to fund projects that focus on regional approaches to helping coastal communities address vulnerabilities to extreme weather events, climate hazards, and changing ocean conditions using resilience strategies. State and local governments, nonprofit organizations, and others are eligible to apply for these grants. NOAA awarded six applicants grants totaling $4.5 million in each of fiscal years 2015 and 2016, according to NOAA officials. Projects eligible for grants may be targeted to a variety of efforts that support resilience, including actions focused on marine coastal ecosystem resilience. For example, in 2016, NOAA awarded one grant for nearly $900,000 to a regional partnership of state governments, nonprofit organizations, and academia involved in a project aimed at mitigating the impacts of weather events on natural resources, among other things. Specifically, the project intends to assess potential coastal storm impacts and increase the implementation of nature-based infrastructure approaches to buffer the effects of coastal storms, among other things. Officials from all 25 state coastal zone management programs said that financial assistance provided by NOAA has been critical for planning projects designed to enhance marine coastal ecosystem resilience and reduce the potential impacts of climate change. Officials from nearly all state coastal zone management programs expressed concern, however, that the amount of financial assistance available is insufficient to address states’ needs in implementing projects. For example, officials from 15 of the 25 state programs said that coastal zone management grants have been the primary source of funding from NOAA that they have used for efforts related to ecosystem resilience. However, these grants generally cannot be used to purchase land or for construction projects—activities the states identified as important for improving the resilience of their coastlines. In addition, officials from 20 of the 25 state programs said that they have had to leverage funds from multiple sources, such as state funds, nonprofit organizations, or other federal agencies, to implement projects aimed at enhancing ecosystem resilience. NOAA officials agreed that there is a high demand for funding for these types of projects, noting, for example, that the Regional Coastal Resilience Grant Program received 132 qualified applications requesting a total of $105 million during its first application period in fiscal year 2015, when a total of $4.5 million was available for the grants. Through its administration of the National Coastal Zone Management Program, NOAA has also provided technical assistance to coastal states to help them understand and address the potential impacts of climate change on marine coastal ecosystems. NOAA officials said they work regularly with state coastal zone managers and they look for opportunities to provide assistance to help the states take actions designed to enhance resilience. For instance, through their reviews of states’ 5-year coastal zone enhancement assessment and strategy reports, NOAA officials said they identify information needs and priorities of state coastal zone management programs. For example, NOAA officials said they found that states had a common interest in knowing more about valuing the economic benefits of coastal ecosystems, such as estimating the financial benefit that ecosystems provide for flood control. As a result, NOAA officials said they presented information on this topic at a 2016 annual meeting with state coastal zone managers. This type of information can help states develop cost-benefit analyses that may more accurately capture the value of services provided by coastal ecosystems—as opposed to man-made infrastructure such as seawalls and levees—when states are exploring options for coastal projects, according to the officials. NOAA officials also said they share the states’ needs and priorities that they identify with other NOAA offices, as well as with external partners such as other federal agencies and nonprofit organizations, to increase the awareness of state program needs and priorities and facilitate coordination and the alignment of resources across programs. NOAA provides a wide range of technical assistance in the form of technical information, guidance, and training related to better understanding and addressing the potential impacts of climate change on marine coastal ecosystems, including: Technical information. NOAA has provided various types of technical information to states to help them understand and incorporate climate information into their state coastal zone management programs. For example, in 2007, in partnership with nonprofit entities, NOAA helped develop a publically available repository of information—called the Digital Coast—to help state coastal zone managers and others analyze potential climate risks and determine how to address those risks. The Digital Coast provides information and tools on such topics as climate models and statistical analyses that coastal managers can use to incorporate climate information into their management activities. For instance, the Digital Coast contains an interactive tool that allows users to estimate sea level rise and simulate different sea level rise scenarios using elevation and surface data to help identify coastal areas that may be affected by rising sea levels in a changing climate. Coastal zone managers from one state said they used this tool to determine the vulnerability of their state’s shoreline to potential sea level rise, which has helped them better target financial assistance to areas they identified as most vulnerable. Officials from all 25 state coastal zone management programs said that the technical information NOAA provides has generally helped them incorporate climate information into their state programs. However, officials from 20 of the 25 state programs said they often need more local or site-specific information for planning and implementing projects. The information NOAA provides is mostly at a national or regional scale, given staffing and resource levels, according to NOAA officials. These officials added that data available through the Digital Coast may be used as a starting point for coastal managers to modify and build in more site-specific elements. For example, one state customized a Digital Coast tool for estimating sea level rise to create a map outlining potential coastal flooding areas under various sea level rise scenarios at a site-specific scale within its state. Guidance. NOAA has developed several guidance documents to help state coastal zone managers and others identify specific ways marine coastal ecosystems may be used to help withstand the potential impacts of climate change and enhance the resilience of coastal areas. For example, in 2015, NOAA developed its Guidance for Considering the Use of Living Shorelines to provide information on how to use natural ecosystems, such as oyster reefs or marshes, to reduce coastal erosion caused by intense storms, wave erosion, or sea level rise. In addition, in 2016, NOAA issued a Guide for Considering Climate Change in Coastal Conservation. The guide provides coastal managers a step-by-step approach to considering climate change in coastal conservation planning, with links to relevant tools, information, and other resources. Officials from 19 of the 25 state coastal zone management programs said NOAA’s guidance was generally useful, but officials from 14 of these programs said that NOAA’s guidance alone is not sufficient to plan or implement actions that enhance ecosystem resilience and address climate change risks. Officials from one state, for example, said that NOAA’s guidance on using living shorelines is helpful for general purposes such as educating the public on the benefits of this technique, but that the guidance does not cover all shoreline types, such as gravel beaches, exposed rocky shores, or tidal flats. NOAA officials said that using living shorelines as a strategy to enhance coastal resilience is a relatively new technique, and as coastal managers gain more experience with its use on different types of shorelines, NOAA plans to incorporate this information into the assistance it provides to coastal states. NOAA officials also said that the guidance was not intended to be a comprehensive source of technical information on living shoreline techniques, but rather to provide information on key technical and policy considerations in planning and designing shoreline management projects. Training. NOAA has developed instructor-led and online training on topics such as the use of marine coastal ecosystems for improving community resilience and understanding how to use the tools found in the Digital Coast as a way to plan for and take action to address the potential impacts of climate change. For example, from 2014 to 2016, NOAA provided training to over 250 state coastal zone managers and other state practitioners across the country on identifying various types of flooding in coastal areas and methods for mapping potential flooding scenarios. Similarly, during the same time period, NOAA officials said they offered 11 3-day climate adaptation workshops across the country that covered a variety of climate-related topics including methods for assessing the vulnerability of coastal areas and options for using ecosystems, such as wetlands, to provide flood protection. Officials from 16 of the 25 state coastal zone management programs told us that they viewed the training provided by NOAA on topics related to climate change and ecosystem resilience as helpful. NOAA officials said they take steps to ensure their training topics meet states’ needs by discussing potential training topics with state coastal zone managers before developing courses and by collecting participant feedback after training courses are provided. For example, NOAA officials said they reach out to all training participants after each course to ask the participants the extent to which they believe they will be able to apply the training to their work. NOAA officials said that the National Estuarine Research Reserve System is important for marine coastal ecosystem resilience, in part, because the reserves serve as “living laboratories” for the study of estuaries and natural and man-made changes, including the impacts of climate change. For example, in 2014, coastal zone managers from one state partnered with the state’s research reserve staff, along with NOAA and others, to study and map marsh migration patterns across the state’s coastline to determine how marsh ecosystems may respond to rising sea levels. The study results were then incorporated into state efforts to help local communities plan for and take action to adapt to the effects of climate change, according to a state coastal zone manager. In the research reserve system’s 2011-16 strategic plan, NOAA and the states identified climate change as one of three strategic areas of focus and investment for the 5-year period. Activities identified in the plan include, among others, generating and disseminating periodic analyses of water quality, habitat change, and the effects of climate change and other stressors at local and regional scales. Officials from 19 of the 25 state coastal zone management programs said that the work carried out through their respective research reserves plays an important role in furthering their understanding of how climate change may affect the structure and function of estuarine ecosystems. NOAA officials agreed that this research plays a critical role in supporting states’ efforts to enhance coastal resilience to climate change. The officials said they are updating the reserve system’s strategic plan for 2017, which they expect to complete in January 2017, and plan to continue highlighting climate change and resilience as key issues to focus their research at the reserves. We provided the Department of Commerce a draft of this report for review and comment. NOAA provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Commerce, 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 members who made key contributions to this report are listed in appendix I. Anne-Marie Fennell, (202) 512-3841 or [email protected]. In addition to the contact named above, Alyssa M. Hundrup (Assistant Director), Michelle Cooper, John Delicath, Cindy Gilbert, Jeanette M. Soares, and Rajneesh Verma made key contributions to this report. Also contributing were Michael Hill, Armetha Liles, Christopher Pacheco, Janice Poling, Steve Secrist, and Joseph Dean Thompson. | Coastal areas—home to over half of the U.S. population—are increasingly vulnerable to catastrophic damage from floods and other extreme weather events that are expected to become more common and intense, according to the 2014 Third National Climate Assessment. This assessment further indicated that less acute effects from changes in the climate, including sea level rise, could also have significant long-term impacts on the people and property along coastal states. Marine coastal ecosystems—including wetlands and marshes—can play an important role in strengthening coastal communities' resilience to the impacts of climate change, such as protecting eroding shorelines from sea level rise. Under the CZMA, NOAA is responsible for administering a federal-state partnership that encourages states to balance development with the protection of coastal areas in exchange for federal financial assistance and other incentives. GAO was asked to review federal efforts to adapt to potential climate change effects on coastal ecosystems. This report provides information about NOAA's actions to support states' efforts to make marine coastal ecosystems more resilient to the impacts of climate change and states' views of those actions. GAO reviewed the CZMA and relevant NOAA policies and guidance; interviewed officials from NOAA headquarters and six regional offices; and conducted structured interviews with officials from the 25 state coastal zone management programs in all 23 marine coastal states. NOAA provided technical comments on this report. The Department of Commerce's National Oceanic and Atmospheric Administration (NOAA) is taking a variety of actions to support states' efforts to make their marine coastal ecosystems more resilient to climate change, and states generally view NOAA's actions as positive steps. The Coastal Zone Management Act (CZMA) provides a foundation for managing these ecosystems and partnering with states to work towards the agency's goals of achieving resilient coastal communities and healthy coastal ecosystems, according to NOAA officials. Through the federal-state partnership established under the CZMA, GAO found that NOAA has taken actions, including: Financial incentives. NOAA has targeted some of its financial incentives for activities aimed at addressing the impacts of climate change. For example, NOAA designated coastal hazards—physical threats to life and property, such as sea level rise—as the focus of CZMA competitive grants. States competed for a total of $1.5 million in grants in fiscal year 2016. Officials from all 25 state programs that GAO interviewed said funding provided by NOAA has been critical for planning projects related to ecosystem resilience, but also expressed concern that the amount of funding is insufficient to address states' needs in implementing projects. For instance, officials from 15 state programs further indicated that coastal zone management grants have been a primary source of funding from NOAA, but that they generally cannot be used to purchase land or for construction projects, activities states identified as important for improving coastal resilience. Technical assistance. NOAA has provided assistance largely through technical information, guidance, and training to help states better understand and address the potential impacts of climate change on marine coastal ecosystems. For example, NOAA helped develop an interactive digital tool to simulate different sea level rise scenarios. NOAA also developed guidance to help identify ways ecosystems may be used to enhance the resilience of coastal areas, such as using natural shorelines to buffer the effects of erosion. In addition, NOAA developed training on topics such assessing the vulnerability of coastal areas. State managers GAO interviewed had generally positive views of the technical assistance provided by NOAA. For example, officials from all 25 state programs said that the technical information NOAA provides has generally helped them incorporate climate information into their state programs. National Estuarine Research Reserve System. NOAA, in partnership with coastal states, manages 25 marine-based estuary reserves, in part, to study natural and man-made changes to estuaries (bodies of water usually found where rivers meet the sea), including the potential impacts of climate change. For example, in 2014, one state used its research reserve to study and map marsh migration patterns across the state's coastline to determine how these ecosystems may respond to rising sea levels. Officials from 19 of the 25 state programs said that work carried out through the research reserves plays an important role in furthering their understanding of how climate change may affect the structure and function of estuarine ecosystems. |
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Dramatic changes that occurred in the world as a result of the end of the Cold War and the dissolution of the Soviet Union have fundamentally altered the United States’ security needs. In March 1993, DOD initiated a comprehensive review to define and redesign the nation’s defense strategy, force structure, modernization, infrastructure, and budgets “from the bottom up.” The report of the Bottom-Up Review, issued in October 1993, concluded that DOD could reduce its forces and infrastructure from a posture designed to meet a global Soviet threat to one that focuses on potential regional conflicts. In our review of the 1995 FYDP, the first FYDP to reflect the implementation of the Bottom-Up Review strategy, we concluded that DOD’s major planning assumptions relied too heavily on optimistic cost estimates and potential savings. As a result, it had not gone far enough to meet economic realities, thus leaving its new plan with more programs than proposed budgets would support. This included approximately $20 billion in overprogramming, which DOD identified in the 1995 FYDP as undistributed future adjustments. The 1995 FYDP, which totaled $1,240 billion, represented DOD’s 5-year program plan through fiscal year 1999. The 1996 FYDP, which totals $1,544 billion, covers the 6-year period from fiscal year 1996 through fiscal year 2001. The 1996 plan overlaps the 1995 plan for the years 1996-99. Table 1 compares the two plans by primary appropriation account. The shaded area represents the common years to both plans. Our analysis of the two FYDPs shows that during the 4 common years, the budget increases by about $3 billion annually. In addition, DOD reduced the 1996 FYDP for the $20 billion in undistributed future adjustments included in the 1995 FYDP. These reductions were made primarily in the procurement account. The largest changes from one year to the next in the 1996 FYDP occur during the last 2 years of the plan when the budget is projected to increase by about $10 billion from 1999 to 2000 and by another $10.4 billion from 2000 to 2001. This represents about a 1-percent real increase after inflation for those years. According to the Secretary of Defense, the 1996 FYDP emphasizes readiness and quality-of-life programs. As such, the Secretary increased the budgeted amounts for the operation and maintenance, military personnel, and family housing accounts from the 1995 FYDP to the 1996 FYDP as shown in table 1. The following sections discuss some of the more significant changes in each of the primary appropriation accounts. The 1995 FYDP proposed holding military pay raises below the amount included in current law, about 1.6 percent versus 2.6 percent. According to DOD, the 1996 FYDP funds the full military pay raises provided for under law through 1999. About $7.3 billion of the $8.7 billion of additional funds proposed for the military personnel account is to cover the planned pay raises. Table 2 shows a comparison of the military personnel account in the 1995 and 1996 FYDPs. As table 3 shows, the operation and maintenance account is projected to increase by a total of about $10 billion for the common years of the 1995 and 1996 FYDPs. The budgeted amounts for many operation and maintenance programs changed from the 1995 to the 1996 FYDP resulting in the net increase of $10 billion during the 4 common years, 1996-99. Our review shows that the largest increases were in the base operations and management headquarters functions. These functions include child care and development, family centers, base communications, real property services, environmental programs, and other infrastructure-related activities. For example, Army base operations and management headquarters, including maintenance and repair activities funding show a net increase of about $3 billion. Similarly, the Navy’s base operations, operations support, and management headquarters activities show a net increase of over $2 billion. Similar Air Force accounts show a net increase in these functions of about $2 billion. The 1995 FYDP contained undistributed future adjustments of about $20 billion. Because of the magnitude of the decrease in the procurement account from the 1995 to the 1996 FYDP, it is evident that most of these adjustments were taken from the procurement account. As table 4 shows, the procurement account decreased by almost $27 billion for the common years in the 1995 and 1996 FYDPs. DOD decreased the procurement account in the 4 common years by stretching out the planned buys for some systems to the year 2000 and beyond and by reducing the total acquisition quantities for others. For example, according to the 1995 FYDP, Defense planned to procure one LPD-17 amphibious ship in 1996, two in 1998, and two in 1999. This procurement schedule slipped in the 1996 FYDP to one ship in 1998, two in 2000, and two in 2001. Also, the F-22 procurement program was slipped 1 year so that the 12 aircraft that were to be procured in 1999, according to the 1995 FYDP, are now programmed to be procured in 2000. The total planned procurement quantities were reduced for other programs, including the F/A-18C/D fighter aircraft and the Navy’s Tomahawk missile. Appendix I shows 14 of the more significant procurement program deferrals or reductions relative to last year’s FYDP. The 14 programs account for about $14.7 billion, or 54 percent, of the approximately $27 billion in reductions to the procurement account. The decrease in procurement dollars during the 4 common years of the 1995 and 1996 FYDPs comes on top of an already steep decline in procurement that began in the mid-1980s. The 1996 procurement budget request is $39.4 billion, which when adjusted for inflation, is a decline of 71 percent from fiscal year 1985. The implication of this trend is that future years’ budgets will eventually have to accommodate a recapitalization of equipment and weapon systems. DOD plans to reverse this trend and increase its procurement budgets starting in fiscal year 1997. Figure 1 shows the sharp decline in the procurement account from fiscal years 1985 to 1996 and, as indicated by the dotted line, DOD’s proposed increase from fiscal years 1997 through 2001. Budget authority is the authority to incur legally binding obligations of the government that will result in immediate or future outlays. Most Defense budget authority is provided by Congress in the form of enacted appropriations. According to the Secretary of Defense, future modernization funds will come from savings achieved through infrastructure reductions and acquisition reforms and from larger future Defense budgets. Significant spending increases are planned in the last 2 years of the 1996 FYDP. Specifically, procurement funding estimates are 15 and 24 percent greater in 2000 and 2001 compared with 1999. Congressional action may result in increasing near-term funding for defense, which could mitigate the need for DOD to increase out-year budgets. The June 1995 Concurrent Resolution on the Budget for Fiscal Year 1996 includes over $24 billion more for defense than the President’s budget for fiscal years 1996-2001. The additional funds are expected, in part, to lessen the need for DOD to reduce or defer weapon modernization programs to meet other near-term readiness requirements. Assuming the funds are appropriated, Congress will specify how defense is to spend some of the added funds, but DOD may have an opportunity to restore some programs that were reduced or deferred in the 1996 FYDP. The Concurrent Resolution on the Budget is discussed further in a later section. As table 5 shows, the research, development, test, and evaluation account increased by $1.6 billion during the common years of the 1995 and 1996 FYDPs. The budgeted amounts for many research and development programs changed from the 1995 FYDP to the 1996 FYDP. Two programs that are projected to receive some of the largest funding increases over the 1995-99 period are special classified programs, which increased by about $1.8 billion, and the F-22 advanced fighter aircraft engineering and manufacturing development, which increased by about $700 million. Two programs that are budgeted substantially less are the defense reinvestment program, which decreased by about $1 billion, and the Comanche helicopter development program, which decreased by about $700 million. Overall, the comparison of the 1995 and 1996 FYDPs for the common years 1996-99 shows that programs in the latter stages of development are receiving increased funds, while those in the earlier stages of development are receiving less funds. For example, programs in demonstration and validation, engineering and manufacturing development, and operational systems development increased by about $7.1 billion while programs in basic research, exploratory development, and advanced development decreased by about $5.4 billion. A large part of the shift was in ballistic missile defense programs from earlier development to later stages of development. As table 6 shows, the 1996 FYDP budgets less for military construction than was planned in the 1995 FYDP. The table shows that although the biggest reduction is projected to occur in fiscal year 1996, the funds continue to decrease through 1998, increase slightly in 1999, and drop below $4 billion in 2000 and 2001. Table 7 shows that, over the common years of the 1995 and 1996 FYDPs, the family housing account increases by about $2.5 billion. According to DOD, worldwide military housing is inadequate and needs to be improved. Most of the funding increases in the 1996 FYDP are for operation and maintenance, new construction, and improvements to DOD’s family housing. DOD anticipates that the realignment and closure of unneeded military bases and facilities resulting from the four rounds of closures since 1988 and force structure reductions will result in substantial savings. Our analysis of the 1996 FYDP shows that savings that have accrued or are expected to accrue from the base closings and force reductions appear to have been offset by increased infrastructure funding requirements primarily for base operations and management headquarters functions and quality-of-life programs. Thus, the proportion of infrastructure funding in the total defense budget in 2001 is expected to be about the same as it was reported for fiscal year 1994 in DOD’s Bottom-Up Review report. DOD stated in its Bottom-Up Review report that $160 billion, or approximately 59 percent, of its total obligational authority for fiscal year 1994 was required to fund infrastructure activities. These activities include logistics support, medical treatment and facilities, personnel costs, including a wide range of dependent support programs, formal training, and installation support such as base operations, acquisition management, and force management. The Bottom-Up Review report noted that a key defense objective was to reduce this infrastructure without harming readiness. Figure 2 shows a breakdown of these infrastructure categories for fiscal year 1994 as displayed in DOD’s report. Using the infrastructure categories identified by DOD, we calculated the amount of infrastructure funding for fiscal years 1995 through 2001. Table 8 shows that, on the basis of current program plans, infrastructure funding (as a percentage of DOD’s total budget) stays relatively stable through 2001 and shows no improvement over the 59-percent infrastructure level DOD reported for fiscal year 1994. According to DOD’s Bottom-Up Review report, approximately 40 percent of infrastructure funding such as for training, supply, and transportation are tied directly to force structure and would be expected to decline with force structure reductions. Historically, savings resulting from force structure reductions lag a few years behind. On the basis of this, and because DOD’s planned drawdown of forces is essentially complete in fiscal year 1996, the 1996 FYDP should begin to reflect some significant infrastructure savings. However, FYDP estimates include the costs of new requirements as well as anticipated savings. Our analysis indicates that increases in personnel, operation and maintenance, research and development, and family housing, which include increases in infrastructure costs, appear to offset most planned infrastructure savings through 2001. As a result, the 1996 FYDP does not show the decline in the proportion of infrastructure funding that might be expected. The concurrent budget resolution approved by both the Senate and the House in June 1995 anticipates $35.6 billion more funding for national defense over the 1996-99 period than the President’s budget request. However, as shown in table 9, the resolution would reduce the President’s proposed budgets for 2000-2001 by a total of $11.4 billion. The net effect of these adjustments is a $24.2-billion increase over the period. These estimates include funding for DOD military, atomic energy defense activities, and defense-related activities. According to the conference agreement on the budget resolution, most of the increase for DOD in 1996 is assumed to be used for the procurement of weapons and research and development activities. For the period 1997 through 2001, budget authority increases are assumed to be split equally between procurement and operation and maintenance. In providing additional defense funds, it is the intent of the conferees to lessen the need for decisionmakers to sacrifice future readiness to meet current readiness requirements. When the funds are appropriated, Congress will undoubtedly specify how DOD is to spend some of the added funds. For example, the House bill on the defense authorization act for fiscal year 1996 would add programs such as the B-2 bomber, which DOD did not request and for which DOD would have to find funding in the future. Also, the Senate’s 1996 authorization bill would significantly increase DOD’s proposed funding for a missile defense system. In addition, DOD may have an opportunity to restore some of the programs that it reduced or deferred to the year 2000 and beyond. The Secretary of Defense shall submit to Congress each year, at or about the time that the President’s budget is submitted . . . a future-years defense program . . . reflecting the estimated expenditures and proposed appropriations included in that budget. The provision requires that program and budget information submitted to Congress by DOD be consistent with the President’s budget. The President’s fiscal year 1996 budget was submitted to Congress on February 6, 1995. The 1996 FYDP was submitted to Congress on March 29, 1995, and was accompanied by a written certification by the Secretary of Defense that the FYDP and associated annexes satisfied the requirements of section 221 of title 10, United States Code. This certification was made after consultation with the DOD Inspector General. On the basis of our review, we consider the FYDP estimates to be consistent with the President’s budget submission. Therefore, in our opinion, the fiscal year 1996 FYDP was submitted in compliance with all applicable legislative requirements. In commenting on this report, DOD stated that we had fairly and accurately assessed the funding adjustments it made to balance the program plans for fiscal years 1996-2001. DOD also stated that the report correctly identified the fiscal implications of funding priorities and strategies that guided the preparation of the 1996-2001 program. We reported that infrastructure funding, as a proportion of the defense budget, is relatively constant from 1995 through 2001. DOD agreed and said that it would be incorrect to infer from this finding that the Department is failing to achieve savings from a smaller infrastructure and applying them to higher priority activities like readiness, quality-of-life, and procurement. We agree with DOD in part. Our analysis shows that infrastructure savings that have occurred have been applied toward new infrastructure requirements, but not to weapons procurement or modernization in any appreciable amounts. DOD expressed concern that it may not be able to accelerate the procurement of programs that are already in the defense program if Congress directs that additional funding be used to acquire new programs with large out-year funding requirements. The full text of DOD’s comments are included as appendix II. To evaluate the major planning assumptions underlying DOD’s fiscal year 1996 FYDP, we interviewed officials in the Office of the DOD Comptroller, the Office of Program Analysis and Evaluation, Office of Environmental Security, Base Closure and Utilization Office, and the Congressional Budget Office. We examined a variety of DOD planning and budget documents, including the FYDP and associated annexes. We also reviewed the President’s fiscal year 1996 budget submission; the fiscal year 1996 concurrent budget resolution; our prior reports; and pertinent reports by the Congressional Budget Office, the Congressional Research Service, and others. To calculate the amount of infrastructure funding for fiscal years 1995 through 2001 we used the infrastructure definitions and categories provided by DOD. Results of our infrastructure analysis were provided to cognizant DOD officials within the Office of Program Analysis and Evaluation for validation and comment. Department officials stated the analysis was correct on the basis of the definitions and categories established in 1994. However, they also stated they were redefining some infrastructure activities and categories that may change the results. DOD would not provide us with the details supporting these new categories during our review so we were unable to evaluate them. To determine whether the FYDP submission complies with the law, we compared its content with the requirements established in section 221 of title 10 of the United States Code and section 1005 of the Defense Authorization Act for fiscal year 1995. We also reviewed references to the reporting requirement in various legislative reports to clarify congressional intent. Our work was conducted from March to August 1995 in accordance with generally accepted government auditing standards. We are providing copies of this report to appropriate House and Senate Committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; and the Director, Office of Management and Budget. We will also provide copies to other interested parties upon request. If you have any questions concerning this report, please call me on (202) 512-3504. Major contributors to this report are listed in appendix III. Table I.1 shows 14 of the more significant procurement program changes for 1996-99 from the 1995 FYDP to the 1996 FYDP. The 14 programs account for about $14.7 billion, or 54 percent, of the approximately $27 billion in reductions to the procurement account. Table I.1: Selected Procurement Program Deferrals or Reductions for 1996-99 From the 1995 FYDP to the 1996 FYDP Although DOD is to decide later this year whether to procure more than 40 C-17s or a commercial alternative, it has reduced the amount of funds available for this procurement by $1.3 billion over the 1996-99 period. Joint Air Force and Navy program. The funds are to be used for the procurement of modification parts. DOD Budget: Selected Categories of Planned Funding for Fiscal Years 1995-99 (GAO/NSIAD-95-92, Feb. 17, 1995). Future Years Defense Program: Optimistic Estimates Lead to Billions in Overprogramming (GAO/NSIAD-94-210, July 29, 1994). DOD Budget: Future Years Defense Program Needs Details Based on Comprehensive Review (GAO/NSIAD-93-250, Aug. 20, 1993). Transition Series: National Security Issues (GAO/OCG-93-9TR, Dec. 1992). High Risk Series: Defense Weapons Systems Acquisition (GAO/HR-93-7, Dec. 1992). Weapons Acquisition: Implementation of the 1991 DOD Full Funding Policy (GAO/NSIAD-92-238, Sept. 24, 1992). Defense Budget and Program Issues Facing the 102nd Congress (GAO/T-NSIAD-91-21, Apr. 25, 1991). DOD Budget: Observations on the Future Years Defense Program (GAO/NSIAD-91-204, Apr. 25, 1991). Department of Defense: Improving Management to Meet the Challenges of the 1990s (GAO/T-NSIAD-90-57, July 25, 1990). DOD Budget: Comparison of Updated Five-Year Plan With President’s Budget (GAO/NSIAD-90-211BR, June 13, 1990). DOD’s Budget Status: Fiscal Years 1990-94 Budget Reduction Decisions Still Pending (GAO/NSIAD-90-125BR, Feb. 22, 1990). Status of Defense Forces and Five Year Defense Planning and Funding Implications (GAO/T-NSIAD-89-29, May 10, 1989). Transition Series: Defense Issues (GAO/OCG-89-9TR, Nov. 1988). Defense Budget and Program Issues: Fiscal Year 1989 Budget (GAO/T-NSIAD-88-18, Mar. 14, 1988). Underestimation of Funding Requirements in Five Year Procurement Plans (GAO/NSIAD-84-88, Mar. 12, 1984). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO compared the Department of Defense's (DOD) fiscal year (FY) 1996 Future Years Defense Program (FYDP) with its FY 1995 FYDP, focusing on: (1) what major program adjustments DOD made from FY 1995 to FY 1996; (2) the implications of these changes for the future; and (3) whether the FY 1996 FYDP complies with statutory requirements. GAO found that: (1) the FY 1996 FYDP, which covers FYs 1996-2001, is considerably different from the 1995 FYDP, which covers FYs 1995-99; (2) the total program increased by about $12.6 billion in the 4 common years of both plans (FYs 1996-99); (3) approximately $27 billion in planned weapon system modernization programs for these 4 years have been eliminated, reduced, or deferred to the year 2000 and beyond; (4) the military personnel, operation and maintenance, and family housing accounts increased by over $21 billion during the common period and continue to increase to 2001 to support Defense's emphasis on readiness and quality-of-life programs; (5) the net effect is a more costly defense program, despite substantial reductions in DOD's weapon modernization programs between 1996 and 1999; (6) Defense plans to compensate for the decline in procurement during the early years of the 1996 FYDP by substantially increasing procurement funding in 2000 and 2001; (7) the Secretary of Defense plans to pay for the increased future modernization with a combination of savings from infrastructure reductions and acquisition reforms and from real budget growth; (8) GAO's analysis shows that the 1996 FYDP does not reflect reduced infrastructure costs, primarily because of funding increases for base operation and management headquarters functions and quality-of-life programs; however, the Concurrent Resolution on the Budget for Fiscal Year 1996 includes over $24 billion more for Defense than requested in the President's budget for FYs 1996-2001; (9) the additional budget amounts are expected, in part, to lessen the need for Defense to reduce or defer weapon modernization programs to meet other near-term readiness requirements; (10) assuming the funds are appropriated, Congress will specify how Defense is to spend some of the added funds; however, DOD may have an opportunity to restore some programs that were reduced or deferred to 2000 and beyond; and (11) the additional near-term funding could mitigate the need for DOD to increase out-year budgets. |
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This section provides information on the Clean Water Act and stormwater management including green infrastructure. The objective of the Clean Water Act is to “restore and maintain the chemical, physical, and biological integrity of the nation’s waters.” The act generally prohibits the discharge of pollutants from “point sources”— such as discharge pipes from industrial facilities and wastewater treatment plants––without an NPDES permit. The act specifies that NPDES permits may not be issued for a term longer than 5 years. In 1987, Congress amended the Clean Water Act to require that EPA implement a comprehensive national program for addressing stormwater discharges; EPA implemented the program in two phases. In the first phase, EPA regulated stormwater discharges from large and medium municipal separate storm sewer system. In the second phase, EPA extended these requirements to smaller systems. Municipalities include cities, towns, villages, or other public entities that provide residents with services, such as drinking water and sewage treatment. Municipalities can have one or both types of stormwater systems, a municipal separate storm sewer system or a combined sewer system. Figure 2 illustrates the components of the two types of systems and how a CSO occurs. In 1990, EPA issued a regulation implementing the first phase of the stormwater program, requiring municipalities serving populations of 100,000 or more to obtain permits for stormwater discharges. In 1999, EPA implemented the second phase by expanding NPDES permit requirements to smaller municipalities. Generally, permits effectively prohibit non-stormwater discharges into storm sewers, and require controls to reduce pollutant discharges to the maximum extent practicable, including the use of best management practices. These practices generally include identifying and eliminating illicit discharges; preventing construction site runoff and post-construction site runoff; and preventing pollution from certain commercial, industrial, and residential areas. Such practices could also include distributing materials with utility bills to help educate the public on activities like cleaning up pet waste and household chemicals, implementing street sweeping to eliminate trash and debris, and training and certifying construction contractors. To manage CSO pollution, in 1994, EPA issued its Combined Sewer Overflow Control Policy, which provides guidance on how to meet the Clean Water Act’s pollution control goals through NPDES permits issued to municipalities with combined sewer systems. Specifically, the policy provides guidance on coordinating the planning, selection, and implementation of CSO controls that meet the requirements of the Clean Water Act. In 2000, Congress amended the Clean Water Act to require that NPDES permits for discharges from combined sewer systems comply with EPA’s Combined Sewer Overflow Control Policy. Actions that can be taken to reduce the number and volume of discharges from a combined sewer system can include separating storm sewer and sanitary sewer systems and building larger tunnels to hold stormwater runoff until it can be treated and discharged by a wastewater treatment plant. When Clean Water Act requirements are violated—for example, when a municipality has an unauthorized CSO event—EPA and states may, among other things, bring suit in court. These suits can result in consent decrees under which a municipality agrees, for example, to take corrective actions to reduce the number and volume of CSO events. In 1998, EPA’s Office of Enforcement and Compliance Assurance began a National Enforcement Initiative to focus enforcement action on keeping raw sewage and contaminated stormwater out of the nation’s waters. According to an EPA official, the agency has addressed noncompliance with stormwater and wastewater requirements of the Clean Water Act by entering into consent decrees with over 50 municipalities from 1998 through 2016. Municipalities use green and gray infrastructure to manage stormwater and meet the requirements of permits and consent decrees. Gray infrastructure refers to sewer structures that are typically made of materials, such as concrete or metal, designed to collect and channel stormwater runoff from impervious surfaces, such as city streets and parking lots, to a wastewater treatment plant or nearby creeks, lakes, and rivers. Green infrastructure includes practices and structures to manage stormwater that use or mimic natural processes to slow stormwater runoff, filter pollutants from the runoff, and facilitate stormwater storage for future use or replenishing groundwater and aquifers. Figure 3 illustrates how green infrastructure allows stormwater to penetrate (seep into) the soil and replenish groundwater and aquifers. Municipalities can meet permit and CSO consent decree requirements using either green or gray infrastructure, or a combination of both. For example, both types of infrastructure can limit the amount of pollutants that stormwater washes into nearby water bodies. Green infrastructure can filter out the pollutants, and gray infrastructure can convey the combined stormwater and wastewater to a wastewater treatment plant. Similarly, both types of infrastructure can prevent CSO events. Green infrastructure can reduce the volume of stormwater entering a combined sewer, and if gray infrastructure has sufficient capacity, the combined sewer will not be overwhelmed during storm events. Since 2007, EPA has encouraged municipalities to use green infrastructure to help meet the requirements of permits and CSO consent decrees. In April 2007, the EPA Administrator entered into an agreement with state, environmental, and wastewater utility groups to promote the use of green infrastructure in reducing stormwater pollution and mitigating CSOs. In August 2007, EPA issued a memorandum stating that EPA regional offices and states may encourage the use of green infrastructure, where appropriate, in meeting permit requirements and CSO consent decrees. According to EPA officials we interviewed, the agency worked with a number of partners, including other federal agencies and nonprofit groups involved in water management, conservation, and housing and development, to promote the use of green infrastructure. EPA developed a strategic plan to help communities use green infrastructure in 2008 and updated it in 2011 and again in 2013. EPA’s latest plan, the 2013 Green Infrastructure Strategic Agenda, includes five goals: Green infrastructure practices are embedded in federal agency programs. Green infrastructure language in permitting and enforcement actions is common practice. Data on the design, performance, costs, and benefits of green infrastructure is known and readily available. Decrease the financial burden to communities of installing and maintaining green infrastructure. Communities across the country are networking and exchanging information on the best green infrastructure approaches. EPA’s website illustrates different types of green infrastructure, with 11 examples. Figure 4 shows the 11 examples of green infrastructure listed on EPA’s website. Most of the 31 municipalities we surveyed use green infrastructure to comply with NPDES permits or CSO consent decrees, but almost half said that less than 5 percent of the area covered by their permits or consent decrees drains into green infrastructure. About three-quarters of the municipalities said that they fund green infrastructure through general revenues and stormwater fees charged to utility customers or residents of the municipality. Of the 31 municipalities we surveyed, 30 reported using at least 1 of the 11 examples of green infrastructure presented on EPA’s website to help meet the provisions of their permits since 2012 or the provisions of their CSO consent decrees. For each of the 11 green infrastructure types, municipalities reported whether to comply, at least in part, with their permit or consent decrees they (1) used or installed the type of green infrastructure themselves or (2) encouraged or required property owners to use or install the type of green infrastructure. Twenty-eight municipalities reported that they used or installed a type of green infrastructure and encouraged or required property owners to use or install a type of green infrastructure. Two municipalities reported that they had not used or installed any green infrastructure themselves but had encouraged or required property owners to use or install a type of green infrastructure. Of the 11 types, the 3 most used or installed by municipalities—or that municipalities encouraged or required their customers to use—were downspout disconnection, rain gardens (also known as bioretention), and permeable pavement. Figure 5 illustrates how many of the 30 municipalities reported using or installing 1 or more of the 11 types of green infrastructure themselves and how many municipalities reported that they encouraged or required private property owners to use or install a type of green infrastructure. In addition to the green infrastructure types identified in figure 5, the municipalities we surveyed also identified other green infrastructure that they used to help meet permit or consent decree requirements. For example, one municipality said that it used habitat restoration and similar efforts to address stormwater runoff. Another municipality reported using an infrastructure system that collected water underneath a parking lot where it could penetrate the soil below the paved surface. The one municipality that reported not using green infrastructure to help comply with the provisions of its consent decree said that there was insufficient public land on which to install green infrastructure and that the type of soil in the area subject to the decree, blue marine clay, is not permeable enough to allow green infrastructure to filter water through the soil. However, the same municipality said that the community that it served was generally receptive to using green infrastructure to manage stormwater and that it uses green infrastructure in other areas of the community not included in the terms of the consent decree. Of the 30 municipalities that reported using green infrastructure to help meet the provisions of their permits or CSO consent decrees, many of them also reported on the percentages of the areas subject to permits or consent decrees that drain into green infrastructure, with the remaining areas draining into gray infrastructure or directly into creeks, lakes, or rivers. Twenty-seven municipalities provided us with information about how much of the areas subject to permits or consent decrees drains into green infrastructure and how much drains into gray infrastructure or elsewhere. Of these 27 municipalities, 15 reported that less than 5 percent of the relevant areas drained into green infrastructure, while 6 municipalities reported that more than 20 percent of the area subject to permits or consent decrees drained into green infrastructure. The remaining 6 municipalities reported that from 5 percent to 20 percent of the relevant areas drains into green infrastructure. Figure 6 provides additional information on the percentages of areas subject to municipalities’ permits or consent decrees that drain into green infrastructure. Of the 30 municipalities that reported using green infrastructure to help comply with the provisions of their permits or CSO consent decrees, 24 municipalities reported using general revenues or specific fees for stormwater management levied on utility customers or municipal residents to fund capital expenditures for green infrastructure over their last 3 fiscal years. Of the remaining 6 municipalities, 2 reported using sales tax revenues or federal grant funding as the sole source of funding, 2 said that they had no capital expenditures for green infrastructure in the last 3 fiscal years, and 2 did not respond to the question. Of the 24 municipalities that reported using general revenues or stormwater fees to fund capital expenditures for green infrastructure to help comply with the provisions of permits or CSO consent decrees, 14 reported that they also used funding from one or more additional sources. Six reported that they also used federal grant funding to help pay for capital expenditures on green infrastructure, 5 said that they also used funding from their state’s Clean Water State Revolving Fund, and 5 said that other nonfederal grants were a source of funding for their green infrastructure. Some municipalities also identified additional sources of revenue to fund capital expenditures for green infrastructure, including fees on new development. Of the 30 municipalities that reported using green infrastructure to meet the provisions of their permits or CSO consent decrees, 17 provided information comparing their capital expenditures for green infrastructure to capital expenditures for gray infrastructure. The remaining municipalities either did not have information that distinguished between capital expenditures on green infrastructure and gray infrastructure or they did not provide us with that information. The amount that the 17 municipalities reported spending on capital expenditure for green infrastructure varied from a 3-year average of about $5,000 to about $5.9 million. The amount that the municipalities reported spending on capital expenditure for gray infrastructure varied from a 3-year average of about $18,000 to about $208.2 million. Of the 17 municipalities that provided data comparing their capital expenditures for green infrastructure to capital expenditures for gray infrastructure, 11 (65 percent) reported spending approximately 20 percent or less of capital expenditures on green infrastructure, including 7 municipalities that reported spending less than approximately 5 percent on green infrastructure. Conversely, 6 of the 17 municipalities reported spending more than approximately 20 percent of capital expenditures on green infrastructure, including 3 municipalities that reported spending more than 60 percent on green infrastructure. Overall, the 17 municipalities reported spending an average of about 24 percent of their capital expenditures for meeting the provisions of their permits or CSO consent decrees on green infrastructure, with the remaining amount spent on gray infrastructure. Most of the 31 municipalities (26) we surveyed reported that one or more aspects of infrastructure development involved with projects to help meet the provisions of their NPDES permits or CSO consent decrees were usually more challenging when using green infrastructure than when using gray infrastructure. However, the municipalities also reported continuing to use green infrastructure. In our survey, we asked the 30 municipalities that reported using green infrastructure to help meet the provisions of their permits or CSO consent decrees about eight aspects of infrastructure development that may have challenged municipalities when using green infrastructure. For each aspect, we asked municipalities if the aspect was usually more challenging for green infrastructure, usually less challenging, or about the same when compared to gray infrastructure. 1. obtaining land to install green infrastructure, 2. developing capital expenditure estimates for green infrastructure, 3. developing operation and maintenance estimates for green 4. designing and engineering green infrastructure, 5. installing green infrastructure, 6. overall cost of using green infrastructure, 7. confidence in the effectiveness of green infrastructure, and 8. political and public opinions regarding green infrastructure. As shown in figure 7, 15 of 30 municipalities reported that four or more of the eight aspects were usually more challenging for green infrastructure than for gray infrastructure. One municipality said that all eight of the aspects were usually more challenging for green infrastructure than for gray infrastructure. Two municipalities reported that no aspects were usually more challenging for green infrastructure than for gray infrastructure. Municipalities most often cited the following aspects of infrastructure development as being more challenging for green infrastructure than for gray infrastructure: developing a capital expenditure estimate, developing an operation and maintenance cost estimate, and designing and engineering a project. Of the 30 municipalities that reported using green infrastructure, 22 reported that developing an operation and maintenance cost estimate was usually more challenging than doing so for gray infrastructure, while none said that it was usually less challenging. Similarly, 16 municipalities reported that developing a capital expenditure estimate for green infrastructure was usually more challenging than doing so for gray infrastructure, while none said that it was less challenging. Finally, 16 municipalities reported that designing and engineering a project was usually more challenging for green infrastructure than for gray infrastructure, while 3 said that it was usually less challenging. Figure 8 shows the number of municipalities that reported for each of the eight aspects whether they were usually more challenging, usually about the same, or usually less challenging when using green infrastructure compared to using gray infrastructure. Figure 8 also shows that political and public opinion regarding green infrastructure was the one aspect that municipalities cited as usually less challenging for green infrastructure than for gray infrastructure. In explaining why these aspects of infrastructure were more challenging for green infrastructure, municipalities most commonly reported that they were not familiar with green infrastructure. For example, when describing their unfamiliarity with green infrastructure, representatives of one municipality said that with gray infrastructure, the maintenance activities and costs associated with traditional sewers are known from experience. For green infrastructure, however, they said that they needed to increase cost estimates for maintenance activities to account for unforeseen events. Representatives of another municipality, referring to gray infrastructure, said they know what it costs to put a pipe in the ground but do not have the skill set or experience to estimate the capital costs of green infrastructure. Discussing the costs associated with maintaining green infrastructure, representatives of another municipality said they hired staff with horticultural expertise to maintain rain gardens because they were unsure about the requirements necessary to maintain them. Another municipality said that it had difficulties finding qualified personnel to assist its engineers with green infrastructure. Of the 26 municipalities that reported that green infrastructure was usually more challenging than gray infrastructure for at least one aspect, 25 reported that there were instances where they used green infrastructure anyway. In describing instances where they used green infrastructure even though it was more challenging, some municipalities reported that they continued to use green infrastructure to help comply with their permits or CSO consent decrees for three primary reasons: they saw using green infrastructure as a learning opportunity, they believed that green infrastructure would perform better or provide additional benefits compared to gray infrastructure, or the community wanted to use green infrastructure. Municipalities expressed a desire to learn from their experiences with green infrastructure. For example, a municipality said that it had to rebuild some green infrastructure—add new soil and replant vegetation—because it let maintenance slide because of budget issues. Representatives of this municipality said that understanding how to plan appropriately for operation and maintenance is part of the learning process associated with using green infrastructure. Another municipality was more specific, with representatives saying that the city had installed permeable pavement on a section of street as an opportunity to learn about permeable materials, especially the maintenance needed to ensure that permeable pavement continues to function properly. Some municipalities reported that using green infrastructure was a better option than using gray infrastructure to address their stormwater management needs. For example, representatives of one municipality said that although they had less experience with green infrastructure, they used it anyway because it was a better option than using pipes and concrete to reduce the flow of stormwater and the amount of contaminants in stormwater. Representatives of another municipality said that they used green infrastructure because it met other project objectives: it was more aesthetically pleasing, it “fit” into the neighborhood better, and it replenished groundwater. These municipality representatives noted that most of the town’s water comes from groundwater wells. Some municipalities also reported that they were committed to using green infrastructure even though it was more challenging than using gray infrastructure on one or more aspects. For example, representatives of one municipality said that their city made a pledge to use green infrastructure. They said the city made the investment and set goals for green infrastructure, and although it is more difficult to generate cost estimates, the municipality continues to pursue green infrastructure. Another municipality said that there was not much data on the long-term costs of caring for the plants used in bioswales under the drought conditions that the municipality was currently experiencing. Nevertheless, the officials said the municipality installed the bioswales because doing so was supported by the public and an environmentally conscious city council interested in aesthetics and habitat restoration. Conversely, of the 26 municipalities that reported that at least one aspect was usually more challenging when using green infrastructure than when using gray infrastructure, 19 reported instances where they were discouraged from using green infrastructure because it was more challenging than using gray infrastructure. We asked municipalities to describe these instances. Some municipalities reported that they were discouraged from using green infrastructure because they were not familiar with it, because conditions specific to the area under consideration were not conducive to using green infrastructure, and because green infrastructure was more expensive than gray infrastructure. For example, describing their unfamiliarity with green infrastructure, representatives of one municipality said that because they were trying to meet the provisions of their consent decree, they needed an option that they had high confidence would meet the provisions. They believed that green infrastructure was not a proven technology. Representatives from another municipality said that while there had been a high turnover in city engineers and that the newer staff was amenable to using green infrastructure, the longer tenured engineers who were reluctant to use green infrastructure had an outsized influence on whether the engineering department would do so. Several of the municipalities reported that they were discouraged from choosing green infrastructure because conditions in the area under consideration were not conducive to using green infrastructure, including that there was not enough land in the right place to use green infrastructure or that the area was too arid. For example, representatives from one municipality said that they were considering bioretention measures to reduce CSOs, but there was not enough available land to make this option viable. They said that because of the topography of the town, any bioretention measures would need to be placed near the center of town, but because it was the center of town, there was no room for bioretention measures. Representatives from another municipality said that widening a road to meet fire protection requirements consumed the green space available for green infrastructure and that buying a right of way was cost prohibitive. Representatives from a third municipality said that installing green infrastructure in a city’s historic district would change the character of the area and could consume limited parking spaces— thus engendering negative public opinion. Municipalities also said that arid conditions discouraged them from installing green infrastructure in some instances. For example, representatives from one municipality said that because their municipality is in a semiarid climate that makes it difficult to establish grasses, they try to predict whether the upcoming season will be wet or dry and install green infrastructure accordingly. They said that if they do not predict correctly, the plants will die and the funds spent on green infrastructure will have been wasted. Several municipalities also reported that they were discouraged from using green infrastructure because it was more expensive than using gray infrastructure. For example, representatives from one municipality said that green infrastructure was more costly than gray infrastructure because of the cost of the land that would need to be purchased to install it. Representatives from another municipality said that green infrastructure would need to be installed in a flat area near the river and that in some instances the city did not own the surface area necessary to install green infrastructure but did own an easement to install gray infrastructure underground. The representatives said that the city was unable or unwilling to purchase such surface rights. Representatives from a third municipality said they did not have the in-house expertise to design green infrastructure and were discouraged from using green infrastructure because of the cost to hire outside consultants with that expertise. Over the last 10 years since EPA began encouraging the use of green infrastructure to manage stormwater, the agency’s efforts have provided information, technical assistance, and funding to help municipalities use green infrastructure. In addition, in 2016, EPA began a pilot project to assist five municipalities in developing long-term stormwater plans that would allow more time to incorporate green infrastructure practices but has not yet developed written agreements documenting how they will work together to collaborate. Since 2007, when EPA began encouraging the use of green infrastructure to manage stormwater, EPA has provided information, technical assistance, and funding for green infrastructure to help municipalities incorporate green infrastructure into their stormwater systems. The goals of the green infrastructure program, as described in EPA’s 2013 Green Infrastructure Strategic Agenda, are (1) embedding green infrastructure in federal agencies; (2) making green infrastructure language in permitting and enforcement actions common practice; (3) making data on design, performance, costs, and benefits of green infrastructure known and readily available; (4) decreasing the financial burden to communities of installing and maintaining green infrastructure; and (5) establishing partnerships and capacity building, where communities are networking and exchanging information on the best green infrastructure approaches. The goals most relevant to EPA’s providing assistance to municipalities to employ green infrastructure are the latter three, providing information, funding, and partnerships and capacity building. To address the goal of making information available on the design, performance, costs, and benefits of green infrastructure, EPA has provided extensive information on its website, including sharing its own research and that of academics, nonprofit groups, and other entities on a variety of issues related to green infrastructure. For example, the website contains links to documents and databases from EPA, universities, and others on the performance and benefits of specific green infrastructure technologies, such as a report summarizing results from research conducted by EPA’s Office of Research and Development into the performance of several green infrastructure practices. The website also contains links to technical webcasts for public officials and green infrastructure practitioners concerning specific green infrastructure practices, such as design, operation, and maintenance, including a webcast addressing strategies on designing, implementing, and maintaining green infrastructure at the local level and a webcast on the cost- savings and benefits of using green infrastructure, and fact sheets and supplemental materials that EPA has developed to provide examples of how green infrastructure can be incorporated into permits and other compliance agreements, such as CSO consent decrees. In addition, since 2012 EPA has provided $2.8 million in technical assistance to 52 municipalities for planning and implementing green infrastructure. On the basis of this work, EPA has posted on its website case studies focused on the use of green infrastructure options to address a variety of site-specific issues related to green infrastructure, such as flood mitigation, the capture of stormwater for reuse for irrigation of parkland, adaptation to climate change, the integration of green infrastructure into transportation planning, and addressing barriers to using green infrastructure. For example, in one case study, EPA identified green infrastructure options for a low-lying coastal area subject to sea level rise. In another case study, EPA worked with a city to develop a conceptual design for a 100,000-gallon storage tank that the city will use to harvest stormwater from a storm drain system, reducing runoff and using the water to irrigate parkland. In addition, EPA also issued a summary report to convey the overall lessons learned in the technical assistance projects. To address the goal of decreasing the financial burden to communities of installing green infrastructure, EPA has provided funding for green infrastructure to municipalities. For example, since 2009, the Green Project Reserve (GPR), which is part of the agency’s Clean Water State Revolving Fund, has provided $944 million for green infrastructure project loans to municipalities, according to EPA’s website. Green infrastructure projects funded under the GPR have included (1) urban reforestation in one city that has served the dual purpose of reducing stormwater runoff and promoting urban revitalization in an economically distressed area and (2) in another city, a bioengineered stream and constructed wetland that reduced stormwater runoff by enhancing water infiltration into the ground while creating a public gathering space. EPA also provides funding under other programs for green infrastructure, including through Clean Water Act Nonpoint Source Grants and through its Urban Waters Small Grants Program, Five Star and Urban Waters Restoration Grants Program, and Greening America’s Communities Program, among others. To address the goal of establishing partnerships and capacity, EPA officials said that they held a series of national community summits to encourage peer-to-peer exchange for better stormwater management from 2013 to 2015. The agency now works with a network of municipalities, which was created in 2015, focused on effectively using green infrastructure. The network brings together green infrastructure practitioners from different communities to help them learn from each other as they use green infrastructure. In addition to collaborating with this network, EPA developed a web application called the Green Infrastructure Wizard to connect communities to EPA green infrastructure tools and resources and maintains an electronic mailing list called GreenStream to help share publications, training, and funding opportunities. EPA officials said that they also sponsored efforts to educate students in the use of green infrastructure. Since 2012, EPA has held the Campus RainWorks Challenge, an annual competition for college students, with the intention of exposing future engineers and designers to green infrastructure concepts. In these challenges, college students form teams, each with a faculty sponsor, and design innovative green infrastructure projects for their campuses to effectively manage stormwater. In 2016, according to EPA’s website, student teams from 30 states submitted designs that were judged by representatives from EPA and its cooperating organizations—the American Society of Landscape Architects, the American Society of Civil Engineers, and the Water Environment Federation. In 2016, EPA conducted an informal assessment of its progress in advancing the use of green infrastructure and determined that the information, assistance, and funding that the agency provided had not resulted in communities institutionalizing green infrastructure in a similar fashion to gray infrastructure. EPA officials we interviewed said that they regarded the early years of the agency’s green infrastructure program as an educational phase that increased awareness of the use of green infrastructure in managing stormwater. However, these officials said that they have found that while municipalities are now generally aware of green infrastructure, they are not using it extensively to manage stormwater, and the officials identified challenges for the municipalities in installing green infrastructure. The officials said that fully integrating stormwater management into other community planning efforts requires a sufficiently long time horizon to help maximize environmental benefits and provide cost efficiencies by synchronizing a community’s plans with its stormwater management and any Clean Water Act obligations; this horizon is likely longer than the current 5-year permit window and the agency is exploring how to incorporate long-term planning approaches into permit conditions. EPA officials said that while it is possible to implement many practices on an ad hoc basis, comprehensive implementation across a municipality’s stormwater area can take multiple permit cycles. The EPA officials said that the agency would like communities to be more easily able to integrate green infrastructure into capital improvement plans and other municipal plans to realize the most effective environmental benefits and cost savings. In addition, EPA officials said that since green infrastructure is relatively new, municipalities do not know if using green infrastructure will meet the requirements of their permits and thus may be discouraged from using it. To address these challenges to installing green infrastructure, EPA officials said that they would develop a new focus on helping municipalities find ways to incorporate green infrastructure into stormwater systems over a longer period of time while still meeting permit requirements. The officials said that beginning in 2016, they launched a pilot project to work with 5 municipalities to develop long-term stormwater plans that incorporate green infrastructure. The officials said that they plan to work with these municipalities to identify projects to address stormwater management, including meeting permit requirements, while developing and implementing larger infrastructure and community plans that address other needs, such as transportation or recreation. According to EPA officials, the long-term stormwater plans will include projects that will be implemented over the course of multiple permit cycles—perhaps as long as 20 to 30 years. The long-term stormwater plans will be incorporated into permits, to show how the permits’ requirements to limit or eliminate stormwater pollution will be met. According to an EPA official, a municipality’s long-term stormwater plan would be reevaluated when its stormwater permit is renewed. EPA officials said that one purpose of the pilot project will be to help integrate a municipality’s long-range stormwater plan into its shorter-term permits. EPA officials also said that the idea of the pilot project is to demonstrate to other municipalities the benefits of using a long-term approach to planning for green infrastructure and stormwater management. According to the officials, this long-term approach can be more cost-effective for municipalities installing green infrastructure and can help reduce the costs of complying with permit requirements. More specifically, agency officials we interviewed said that by incorporating stormwater management at the same time as other infrastructure projects, such as transportation projects, the costs of implementing green infrastructure could be reduced while balancing other community priorities. For example, a park that includes green infrastructure features, such as bioswales, will serve two purposes, providing both recreational area and stormwater drainage, and the costs to install permeable pavement are not as high if the work is synchronized with other repaving projects, such as adding bike lanes. EPA officials we interviewed said that through the pilot project, the agency plans to establish groups in five municipalities to work collaboratively on developing long-term stormwater plans. By working with each municipality for at least 12 to 18 months, EPA officials said that they intend for each municipality to form a group of stakeholders that will collaborate to integrate green infrastructure into long-range plans that may include other municipal infrastructure elements, such as parks or streets. The participants for each of the five municipalities will include EPA; its consultants; the municipal department responsible for stormwater; potentially state NPDES permitting authorities; other municipal departments, such as for roads or parks; interest groups; and members of the general public. The participants may vary, depending on the municipality and other potential infrastructure improvements the municipality may be planning, and EPA officials said that they will work with stormwater officials in each municipality to identify the appropriate local agencies and other stakeholders that need to be involved in developing the stormwater management plan. The use of such a collaborative group is consistent with one of the mechanisms to implement interagency collaborative efforts that we identified in a 2012 report on key considerations for implementing interagency collaborative mechanisms. That report discusses different types of collaborative mechanisms, such as a coordinator appointed by the President or an interagency task force. In that report, we also identified that all collaborative mechanisms benefit from certain key features, which raise issues to consider when implementing these mechanisms. These issues are shown in table 1. EPA officials said that they have agreements with each municipality that the agency will provide each group with technical assistance. EPA officials also said that they would provide $150,000 to each municipality, for a total of $750,000 for the pilot. When we asked about what resources or documents EPA would use to guide the pilot project and the work with the five municipal groups, EPA officials referred us to the following agency resources that provide guidance to communities and wastewater utilities for planning for sustainability and managing stormwater planning more generally. Community Solutions for Stormwater Management: A Guide for Voluntary Long-term Planning (2016). According to the guide, it describes how to develop a comprehensive long-term community stormwater plan that integrates stormwater management with a municipality’s broader plans for economic development, infrastructure investment, and environmental compliance. The document says that when developing a plan, a community should determine and define the scope of the integration effort, ensure the active participation of entities that are needed to implement the plan, and identify the role each entity will have in implementing the plan. EPA officials said that this document outlines the approach they will use for the pilot projects. EPA is also developing a web-based Toolkit that will include technical and financing resources to walk communities through the long-term stormwater planning process provided in the Community Solutions for Stormwater Management guide Integrated Municipal Stormwater and Wastewater Planning Approach Framework (2012). According to the document, it is for use by EPA, states, and local governments to develop and implement integrated plans under the Clean Water Act. Steps for developing a plan include defining the scope of the integration effort, ensuring participation of the entities needed to implement the integrated plan, and identifying the role each entity will have in implementing the plan. EPA officials said that the pilot project’s approach to long-term planning reflects EPA’s Integrated Planning Framework. In addition, we identified other EPA resources which include some features that we have identified as being helpful for collaborative groups. These documents include the following information: Green Infrastructure in Parks: A Guide to Collaboration, Funding, and Community Engagement (2017). According to the guide, it is intended to encourage partnerships between park agencies and stormwater agencies aimed at promoting the use of green infrastructure on park lands. It identifies steps to facilitate the implementation of green infrastructure in parks, including identifying and engaging stakeholders; building relationships; leveraging funding opportunities; and undertaking high-visibility pilot projects, which it says helps gain support for more green practices. Planning for Sustainability: Handbook for Water and Wastewater Utilities (2012). According to the handbook, it is intended to provide information about how to enhance current planning processes by building in sustainability considerations. It is designed to be useful for various types and scales of planning efforts, such as long-range integrated water resources planning. The steps include the utility internally identifying sustainability priorities and potential opportunities and engaging the community about its sustainability priorities. Key to the success of the five groups is collaboration among the participants as they develop their long-range stormwater plans. Although EPA officials said that the documents they provided were not intended to include how EPA, municipal departments, and other stakeholders are to collaborate, they reflect some of the key considerations for implementing interagency collaborative mechanisms that we identified in our past work. For example, the two 2012 documents identify the need for appropriate participants to be involved in a collaborative group, and the 2016 document discusses the need to identify the roles that each entity will have in implementing a plan and to define the scope of the effort. In addition, the 2017 park planning document states that identifying opportunities to provide resources through leveraging funds can help incorporate green infrastructure features into a park, while at the same time accomplishing other purposes, such as providing trails and irrigation for sports fields. EPA officials we interviewed said that the efforts with the five municipal groups have just started and that they have not developed further guidance for how to collaborate with the municipalities and relevant stakeholders. In particular, EPA officials said that the five groups have not yet developed agreements on how they will work together to collaborate. According to the officials, they are working on additional resources to provide further details about options to engage communities, promote accountability, prioritize goals and actions, and identify financing options. Our prior work has found that agencies that articulate their agreements in formal documents, such as memorandums of understanding, can strengthen their commitment to working collaboratively. A written document can incorporate agreements reached among participants in any or all of the following areas: leadership, accountability, roles and responsibilities, and resources. When working with the five groups in the pilot project, EPA could better assure that they will successfully develop long-term stormwater plans if they document their agreement on how they will collaborate, such as in a memorandum of understanding, aligned with our key considerations for implementing interagency collaborative mechanisms. Similarly, any other efforts to develop long-term stormwater plans after the pilot project would benefit from the groups documenting their agreement on how they will collaborate. In the last 10 years, EPA’s green infrastructure program has focused on educating municipalities by providing information, technical assistance, and funding and, as our survey results show, has helped municipalities achieve familiarity with the general concept of green infrastructure. Yet EPA officials we interviewed believe that they are now at a turning point in this program, noting that green infrastructure is still not a prominent component of most municipal stormwater programs. EPA’s pilot project with five municipalities is a good way to focus on developing long-term stormwater plans. However, the success of EPA’s pilot project—and any other efforts to develop long-term stormwater plans after the pilot project—depends on successful collaboration among wide-ranging groups of participants. Our previous work on key considerations for implementing interagency collaborative mechanisms, such as the municipal groups proposed by EPA, provides more specific ways for groups to work together than what is currently contained in EPA documents. That work has also found that agencies that articulate their agreements in formal documents, such as memorandums of understanding, can strengthen their commitment to working collaboratively. When working with the municipal departments and other stakeholders, such as those in each of the five groups in the pilot project, EPA could have a better assurance that the groups will successfully develop long-term stormwater plans if they document their agreement on how they will collaborate, such as in a memorandum of understanding, aligned with our key considerations for implementing interagency collaborative mechanisms. The Director of EPA’s Office of Wastewater Management should, when working with municipalities and other stakeholders to develop long-term stormwater plans, document agreements on how they will collaborate, such as in a memorandum of understanding, aligned with our key considerations for implementing interagency collaborative mechanisms. (Recommendation 1) We provided a draft of this report to EPA for review and comment. In its written comments, reproduced in appendix III, EPA generally agreed with our findings, conclusions, and recommendation. EPA stated that it is in the early stages of the pilot project to assist municipalities in developing long-term stormwater plans and will utilize the collaborative practices recommended by GAO as it implements the project over the next 12 to 18 months. EPA’s plans, if implemented as described, would address our recommendation. EPA also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees; the Administrator of the Environmental Protection Agency; the Director, Office of Management and Budget; 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 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. Key contributors to this report are listed in appendix IV. In this report, we (1) describe to what extent selected municipalities are incorporating green infrastructure into their efforts to comply with National Pollutant Discharge Elimination System (NPDES) permits and consent decrees that address combined sewer overflows (CSO), and what is known about funding for such efforts; (2) describe what challenges, if any, these municipalities reported facing to incorporate green infrastructure into their efforts to comply with those permits and consent decrees; and (3) examine efforts the Environmental Protection Agency (EPA) is taking to help municipalities use green infrastructure. To describe how selected municipalities are incorporating green infrastructure into their efforts to comply with NPDES permits and consent decrees that address CSOs, what is known about funding for such efforts, and any challenges municipalities reported facing in incorporating green infrastructure into these efforts, we conducted a survey of representatives of 31 municipalities. We selected 20 municipalities that had NPDES permits required of municipalities to discharge stormwater into nearby water bodies, such as creeks, lakes, and rivers. The remaining 11 municipalities had entered into consent decrees with EPA to address CSOs. We restricted our selection of the 31 municipalities to those in the 50 states and Washington, D.C. Although we selected these municipalities at random from a range of geographic locations and a range of sizes, our sample of 31 municipalities cannot be generalized to all municipalities in the United States. We randomly selected the 20 municipalities with NPDES permits from the list of more than 5,000 municipalities that EPA identified in its 1999 rule extending the NPDES program to smaller municipalities. By using the 1999 list, which is almost 18 years old, we enhanced the likelihood that survey respondents would have experience conducting work to comply with their permits. We stratified our sample by size and location. Specifically, we randomly selected 10 municipalities with phase I permits—generally required for municipalities with populations of 100,000 or more—from each of EPA’s 10 regions. We also randomly selected 10 municipalities with phase II permits—generally required for governmental entities with populations of fewer than 100,000 from each of EPA’s 10 regions. Six of the selected municipalities were not available to participate in our survey; in each case, we randomly selected a municipality with the same type of permit from the same EPA region to take its place. Table 2 lists the 20 municipalities with permits that we surveyed, the EPA region in which it is located, and the size of population it serves. We randomly selected the 11 municipalities that have entered into consent decrees with EPA to address CSOs from a list of 36 such municipalities that EPA provided to us. These were municipalities that entered into consent decrees to address CSOs after August 2007. August 2007 is the date of a memorandum in which EPA states, among other things, that it will consider the feasibility of using green infrastructure in its enforcement activities, for example, consent decrees that address CSOs. An analysis of the 36 consent decrees showed that they differed in two characteristics—about half had some mention of green infrastructure in the text of the consent decree and about half were entered into with municipalities in EPA’s Region 5 (the Great Lakes region). The consent decrees were roughly distributed evenly among four groups—with and without mention of green infrastructure and either in or not in Region 5. We stratified our sample of 11 municipalities with consent decrees to be proportionally representative of both of these characteristics. In four instances, a municipality was not available to participate in our survey, in which case we randomly selected another municipality with similar characteristics. We selected these municipalities at random from a range of geographic locations and a range of sizes; however, because of the sample size, among other factors, the results are not generalizable to all municipalities in the United States. Table 3 lists the 11 municipalities with CSO consent decrees that we surveyed, the EPA region in which it is located, and population it serves. The questions we asked municipalities in our survey focused on (1) the extent to which the municipalities were using green infrastructure to comply, at least in part, with requirements of their permits or consent decrees; (2) the amount and source of capital expenditures for green infrastructure to comply, at least in part, with requirements of their permits or consent decrees; and (3) the challenges the municipalities may have experienced in using or considering green infrastructure to comply, at least in part, with requirements of their permits or consent decrees. The time frames for which we asked for information from the survey respondents varied by the questions we asked and whether a municipality was included in our survey because it has an NPDES permit or a consent decree to address CSOs. For questions to municipalities with permits about the extent to which the municipalities were using green infrastructure and questions about the challenges the municipalities may have experienced in using or considering green infrastructure, we asked for information for approximately the 5-year period prior to our survey. For questions to municipalities with consent decrees, we did not specify a time frame. For information on the amount and source of capital expenditure for municipalities with permits and municipalities with consent decrees, we asked survey respondents for the information from the respondents’ last 3 completed fiscal years. We limited these questions to 3 fiscal years to reduce the work burden on the respondents. Our survey questions about the extent to which the municipalities were using green infrastructure included questions about each of the 11 examples of green infrastructure that EPA listed on its website. Our survey questions about the amount and source of capital expenditures for green infrastructure asked about the cost of green infrastructure that was incurred by the permit holder. Seventeen respondents were able to provide us with the information—some provided it during the survey, and others provided it after we concluded the survey. In some instances, the respondents indicated that the expenditure information was an estimate. Our survey questions about challenges asked about the experiences the municipalities had regarding eight aspects of infrastructure development that may have posed challenges to them in using green infrastructure compared to their experiences in using gray infrastructure. The eight aspects are (1) obtaining land for the infrastructure project, (2) designing and engineering the project, (3) developing estimates for capital expenditures, (4) developing estimates for operation and maintenance expenditures, (5) installing the project, (6) the overall cost of the project, (7) confidence in the effectiveness of green infrastructure compared to gray infrastructure, and (8) the political and public opinion of green infrastructure compared to that of gray infrastructure. For each of these eight aspects, we asked municipalities to describe situations in which the aspect encouraged them to install green infrastructure and situations in which the aspect discouraged them from doing so. We examined each of the responses for each of the aspects to identify broad themes, including being unfamiliar with green infrastructure and being committed to using it. To identify the most common themes, we conducted a content analysis in which one analyst classified each response into one or more of the themes and a second analyst independently verified these classifications. For each aspect, we also asked municipalities if, in general, the aspect made green infrastructure usually more challenging than gray infrastructure, usually less challenging, or about the same. We conducted the survey by telephone from November 2016 through April 2017, with one analyst asking the questions, a second analyst documenting the responses electronically, and usually a third analyst taking handwritten notes. We reviewed the responses for accuracy and electronically transferred them into an Excel spreadsheet for analysis. For our survey, we used two questionnaires that were similar in content—one was used with municipalities with NPDES permits and the other was used with municipalities with CSO consent decrees. Both questionnaires are presented in appendix II. To help formulate our survey questions, we reviewed EPA documents and other literature describing green infrastructure and how green infrastructure projects are developed. We then met several times with a public interest group that represents municipal utilities and is familiar with green infrastructure and stormwater. We also pretested the survey with three municipalities and adjusted questions to make them more clear and answerable, as appropriate. To examine efforts EPA is taking to help municipalities use green infrastructure, we reviewed EPA regulations, guidance, and reports, as well as information and tools on EPA’s green infrastructure website. In addition, we interviewed officials from EPA’s Office of Wastewater Management about their ongoing and proposed efforts to encourage the use of green infrastructure. Specifically, we interviewed them about progress toward the items in the agency’s 2013 Strategic Agenda for green infrastructure and efforts they have made to develop a pilot project to collaborate with five communities to incorporate green infrastructure into long-term infrastructure investment plans and permits. We used key considerations on interagency collaboration identified in our prior work to assess the guidance available to the agency to develop collaborative groups. Specifically, our previous work identifies features of collaborative groups, including defining outcomes and ways to track progress, clarifying roles and responsibilities of participating agencies, ensuring that relevant groups participate, and putting guidance and agreements in writing. For all three objectives, we interviewed EPA officials in the agency’s Office of Wastewater Management, the office responsible for managing the Green Infrastructure Program, and Office of Enforcement and Compliance Assurance, as well as representatives from several public interest groups, about the use of green infrastructure by municipalities. We conducted this performance audit from February 2016 to September 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. GAO used two questionnaires that were similar in content to conduct the survey of municipalities. One questionnaire was used for municipalities with National Pollutant Discharge Elimination System (NPDES) permits, and the other questionnaire was used for municipalities with consent decrees that address combined sewer overflows (CSO). Both questionnaires are presented below. In addition to the contact named above, Susan Iott (Assistant Director), Rodney Bacigalupo, Mark Braza, John W. Delicath, Elizabeth M. Dretsch, Charles Egan, Richard P. Johnson, Ilga Semeiks, and Sarah Veale made key contributions to this report. | Urban stormwater runoff is a major contributor to pollution in U.S. waters. Municipalities historically managed stormwater with gray infrastructure. In 2007, EPA began encouraging the use of green infrastructure to manage stormwater and reduce the need for gray infrastructure. GAO was asked to examine the use of green infrastructure by municipalities to meet EPA's stormwater requirements. This report (1) describes the extent to which selected municipalities are incorporating, and funding, green infrastructure in stormwater management efforts; (2) describes what challenges, if any, municipalities reported facing in incorporating green infrastructure into stormwater management efforts; and (3) examines efforts EPA is taking to help municipalities use green infrastructure. GAO surveyed two nongeneralizable samples totaling 31 municipalities with stormwater permits or consent decrees for CSOs and interviewed EPA officials to examine EPA efforts to help municipalities use green infrastructure. The municipalities were randomly selected from lists of municipalities that are required to have permits and have consent decrees. Almost all 31 municipalities GAO surveyed reported using green infrastructure to comply with their Clean Water Act permits or combined sewer overflow (CSO) consent decrees. The Environmental Protection Agency (EPA) regulates stormwater pollution under the Clean Water Act, which requires municipalities to obtain permits to discharge stormwater into waterbodies. EPA has also entered into consent decrees with municipalities that have CSOs—events where raw sewage is discharged into waterbodies. Green infrastructure uses natural processes to manage stormwater, such as capturing stormwater so it can seep into soil (see figure). However, of 27 municipalities responding, 15 reported that less than 5 percent of the area subject to their permit or consent decree drained into green infrastructure, with the remaining area draining into gray infrastructure, such as concrete sewers, or directly to waterbodies. Most of the municipalities reported funding green infrastructure with fees and general revenues. Of the 31 municipalities GAO surveyed, 26 reported that green infrastructure was more challenging than gray infrastructure in aspects of infrastructure development, such as developing project operation and maintenance cost estimates. Nevertheless, 25 of these municipalities reported instances where they used green infrastructure even though it was more challenging. Some municipalities reported that they were less familiar with green infrastructure but used it anyway because it performed better or it provided additional benefits, the community wanted to use it, and the municipality saw an opportunity to learn about green infrastructure. EPA provides multiple resources to educate and assist municipalities on the use of green infrastructure. In 2016, the agency launched a pilot project with five municipalities to encourage states, communities, and municipalities to develop long-term stormwater plans to increase their use of green infrastructure. Key to the success of the pilot project is collaboration among many stakeholders from across each community, such as members of the local utility, transportation, and recreation departments, as well as local organizations. GAO has previously identified key considerations, such as documenting agreements on how to collaborate that can benefit collaborative efforts. However, EPA has not yet documented collaborative agreements with pilot stakeholders. EPA could better assure that the stakeholders will successfully develop long-term stormwater plans if it documents how the stakeholders will collaborate. GAO recommends that EPA document agreements, when working with municipalities and other stakeholders, on how they will collaborate when developing long-term stormwater plans. EPA generally agreed with GAO's recommendation and plans to implement it over the next 12 to 18 months. |
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The purpose of the PRA is to (1) minimize the federal paperwork burden for individuals, small businesses, state and local governments, and other persons; (2) minimize the cost to the federal government of collecting, maintaining, using, and disseminating information; and (3) maximize the usefulness of information collected by the federal government. The PRA also aims to provide for timely and equitable dissemination of federal information; improve the quality and use of information to increase government accountability at a minimized cost; and manage information technology to improve performance and reduce burden, while improving the responsibility and accountability of OMB and the federal agencies to Congress and the public. To achieve these purposes, the PRA prohibits federal agencies from conducting or sponsoring an information collection unless they have prior approval from OMB. The PRA requires that information collections be approved by OMB when facts or opinions are solicited from 10 or more people. Under the law, OMB is required to determine that an agency information collection is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility. The PRA requires every agency to establish a process for its chief information officer (CIO) to review program offices’ proposed information collections, such as certifying that each proposed collection complies with the PRA, including ensuring that it is not unnecessarily duplicative. The agency is to provide two public notice periods—an initial 60-day notice period and a 30-day notice period after the information collection is submitted to OMB for approval. Agencies are responsible for consulting with members of the public and other affected agencies to solicit comments on, among other things, ways to minimize the burden on respondents, including through the use of automated collection techniques or other forms of information technology. According to an OMB official, this could include asking for comments on a proposal to use administrative data instead of survey data. Following satisfaction of these requirements, an agency is to submit its proposed information collection for OMB review, whether for new information collections or re-approval of existing information collections. Before an agency submits a proposed information collection for approval, an agency may invest substantial resources to prepare to conduct an information collection. An agency may undertake, among other things, designing the information collection, testing, and consulting with users. For example, over the last 8 years, BLS has led an interagency effort designed to develop a measure of the employment rate of adults with disabilities pursuant to Executive Order 13078 signed by President Clinton in 1998. This effort has entailed planning, developing, and testing disability questions to add to the CPS. OMB is responsible for determining whether each information collection is necessary for the proper performance of the agency’s functions. According to the Statistical Programs of the United States Government: Fiscal Year 2006, an estimated $5.4 billion in fiscal year 2006 was requested for statistical activities. The PRA also requires the establishment of the Interagency Council on Statistical Policy (ICSP). According to the Statistical Programs of the United States Government: Fiscal Year 2006, the ICSP is a vehicle for coordinating statistical work, particularly when activities and issues cut across agencies; for exchanging information about agency programs and activities; and for providing advice and counsel to OMB on statistical matters. The PRA also requires OMB to annually report on the paperwork burden imposed on the public by the federal government and efforts to reduce this burden, which is reported in Managing Information Collection: Information Collection Budget of the United States Government. For example, the 2006 Information Collection Budget reported on agency initiatives to reduce paperwork, such as HHS’s assessment of its information collections with a large number of burden hours, which resulted in reducing the department’s overall burden hours by over 36 million in fiscal year 2005. OMB produces the annual Statistical Programs of the United States Government report to fulfill its responsibility under the PRA to prepare an annual report on statistical program funding. This document outlines the effects of congressional actions and the funding for statistics proposed in the President’s current fiscal year budget, and highlights proposed program changes for federal statistical activities. It also describes a number of long-range planning initiatives to improve federal statistical programs, including making better use of existing data collections while protecting the confidentiality of statistical information. At the time of our review, OMB had approved 584 new and ongoing statistical and research surveys as recorded in the database of OMB- approved information collections. OMB uses the database for tracking purposes, as it provides the only centralized information available on the characteristics of the surveys that OMB has approved. The database contains information on some, but not all, of the characteristics of the information collections. The information that agencies provide in the packages they submit to OMB for approval includes additional data, such as the estimated cost. Statistical and research surveys represent about 7 percent of the total universe of 8,463 OMB-approved information collections, the majority of which, as shown in figure 1, are for regulatory or compliance and application for benefits purposes. Although there are certain surveys funded through grants and contracts that are not approved by OMB under the PRA, OMB stated that there is no comprehensive list of these surveys. Forty percent of OMB-approved statistical and research surveys were administered to individuals and households, as shown in figure 2. Annual estimated burden hours are defined as the amount of time for the average respondent to fill out a survey times the number of respondents. Figure 3 shows the range of burden hours, for general purpose research and statistics information collections, with about 35 percent of the surveys each accounting for 1,000 or fewer total burden hours. According to an OMB official, the electronic system, Regulatory Information Service Center Office of Information and Regulatory Affairs Consolidated Information System, has automated the agency submission and OMB review process. This new system, which was implemented in July of 2006, is intended to allow OMB and agency officials to search information collection titles and abstracts for major survey topics and key words. Table 2 provides information from agency officials and documents for the selected surveys that we reviewed in more depth. For these seven surveys, the sample sizes ranged from 5,000 individuals for the NHANES to 55,000 housing units for the AHS. The NHANES has a much smaller sample size and greater cost (as compared to the other surveys with similar burden hours) because it includes both an interview and a physical examination in a mobile exam center. The physical examination can include body measurements and tests and procedures, such as a blood sample and dental screening, to assess various aspects of respondents’ health. Other differences among the surveys we reviewed included their specific purposes (e.g., to obtain health information or demographics data); the time period considered (some of the surveys provide data as of a certain point in time while others are longitudinal and follow the same respondents over a period of time); and the frequency with which the surveys were conducted. In addition, many of these surveys have been in existence for decades. Of the seven surveys we reviewed, five are defined by the Statistical Programs of the United States Government Fiscal Year 2006 as major household surveys (ACS, AHS, CPS, NHIS, and SIPP), and in addition MEPS’s household sample is a sub-set of NHIS’s sample. The ACS, unlike the other surveys, is mandatory and will replace the decennial census long-form. In addition to the surveys that we reviewed, two other surveys, the Consumer Expenditure Surveys and the National Crime Victimization Survey, are also defined by the Statistical Programs of the United States Government of 2006 as major household surveys. Agencies and OMB have procedures intended to identify and prevent unnecessary duplication in information collections. Agencies are responsible for certifying that an information collection is not unnecessarily duplicative of existing information as part of complying with OMB’s approval process for information collections. OMB has developed guidance that agencies can use in complying with the approval process. Once an agency submits a proposed information collection to OMB, OMB is required to review the agency’s paperwork, which includes the agency’s formal certification that the proposed information collection is not unnecessarily duplicative. “For example, unnecessary duplication exists if the need for the proposed collection can be served by information already collected for another purpose - such as administrative records, other federal agencies and programs, or other public and private sources. If specific information is needed for identification, classification, or categorization of respondents; or analysis in conjunction with other data elements provided by the respondent, and is not otherwise available in the detail necessary to satisfy the purpose and need for which the collection is undertaken; and if the information is considered essential to the purpose and need of the collection, and/or to the collection methodology or analysis of results, then the information is generally deemed to be necessary, and therefore not duplicative within the meaning of the PRA and OMB regulation.” When an agency is ready to submit a proposed information collection to OMB, the agency’s CIO is responsible for certifying that the information collection satisfies the PRA standards, including a certification that the information collection is not unnecessarily duplicative of existing information sources. We have previously reported that agency CIOs across the government generally reviewed information collections and certified that they met the standards in the act. However, our analysis of 12 case studies at the Internal Revenue Service (IRS) and the Department of Veterans Affairs, HUD, and DOL, showed that the CIOs certified collections even though support was often missing or incomplete. For example, seven of the cases had no information and two included only partial information on whether the information collection avoided unnecessary duplication. Further, although the PRA requires that agencies publish public notices in the Federal Register and otherwise consult with the public, agencies governmentwide generally limited consultation to the publication of the notices, which generated little public comment. Without appropriate support and public consultation, agencies have reduced assurance that collections satisfy the standards in the act. We recommended that the Director of OMB alter OMB’s current guidance to clarify the kinds of support that it asks agency CIOs to provide for certifications and to direct agencies to consult with potential respondents beyond the publication of Federal Register notices. OMB has not implemented these recommendations. OMB has three different guidance publications that agencies can consult in the process of developing information collection submissions, according to OMB officials. The three guidance publications address unnecessary duplication to varying degrees. The draft, Implementing Guidance for OMB Review of Agency Information Collection, provides, among other things, instructions to agencies about how to identify unnecessary duplication of proposed information collections with existing available information sources. OMB’s Questions and Answers When Designing Surveys for Information Collections discusses when it is acceptable to duplicate questions used in other surveys. The publication also encourages agencies to consult with OMB when they are proposing new surveys, major revisions, or large-scale experiments or tests, before an information collection is submitted. For example, when BLS was developing its disability questions for the CPS, BLS officials stated that they consulted OMB on numerous occasions. OMB officials also said that when they are involved early in the process, it is easier to modify an agency’s plan for an information collection. OMB officials told us that an agency consultation with OMB before an information collection is developed can provide opportunities to identify and prevent unnecessary duplication. For example, according to an OMB official, while OMB was working with the Federal Emergency Management Agency (FEMA) to meet the need for information on the impact of Hurricane Katrina, OMB identified a survey partially funded by the National Institute of Mental Health (NIMH) that was in the final stages of design and would be conducted by Harvard University—the Hurricane Katrina Advisory Group Initiative. OMB learned that this survey, which was funded through a grant (and was not subject to review and approval under the PRA), planned to collect data on many of the topics that FEMA was interested in. OMB facilitated collaboration between FEMA and HHS and ultimately, FEMA was able to avoid launching a new survey by enhancing the Harvard study. OMB’s draft of the Proposed Standards and Guidelines for Statistical Surveys, which focuses on statistical surveys and their design and methodology, did not require that agencies assess potential duplication with other available sources of information as part of survey planning. We suggested that OMB require that when agencies are initiating new surveys or major revisions of existing surveys they include in their written plans the steps they take to ensure that a survey is not unnecessary duplicative with available information sources. OMB has incorporated this suggestion. Under the PRA, OMB is responsible for reviewing proposed information collections to determine whether a proposed information collection meets the PRA criteria, which include a requirement that it not unnecessarily duplicate available information. According to an OMB official responsible for reviewing information collections, OMB’s review process consists of several steps. She said that once an agency has submitted the proposed information collection package to OMB, the package is sent to the appropriate OMB official for review. When there is a need for clarification or questions exist, this OMB official told us that OMB communicates with the agency either through telephone conferences or via e-mail. After approval, OMB is required to assign a number to each approved information collection, which the agencies are then to include on their information collection (e.g., survey) forms. In addition to its responsibilities for reviewing proposed information collections, OMB also contributes to or leads a wide range of interagency efforts that address federal statistics. For example, OMB chairs the ICSP. The ICSP is a vehicle for coordinating statistical work, exchanging information about agency programs and activities, and providing advice and counsel to OMB on statistical matters. The council consists of the heads of the principal statistical agencies, plus the heads of the statistical units in the Environmental Protection Agency, IRS, National Science Foundation, and Social Security Administration (SSA). According to an OMB official, the ICSP can expand its membership for working groups to address specific topics. For example, the ICSP established an employment-related health benefits subcommittee and included non-ICSP agencies, such as HHS’s AHRQ (which co-chaired the subcommittee). The ICSP member agencies exchange experiences and solutions with respect to numerous topics of mutual interest and concern. For example, in the past year, the council discussed topics such as the revision of core standards for statistical surveys opportunities for interagency collaboration on information technology development and investment and sample redesign for the major household surveys with the advent of the ACS. On the basis of OMB’s definition of unnecessary duplication, the surveys we reviewed could be considered to contain necessary duplication. To examine selected surveys to assess the extent of unnecessary duplication in areas with similar subject matter, we looked at surveys that addressed three areas: (1) people without health insurance (CPS, NHIS, MEPS, and SIPP), (2) people with disabilities (NHIS, NHANES, MEPS, SIPP, and ACS), and (3) the housing questions on the AHS and ACS. We found that the selected surveys had duplicative content and asked similar questions in some cases. However, the agencies and OMB judged that this was not unnecessary duplication given the differences among the surveys. In some instances, the duplication among these surveys yielded richer data, allowing fuller descriptions of specific topics and providing additional perspectives on a topic, such as by focusing on the different sources and effects of disabilities. The seven surveys we reviewed originated at different times and differ in many aspects, including the samples drawn, the time periods measured, the types of information collected, and level of detail requested. These factors can affect costs and burden hours associated with the surveys. In addition, the differences can create confusion in some cases because they produce differing estimates and use different definitions. Although the CPS, NHIS, MEPS, and SIPP all measure people who do not have health insurance, the surveys originated at different times and differ in several ways, including the combinations of information collected that relate to health insurance, questions used to determine health insurance status, and time frames. Health insurance status is not the primary purpose of any of these surveys, but rather one of the subject areas in each survey. In addition, because each survey has a different purpose, each survey produces a different combination of information related to people’s health insurance. The CPS originated in 1948 and provides data on the population’s employment status. Estimates from the CPS include employment, unemployment, earnings, hours of work, and other indicators. Supplements also provide information on a variety of subjects, including information about employer-provided benefits like health insurance. CPS also provides information on health insurance coverage rates for sociodemographic subgroups of the population. The time frame within which data is released varies; for example, CPS employment estimates are released 2-3 weeks after collection while supplement estimates are released in 2-9 months after collection. The NHIS originated in 1957 and collects information on reasons for lack of health insurance, type of coverage, and health care utilization. The NHIS also collects data on illnesses, injuries, activity limitations, chronic conditions, health behaviors, and other health topics, which can be linked to health insurance status. HHS stated that although health insurance data are covered on other surveys, NHIS’s data on health insurance is key to conducting analysis of the impact of health insurance coverage on access to care, which is generally not collected on other surveys. The MEPS originated in 1977 and provides data on health insurance dynamics, including changes in coverage and periods without coverage. The MEPS augments the NHIS by selecting a sample of NHIS respondents and collecting additional information on the respondents. The MEPS also links data on health services spending and health insurance status to other demographic characteristics of survey respondents. The MEPS data can also be used to analyze the relationship between insurance status and a variety of individual and household characteristics, including use of and expenditures for health care services. The SIPP originated in 1983 in order to provide data on income, labor force, and government program participation. The information collected in the SIPP, such as the utilization of health care services, child well-being, and disability, can be linked to health insurance status. The SIPP also measures the duration of periods without health insurance. Because the surveys use different methods to determine health insurance status, they can elicit different kinds of responses and consequently differing estimates within the same population. To determine if a person is uninsured, surveys use one of two methods: they ask respondents directly if they lack insurance coverage or they classify individuals as uninsured if they do not affirmatively indicate that they have coverage. The CPS and the NHIS directly ask respondents whether they lack insurance coverage. While the difference between these approaches may seem subtle, using a verification question prompts some people who did not indicate any insurance coverage to rethink their status and indicate coverage that they had previously forgotten to mention. The surveys also differ both in the time period respondents are asked to recall and in the time periods measured when respondents did not have health insurance. Hence, the surveys produce estimates that do not rely upon standardized time or recall periods and as a result are not directly comparable. The ASEC to the CPS is conducted in February, March, and April and asks questions about the prior calendar year. An interviewer asks the respondent to remember back for the previous calendar year which can be as long as 16 months in the April interview. The other three surveys, in contrast, asked about coverage at the time of the interview. Because a respondent’s ability to recall information generally degrades over time, most survey methodologists believe that the longer the recall period, the less accurate the answers will be to questions about the past, such as exactly when health insurance coverage started or stopped, or when it changed because of job changes. Another difference is the time period used to frame the question. The CPS asked whether the respondent was uninsured for an entire year, while NHIS, MEPS, and SIPP asked whether the individual was ever insured, or was uninsured at the time of the interview, for the entire last year, and at any time during the year. Table 3 illustrates the differing estimates obtained using data from the four selected surveys. While these differences can be explained, the wide differences in the estimates are of concern and have created some confusion. For example, the 2004 CPS estimate for people who were uninsured for a full year is over 50 percent higher than the NHIS estimate for that year. HHS has sponsored several interagency meetings on health insurance data, which involved various agencies within HHS and the Census Bureau. The meetings focused on improving estimates of health insurance coverage and included, among other things, examining how income data are used, exploring potential collaboration between HHS and the Census Bureau on whether the CPS undercounts Medicaid recipients, examining health insurance coverage rates, and discussing a potential project to provide administrative data for use in the CPS. As a result, HHS created a Web site with reports and data on relevant surveys and HHS’s office of the Assistant Secretary for Planning and Evaluation (ASPE) produced the report Understanding Estimates of the Uninsured: Putting the Differences in Context with input from the Census Bureau in an effort to explain the differing estimates. Similarly, although the NHIS, NHANES, MEPS, SIPP, and ACS all estimate the percentage of the population with disabilities, the surveys define disability differently and have different purposes and methodologies. In addition to these five surveys, which measure aspects of disability, BLS is also currently developing questions to measure the employment levels of the disabled population. HHS also stated that disability is included on multiple surveys so that disability status can be analyzed in conjunction with other information that an agency needs. For example, disability information is used by health departments to describe the health of the population, by departments of transportation to assess access to transportation systems, and departments of education in the education attainment of people with disabilities. The lack of consistent definitions is not unique to surveys; there are over 20 different federal agencies that administer almost 200 different disability programs for purposes of entitlement to public support programs, medical care, and government services. Although each of the surveys asks about people’s impairments or functionality in order to gauge a respondent’s disability status, there are some differences in how disability is characterized. For example, the NHIS asks respondents if they are limited in their ability to perform age- dependent life and other activities. The NHIS also asks about the respondent needing assistance with performing activities of daily living and instrumental activities of daily living. The NHANES measures the prevalence of physical and functional disability for a wide range of activities in children and adults. Extensive interview information on self- reported physical abilities and limitations is collected to assess the capacity of the individual to do various activities without the use of aids, and the level of difficulty in performing the task. The MEPS provides information on days of work or school missed due to disability. The SIPP queries whether the respondent has limitations of sensory, physical, or mental functioning and limitations on activities due to health conditions or impairments. The ACS asks about vision or hearing impairment, difficulty with physical and cognitive tasks, and difficulty with self-care and independent living. Because surveys produce different types of information on disability, they can provide additional perspectives on the sources and effects of disabilities, but they can also cause confusion because of the differences in the way disability is being measured. The NHIS contains a broad set of data on disability-related topics, including the limitation of functional activities, mental health questions used to measure psychological distress, limitations in sensory ability, and limitations in work ability. Moreover, the NHIS provides data, for those persons who indicated a limitation performing a functional activity, about the source or condition of their functional limitation. The NHANES links medical examination information to disability. The MEPS measures how much individuals spend on medical care for a person with disabilities and can illustrate changes in health status and health care expenses. The SIPP provides information on the use of assistive devices, such as wheelchairs and canes. Finally, the ACS provides information on many social and economic characteristics, such as school enrollment for people with disabilities as well as the poverty and employment status of people with different types of disabilities. However, the estimates of disability in the population that these surveys produce can vary widely. A Cornell University study compared disability estimates among the NHIS, SIPP, and ACS. A number of categories of disability were very similar, such as the nondisabled population, while others, such as the disabled population or people with sensory disabilities, had widely varying estimates, as shown in table 4. For example, according to data presented in a Cornell University study that used survey questions to define and subsequently compare different disability measures across surveys, the SIPP 2002 estimate of people with sensory disabilities for ages 18-24 was more than six times the NHIS estimate for that year for ages 18-24. In commenting on this report, the DOC and HHS acknowledged that comparing the NHIS and SIPP with respect to sensory disabilities is problematic. HHS officials noted that the confusion caused by these different estimates derives mostly from the lack of a single definition of disability, which leads to data collections that use different questions and combinations of information to define disability status. Because the concept of disability varies, with no clear consensus on terminology or definition, and there are differing estimates, several federal and international groups are examining how the associated measures of disability could be improved. HHS’s Disability Workgroup, which includes officials from HHS and the Department of Education, examines how disability is measured and used across surveys. The task of another federal group, the Subcommittee on Disability Statistics of the Interagency Committee on Disability Research, is to define and standardize the disability definition. The Washington Group on Disability Statistics (WGDS), an international workgroup sponsored by the United Nations in which OMB and NCHS participate, is working to facilitate the comparison of data on disability internationally. The WGDS aims to guide the development of a short set or sets of disability measures that are suitable for use in censuses, sample-based national surveys, or other statistical formats, for the primary purpose of informing policy on equalization of opportunities. The WGDS is also working to develop one or more extended sets of survey items to measure disability, or guidelines for their design, to be used as components of population surveys or as supplements to specialty surveys. HHS added that the interest in standardizing the measurement of disability status is also driven by the desire to add a standard question set to a range of studies so that the status of persons with disabilities can be described across studies. In 2002, we reported that the AHS and ACS both covered the subject of housing. Of the 66 questions on the 2003 ACS, 25 were in the section on housing characteristics, and all but one of these questions were the same as or similar to the questions on the AHS. For example, both the AHS and the ACS ask how many bedrooms a housing unit has. However, the two surveys differ in purposes and scope. The purpose of the AHS is to collect detailed housing information on the size, composition, and state of housing in the United States, and to track changes in the housing stock over time, according to a HUD official. To that end, the AHS includes about 1,000 variables, according to a HUD official, such as the size of housing unit, housing costs, different building types, plumbing and electrical issues, housing and neighborhood quality, mortgage financing, and household characteristics. The AHS produces estimates at the national level, metropolitan level for certain areas, and homogenous zones of households with fewer than 100,000 households. The AHS is conducted every 2 years nationally and every 6 years in major metropolitan areas, except for six areas, which are surveyed every 4 years. In contrast, the level of housing data in the ACS is much less extensive. The ACS is designed to replace the decennial Census 2010 long-form and covers a wide range of subjects, such as income, commute time to work, and home values. The ACS provides national and county data and, in the future, will provide data down to the Census tract level, according to a Census Bureau official. The ACS is designed to provide communities with information on how they are changing, with housing being one of the main topic areas along with a broad range of household demographic and economic characteristics. The AHS and ACS also have different historical and trend data and data collection methods. The AHS returns to the same housing units year after year to gather data; therefore, it produces data on trends that illustrate the flow of households through the housing stock, according to a HUD official, while the ACS samples new households every month. Historical data are also available from the AHS from the 1970s onward, according to a HUD official. Analysts can use AHS data to monitor the interaction among housing needs, demand, and supply, as well as changes in housing conditions and costs. In addition, analysts can also use AHS data to support the development of housing policies and the design of housing programs appropriate for different groups. HUD uses the AHS data, for example, to analyze changes affecting housing conditions of particular subgroups, such as the elderly. The AHS also plays an important role in HUD’s monitoring of the lending activities of the government-sponsored enterprises, Fannie Mae and Freddie Mac, in meeting their numeric goals for mortgage purchases serving minorities, low-income households, and underserved areas. AHS’s characteristic of returning to the same housing units year after year provides the basis for HUD’s Components of Inventory Change (CINCH) and Rental Dynamics analyses. The CINCH reports examine changes in housing stock over time by comparing the status and characteristics of housing units in successive surveys. The Rental Dynamics program, which is a specialized form of CINCH, looks at rental housing stock changes, with an emphasis on changes in affordability. Another use of AHS data has been for calculating certain fair market rents (FMR), which HUD uses to determine the amount of rental assistance subsidies for major metropolitan areas between the decennial censuses. However, HUD plans to begin using ACS data for fiscal year 2006 FMRs. As we previously reported, this could improve the accuracy of FMRs because the ACS provides more recent data that closely matches the boundaries of HUD’s FMR areas than the AHS. In our 2002 report, which was published before the ACS was fully implemented, we also identified substantial overlap for questions on place of birth and citizenship, education, labor force characteristics, transportation to work, income, and, in particular, housing characteristics. We recommended that the Census Bureau review proposed ACS questions for possible elimination that were asked on the AHS to more completely address the possibility of reducing the reporting burden in existing surveys. The Census Bureau responded that they are always looking for opportunities to streamline, clarify, and reduce respondent burden, but that substantial testing would be required before changes can be made in surveys that provide key national social indicators. In addition to efforts underway to try to reconcile inconsistencies among surveys that address the same subject areas, a number of major changes have occurred or are planned to occur that will affect the overall portfolio of major household surveys. As previously discussed, the ACS was fully implemented in 2005 and provides considerable information that is also provided in many other major household surveys. The ACS is the cornerstone of the government’s effort to keep pace with the nation’s changing population and ever-increasing demands for timely and relevant data about population and housing characteristics. The new survey will provide current demographic, socioeconomic, and housing information about America’s communities every year, information that until now was only available once a decade. Starting in 2010, the ACS will replace the long-form census. As with the long-form, information from the ACS will be used to administer federal and state programs and distribute more than $200 billion a year. Detailed data from national household surveys can be combined with data from the ACS to create reliable estimates for small geographic areas using area estimation models. Partly in response to potential reductions in funding for fiscal year 2007, the Census Bureau is planning to reengineer the SIPP with the intent of ultimately providing better information at lower cost. SIPP has been used to estimate future costs of certain government programs. For example, HUD used SIPP’s longitudinal capacity to follow families over time to determine that households with high-rent burdens in one year move in and out of high-rent burden status over subsequent years. Therefore, although the overall size of the population with worst-case housing needs is fairly stable, the households comprising this population change with considerable frequency—an issue that HUD told us is potentially important in the design of housing assistance programs. Although the SIPP has had problems with sample attrition and releasing data in a timely manner, which the reengineering is intended to ameliorate, there has been disagreement about this proposal among some users of SIPP data. Census Bureau officials said they are meeting with internal and external stakeholders and are considering using administrative records. Census Bureau officials told us that they could develop a greater quality survey for less money, with a final survey to be implemented in 2009. They also said that they may consider using the ACS or CPS sampling frame. In addition to the seven surveys discussed previously, we also identified examples of how, over the years, agencies have undertaken efforts to enhance their surveys’ relevance and efficiency through steps such as using administrative data in conjunction with survey data, reexamining and combining or eliminating surveys, and redesigning existing surveys. The Census Bureau and BLS have used administrative data collected for the administration of various government programs in conjunction with survey data. The Census Bureau and BLS have used the administrative data to target specific populations to survey and to obtain information without burdening survey respondents. The Census Bureau uses administrative data in combination with survey data to produce its Economic Census business statistics, which, every 5 years, profile the U.S. economy from the national to the local level. The Economic Census relies on the centralized Business Register, which is compiled from administrative records from IRS, SSA, and BLS, along with lists of multi-establishment businesses that the Census Bureau maintains. The Business Register contains basic economic information for over 8 million employer businesses and over 21 million self-employed businesses. The Economic Census uses the Business Register as the sampling frame to identify sets of businesses with specific characteristics, such as size, location, and industry sector. BLS also uses a combination of administrative and survey data to produce its quarterly series of statistics on gross job gains and losses. BLS uses administrative data provided by state workforce agencies that compile and forward quarterly state unemployment insurance (UI) records to BLS. These state agencies also submit employment and wage data to BLS. The data states provide to BLS include establishments subject to state UI laws and federal agencies subject to the Unemployment Compensation for Federal Employees program, covering approximately 98 percent of U.S. jobs. These administrative data enable BLS to obtain information on many businesses without having to impose a burden on respondents. BLS augments the administrative data with two BLS-funded surveys conducted by the states. The Annual Refiling Survey updates businesses’ industry codes and contact information, and the Multiple Worksite Report survey provides information on multiple work sites for a single business, data that are not provided by the UI records, enabling BLS to report on business statistics by geographic location. Combining the data from these surveys with administrative data helps BLS increase accuracy, update information, and include additional details on establishment openings and closings. However, because of restrictions on information sharing, BLS is not able to access most of the information that the Census Bureau uses for its business statistics because much of this information is commingled with IRS data. The Confidential Information Protection and Statistical Efficiency Act of 2002 (CIPSEA, 44 U.S.C. § 3501 note) authorized identifiable business records to be shared among the Bureau Economic Analysis (BEA), BLS, and the Census Bureau for statistical purposes. CIPSEA, however, did not change the provisions of the Internal Revenue Code that preclude these agencies from sharing tax return information for statistical purposes. OMB officials stated that there is continued interest in examining appropriate CIPSEA companion legislation on granting greater access for the Census Bureau, BLS, and BEA to IRS data. Several agencies have reexamined some of their surveys, which has led to their elimination or modification. The Census Bureau, for example, reviewed its portfolio of Current Industrial Reports (CIR) program surveys of manufacturing establishments, which resulted in the elimination and modification of some surveys. Census Bureau officials said they decided to undertake this reexamination in response to requests for additional data that could not be addressed within existing budgets without eliminating current surveys. They were also concerned that the character of manufacturing, including many of the industries surveyed by the CIR program, had changed since the last reexamination of the CIR programs, which had been over 10 years earlier. Using criteria developed with key data users, Census Bureau officials developed criteria and used them to rank 54 CIR program surveys. The criteria included 11 elements, such as whether the survey results were important to federal agencies or other users, and the extent to which the subject matter represented a growing economic activity in the United States. The recommendations the Census Bureau developed from this review were then published in the Federal Register and after considering public comments, the Census Bureau eliminated 11 surveys, including ones on knit fabric production and industrial gases. The Census Bureau also redesigned 7 surveys, scaling back the information required to some extent and updating specific product lists. As a result of this reexamination, the Census Bureau was able to add a new survey on “analytical and biomedical instrumentation,” and it is considering whether another new CIR program survey is needed to keep pace with manufacturing industry developments. Census Bureau officials told us that they plan on periodically reexamining the CIR surveys in the future. HHS has also reexamined surveys to identify improvements, in part by integrating a Department of Agriculture (USDA) survey which covered similar content into HHS’s NHANES. For about three decades, HHS and USDA conducted surveys that each contained questions on food intake and health status (NHANES and the Continuing Survey of Food Intakes by Individuals, respectively). HHS officials stated that HHS and USDA officials considered how the two surveys could be merged for several years before taking action. According to HHS officials, several factors led to the merger of the two surveys, including USDA funding constraints, the direct involvement of senior-level leadership on both sides to work through the issues, and HHS officials’ realization that the merger would enable them to add an extra day of information gathering to the NHANES. Integrating the two surveys into the NHANES made it more comprehensive by adding a follow-up health assessment. According to HHS officials, adding this component to the original in-person assessment allows agency officials to better link dietary and nutrition information with health status. Another mechanism HHS has established is a Data Council, which, in addition to other activities, assesses proposed information collections. The Data Council oversees the entire department’s data collections to ensure that the department relies, where possible, on existing core statistical systems for new data collections rather than on the creation of new systems. The Data Council implements this strategy through communicating and sharing plans, conducting annual reviews of proposed data collections, and reviewing major survey modifications and any new survey proposals. According to HHS officials, in several instances, proposals for new surveys and statistical systems have been redirected and coordinated with current systems. For example, HHS officials stated that when the Centers for Disease Control and Prevention (CDC) proposed a new survey on youth tobacco use, the Data Council directed it to the Substance Abuse and Mental Health Services Administration’s National Survey of Drug Use and Health. The Data Council stated that by adding questions on brand names, CDC was able to avoid creating a new survey to measure youths’ tobacco use. OMB recognizes that the federal government should build upon agencies’ practice of reexamining individual surveys to conduct a comprehensive reexamination of the portfolio of major federal household surveys, in light of the advent of the ACS. OMB officials acknowledged that this effort would be difficult and complex and would take time. According to OMB, integrating or redesigning the portfolio of major household surveys could be enhanced if, in the future, there is some flexibility to modify the ACS design and methods. For example, an OMB official stated that using supplements or flexible modules periodically within the ACS might enable agencies to integrate or modify portions of other major household surveys. OMB officials indicated that such an effort would likely not happen until after the 2010 decennial census, a critical stage for ACS when ACS data can be compared to 2010 Census data. OMB officials said and their long- range plans have already indicated their expectation that there will be improved integration of the portfolio of related major household surveys with the advent of the ACS. For example, the Statistical Programs of the United States Government: Fiscal Year 2006 describes plans for redesigning the samples for demographic surveys, scheduled for initial implementation after 2010, when the ACS may become the primary data source. In light of continuing budgetary constraints, as well as major changes planned and underway within the U.S. statistical system, the portfolio of major federal household surveys could benefit from a holistic reexamination. Many of the surveys have been in place for several decades, and their content and design may not have kept pace with changing information needs. The duplication in content in some surveys, while considered necessary, may be a reflection of incremental attempts over time to address information gaps as needs changed. OMB and the statistical agencies have attempted to address some of the more troublesome aspects of this duplication by providing explanations of the differences in health insurance estimates and with efforts to develop more consistent definitions of disability. These efforts, however, while helpful, address symptoms of the duplication without tackling the larger issues of need and purpose. In many cases, the government is still trying to do business in ways that are based on conditions, priorities, and approaches that existed decades ago and are not well suited to addressing today’s challenges. Thus, while the duplicative content of the surveys can be explained, there may be opportunities to modify long-standing household surveys, both to take advantage of changes in the statistical system, as well as to meet new information needs in the face of ever-growing constraints on budgetary resources. Some agencies have begun to take steps to reevaluate their surveys in response to budget constraints and changing information needs. Agencies have reexamined their surveys and used administrative data in conjunction with survey data to enhance their data collection efforts. These actions, however, focused on individual agency and user perspectives. By building upon these approaches and taking a more comprehensive focus, a governmentwide reexamination could help reduce costs in an environment of constrained resources and help prioritize information needs in light of current and emerging demands. Given the upcoming changes in the statistical system, OMB should lead the development of a new vision of how the major federal household surveys can best fit together. OMB officials told us they are beginning to think about a broader effort to better integrate the portfolio of major household surveys once the ACS has been successfully implemented. Providing greater coherence among the surveys, particularly in definitions and time frames, could help reduce costs to the federal government and associated burden hours. The Interagency Council on Statistical Policy (ICSP) could be used to bring together relevant federal agencies, including those that are not currently part of the ICSP. The ICSP has the leadership authority, and in light of the comprehensive scope of a reexamination initiative, could draw on leaders from the agencies that collect or are major users of federal household survey data. While OMB officials have stated that the ACS may not have demonstrated its success until after 2010, the complexity and time needed to reexamine the portfolio of major federal household surveys means that it is important to start planning for that reexamination. To deal with the longer term considerations crucial in making federally funded surveys more effective and efficient, GAO recommends that the Director of OMB work with the Interagency Council on Statistical Policy to plan for a comprehensive reexamination to identify opportunities for redesigning or reprioritizing the portfolio of major federal household surveys. We requested comments on a draft of this report from the Director of OMB and the Secretaries of Commerce, HHS, HUD, and Labor or their designees. We obtained oral and technical comments on a draft of this report from the Chief Statistician of the United States and her staff at OMB, as well as written comments from the Acting Deputy Under Secretary for Economic Affairs at Commerce; the Assistant Secretary for Legislation at HHS; and the Assistant Secretary for Policy Development and Research at HUD; and technical comments from the Acting Commissioner of BLS at Labor, which we incorporated in the report as appropriate. In commenting on a draft of the report, OMB officials stated that the draft report presented an interesting study that addresses an issue worth looking at. OMB officials generally agreed with our recommendation, although they expressed concerns about the range of participants that might be involved in such a reexamination. We revised the recommendation to provide clarification that OMB should work with the Interagency Council on Statistical Policy rather than with all relevant stakeholders and decision makers. OMB officials also expressed concerns about moving from examining selected surveys in three subject areas to the conclusion that the entire portfolio of household surveys should be reexamined. In response we clarified that we were recommending a comprehensive reexamination of the seven surveys that comprise the portfolio of major federal household surveys, most of which were included in our review. OMB officials also provided clarification on how we characterized their statements on reexamining the portfolio of major household surveys, which we incorporated into the report. Each of the four departments provided technical clarifications that we incorporated into the report, as appropriate. In addition, HHS and HUD officials offered written comments on our findings and recommendation, which are reprinted in appendix II. HHS stated that a reexamination was not warranted without evidence of unnecessary duplication and also highlighted a number of examples of agency efforts to try to clarify varying estimates. However we did not rely on evidence of duplication, but rather based our recommendation on other factors, including a need to provide greater coherence among the surveys and to take advantage of changes in the statistical system to reprioritize information needs and possibly help reduce costs to the federal government and associated burden hours. Further, in light of the major upcoming changes involving the ACS and SIPP, and in conjunction with constrained resources and changing information needs, we believe that the major household surveys should be considered from a broader perspective, not simply in terms of unnecessary duplication. HHS also provided a number of general comments. We incorporated additional information to reflect HHS’s comments on the different uses of disability information, a standard set of disability questions, NHIS’s coverage of access to care, and the fact that MEP’s sample is a subset of the NHIS sample. HHS’s comments on differences in estimates and the lack of a single definition of disability were already addressed in the report. HHS also stated that NCHS works through various mechanisms to ensure that surveys are efficient. We support efforts to enhance efficiency and believe that our recommendation builds upon such efforts. HUD officials were very supportive of our recommendation, stating that such a reexamination is especially important as the ACS approaches full- scale data availability. In response to HUD’s comments suggesting adding more information on SIPP and AHS, we expanded the report’s discussion of the longitudinal dimension of SIPP and AHS. As agreed with your office, unless you publicly announce the contents of the report earlier, we plan no further distribution of it until 30 days from the date of the report. We will then send copies of this report to the appropriate congressional committees and to the Director of OMB, and the Secretaries of Commerce, HHS, HUD, and Labor, as well as to other appropriate officials in these agencies. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http:/www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6543 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. To answer our first objective of identifying the number and characteristics of Office of Management and Budget (OMB)-approved federally funded statistical and research surveys, we obtained the database of information collections that had been approved by OMB as of August 7, 2006. The information in the database is obtained from Form 83-I which is part of an agency’s submission for OMB approval of an information collection. As the approval is in effect for up to 3 years, this database reflects all those collections with OMB approval for their use as of that date, and is thus a snapshot in time. Although OMB Form 83-I requires agencies to identify various types of information about an information collection, including whether the information collection will involve statistical methods, the form does not require agencies to identify which information collections involve surveys consequently the database of OMB-approved information collections does not identify which information collections are surveys. Furthermore, the definition of information collections contained in the Paperwork Reduction Act (PRA) of 1980 is written in general terms and contains very few limits in scope or coverage. On the form, agencies can select from seven categories when designating the purpose of an information collection, which are (1) application for benefits, (2) program evaluation, (3) general purpose statistics, (4) audit, (5) program planning or management, (6) research, and (7) regulatory or compliance. When completing the form, agencies are asked to mark all categories that apply, denoting the primary purpose with a “P” and all others that apply with an “X.” Since OMB does not further define these categories, the agency submitting the request determines which categories best describe the purpose(s) of the proposed collection. The choices made may reflect differing understandings of these purposes from agency to agency or among individuals in the same agency. The list of surveys contained in this report was derived from the database of OMB-approved information collections and therefore contains all information collections that an agency designated as either “general purpose statistics” or “research” in the primary purpose category that we used as a proxy for the universe of surveys. The directions to agencies completing the forms call for agencies to mark “general purpose statistics” when the data are collected chiefly for use by the public or for general government use without primary reference to the policy or program operations of the agency collecting the data. Agencies are directed to mark “research” when the purpose is to further the course of research, rather than for a specific program purpose. We did not determine how accurately or reliably agencies designated the purpose(s) of their information collections. It is also possible that the database may contain other federally funded surveys that the agency did not identify under the primary purpose we used to “identify” surveys, and these would not be included in our list of surveys. We have taken several steps to ensure that the database of OMB-approved information collections correctly recorded agency-submitted data and contained records of all Forms 83-I submitted to OMB. Our report, entitled Paperwork Reduction Act: New Approach May Be Needed to Reduce Burden on Public, GAO-05-424 (Washington, D.C.: May 20, 2005), examined the reliability of the database of OMB-approved information collections and concluded that the data were accurate and complete for the purposes of that report. Because this assessment was recent, we decided that we would not repeat this assessment. We did, however, compare a sample of the surveys from the Inventory of Approved Information Collection on OMB’s Web site to our copy of the database of OMB-approved collections. We found that all of the surveys in the Inventory of Approved Information Collection were contained in the database. Not all information collections require OMB approval under the PRA. OMB’s draft Implementing Guidance for OMB Review of Agency Information Collection explains that in general, collections of information conducted by recipients of federal grants do not require OMB approval unless the collection meets one or both of the following two conditions: (1) the grant recipient is collecting information at the specific request of the sponsoring agency or (2) the terms and conditions of the grant require that the sponsoring agency specifically approve the information collection or collection procedures. As also stated in the OMB draft, information collections that are federally funded by contracts do not require OMB approval unless the information collection meets one or both of the following two conditions: (1) if the agency reviews and comments upon the text of the privately developed survey to the extent that it exercises control over and tacitly approves it or (2) if there is the appearance of sponsorship, for example, public endorsement by an agency, the use of an agency seal in the survey, or statements in the instructions of the survey indicating that the survey is being conducted to meet the needs of a federal agency. Although there are additional surveys funded through grants and contracts that are not approved by OMB under the PRA, OMB stated that there is no comprehensive list. In addition, the draft guidance states that the PRA does not apply to current employees of the federal government, military personnel, military reservists, and members of the National Guard with respect to all inquiries within the scope of their employment and for purposes of obtaining information about their duty status. For the second objective describing current agency and OMB roles in identifying and preventing unnecessary duplication, we took several different steps. We reviewed the PRA requirements for agencies and OMB. We also interviewed agency clearance officers at the Departments of Commerce, Health and Human Services, and Labor about their processes for submitting information collection packages to OMB. These agencies are the top three agencies in terms of funding for statistical activities in fiscal year 2006. We also interviewed OMB officials about their role in approving proposed information collections. For the third objective, through reviewing our reports and literature and by interviewing agency officials, we identified surveys with duplicative content. We identified duplication by looking for areas of potential duplication when several surveys contained questions on the same subject. This duplication was strictly based on similar content in the surveys on the same subject, specifically people without health insurance and those with disabilities. We also looked at the duplication in the subject area of housing between the American Community Survey and American Housing Survey, which had been identified by our previous work. We also looked at environmental surveys, but determined that there was not duplicative content with our major surveys. Once we had identified the three subject areas, we used literature and interviews to identify the current federally funded surveys that were cited as the major surveys in each theme. We did not focus on any particular type of survey, but rather chose the surveys that were cited as the major surveys in each theme. To learn more about the duplicative content between surveys related to these three themes, we reviewed relevant literature and agency documents. We also interviewed officials from OMB, and the Departments of Commerce, Labor, Health and Human Services, and Housing and Urban Development. In addition, we interviewed experts from organizations that focus on federal statistics, such as at the Council of Professional Associations on Statistics and the Committee on National Statistics, National Academies of Science. Although we have included the Census Bureau’s Survey of Income and Program Participants as part of our assessment of potential duplication, the fiscal year 2007 President’s budget proposed to cut Census Bureau funding by $9.2 million, to which the Census Bureau responded by stating that it would reengineer the SIPP. Therefore, the fate of the SIPP is uncertain, and reengineering has not been completed. For the fourth objective, we also interviewed OMB officials, agency officials, and organizations that focus on federal statistics. Through the combination of agency and OMB interviews, expert interviews, and research, we identified selected agency efforts to improve the efficiency and relevance of surveys. In addition to the contact named above, key contributors to this report were Susan Ragland, Assistant Director; Maya Chakko; Kisha Clark; Ellen Grady; Elizabeth M. Hosler; Andrea Levine; Jean McSween; Elizabeth Powell; and Greg Wilmoth. | Federal statistical information is used to make appropriate decisions about budgets, employment, and investments. GAO was asked to (1) describe selected characteristics of federally funded statistical or research surveys, (2) describe agencies' and Office of Management and Budget's (OMB) roles in identifying and preventing unnecessary duplication, (3) examine selected surveys to assess whether unnecessary duplication exists in areas with similar subject matter, and (4) describe selected agencies' efforts to improve the efficiency and relevance of surveys. GAO reviewed agency documents and interviewed officials. Using this information and prior GAO work, GAO identified surveys with potential unnecessary duplication. At the time of GAO's review, OMB had approved 584 ongoing federal statistical or research surveys, of which 40 percent were administered to individuals and households. Under the Paperwork Reduction Act, agencies are to certify to OMB that each information collection does not unnecessarily duplicate existing information, and OMB is responsible for reviewing the content of agencies' submissions. OMB provides guidance that agencies can use to comply with the approval process and avoid unnecessary duplication, which OMB defines as information similar to or corresponding to information that could serve the agency's purpose and is already accessible to the agency. Based on this definition, the seven surveys GAO reviewed could be considered to contain necessary duplication. GAO identified three subject areas, people without health insurance, people with disabilities, and housing, covered in multiple major surveys that could potentially involve unnecessary duplication. Although they have similarities, most of these surveys originated over several decades, and differ in their purposes, methodologies, definitions, and measurement techniques. These differences can produce widely varying estimates on similar subjects. For example, the estimate for people who were uninsured for a full year from one survey is over 50 percent higher than another survey's estimate for the same year. While agencies have undertaken efforts to standardize definitions and explain some of the differences among estimates, these issues continue to present challenges. In some cases, agencies have reexamined their existing surveys to reprioritize, redesign, combine, and eliminate some of them. Agencies have also used administrative data in conjunction with their surveys to enhance the quality of information and limit respondent burden. These actions have been limited in scope, however. In addition, two major changes to the portfolio of major federal household surveys are underway. The American Community Survey is intended to replace the long-form decennial census starting in 2010. This is considered to be the cornerstone of the government's efforts to provide data on population and housing characteristics and will be used to distribute billions of dollars in federal funding. Officials are also redesigning the Survey of Income and Program Participation which is used in estimating future costs of certain government benefit programs. In light of these upcoming changes, OMB recognizes that the federal government can build upon agencies' practices of reexamining individual surveys. To ensure that surveys initiated under conditions, priorities, and approaches that existed decades ago are able to cost-effectively meet current and emerging information needs, there is a need to undertake a comprehensive reexamination of the long standing portfolio of major federal household surveys. The Interagency Council on Statistical Policy (ICSP), which is chaired by OMB and made up of the heads of the major statistical agencies, is responsible for coordinating statistical work and has the leadership authority to undertake this effort. |
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Congress authorized the five-year MPNDI pilot program in Section 866 of the NDAA for Fiscal Year 2011 with the intent to test whether streamlined acquisition procedures, similar to those available for commercial items, can serve as an effective incentive for “nontraditional defense contractors” to innovate in areas useful to DOD. Congress extended authority for the pilot program through December 31, 2019 in Section 814 of the National Defense Authorization Act for Fiscal Year 2014. Section 866 defined a number of terms for the purposes of the pilot program, such as MPNDI and nontraditional defense contractor, as shown in table 1. Section 866 also required that contracts awarded under the pilot program meet a number of contract requirements as outlined in table 2. To help encourage nontraditional defense contractors to offer items to DOD under streamlined procedures, Congress exempted contracts awarded under the pilot program from the requirement to submit certified cost or pricing data and from the federal Cost Accounting Standards, two requirements that have previously been identified as increasing contractor costs or discouraging such companies from competing for federal contracts. Certified cost or pricing data, by regulation, is to be provided to the government by contractors and subcontractors, at certain threshold contract levels unless an exception applies, to support their proposed prices and to certify that the data are accurate, complete, and current. Certified cost or pricing data documentation requirements can be extensive. Cost Accounting Standards are mandatory for use by executive agencies and by contractors and subcontractors in estimating, accumulating, and reporting costs in connection with pricing and administration of, and settlement of, disputes generally concerning all negotiated prime contract and subcontract procurements with the government in excess of the thresholds for submission of certified cost or pricing data. Congress required that DOD provide information on contracts awarded under the pilot program not later than 60 days after the end of each fiscal year in which the pilot program is in effect. Each report is to include the contractor, the item or items to be acquired, the military purpose to be served by the item(s), the amount of the contract, and the actions taken to ensure that the price paid is fair and reasonable. Attracting contractors that do not traditionally pursue government contracts due to the cost and impact of complying with government procurement requirements has been a longstanding concern within the government. Congress and others have taken various steps, including creation of the MPNDI pilot program, to address these concerns. For example, in 1996 Congress established a commercial item test program to provide contracting officers with additional procedural discretion and flexibility to acquire commercial items. Commercial items and services are those generally available in the commercial marketplace in contrast with items developed to meet specific federal government requirements. Commercial items are generally exempt from the requirement to provide certified cost or pricing data or comply with cost accounting standards. Similarly, Congress provided DOD the authority to enter into “other transactions” to take advantage of technological advances made by the private sector. Other transactions are generally not subject to federal laws and regulations governing standard procurement contracts. Further, in May 2013, the Deputy Secretary of Defense asked the Defense Business Board to begin studying ways to encourage broader participation in DOD acquisitions from the private sector for the purpose of encouraging innovation. DOD reported that it has not awarded any contracts using the authority provided by the pilot program since it was initiated in 2011. As a result, the pilot program has not resulted in DOD obtaining items that otherwise might not have been available to it nor assisted DOD in the rapid acquisition and fielding of capabilities to meet urgent operational needs. Our review of input provided by the military departments and defense agencies to DPAP and our interviews with DOD program and contracting officials identified a number of factors that may be contributing to the lack of use of the pilot program, including limited awareness of the program, challenges in meeting all the criteria needed to use the program, and the ability to use other flexibilities to obtain needed items. DOD has not taken steps to address these concerns, however, which may continue to limit the future use of the pilot program. DOD initiated the pilot program in June 2011 through an interim rule to the DFARS. Under this interim rule, DOD created DFARS subpart 212.71, which generally reiterated the pilot program requirements as prescribed by Section 866. The subpart provided that a new clause, DFARS 252.212-7002, be used in all solicitations that would meet the criteria of the pilot program. The subpart also required that departments and agencies prepare a consolidated annual report to provide information about contracts awarded under the pilot program authority and submit it by October 31 of each year. The interim rule was finalized without change in January 2012. The military departments also provided varying levels of guidance that generally reiterated the pilot program rules as stated in DFARS. For example, the Navy Marine Corps Acquisition Regulation Supplement requires that contracts awarded under the pilot program during the preceding fiscal year be reported annually to the Deputy Assistant Secretary of the Navy for Acquisition and Procurement. Air Force Materiel Command restated the requirements of the pilot program in their February 2012 and April 2014 Contracting Bulletins, which are distributed to contracting personnel across the command, and also issued corresponding training slides that restated the requirements of the pilot program. In addition, during the course of our audit, the Army distributed a policy alert on the proper use of the pilot program by restating the requirements. Over the past three years, the Under Secretary of Defense for Acquisition, Technology and Logistics has reported to Congress that DOD has not awarded contracts under the authority provided by the pilot program during each of the prior fiscal years. To prepare its annual reports, DPAP requests data from each of the military departments, defense agencies, and other defense offices on all instances of use of the pilot program during the relevant fiscal year. Each DOD component is required to provide information for each contract awarded under the pilot program, including the contractor, item(s) acquired, price, military purpose served by the item(s) acquired, and steps taken to ensure fair and reasonable pricing. DPAP also requires the components to report if they have not used the pilot program during the course of the prior fiscal year. DOD’s annual reports found, and our discussions with military department and defense agency officials confirmed, that DOD has not used the authority from fiscal years 2011 to 2013. As a result, the pilot program has not resulted in DOD obtaining items that otherwise might not have been available to it nor assisted in the rapid acquisition and fielding of capabilities to meet urgent operational needs. The absence of contracts awarded under the pilot program precludes us from determining how DOD protected the government’s interests in paying fair and reasonable prices for the item(s) acquired. Our review of the input provided by the defense components, as well as our information from interviews with policy, program, and contracting officials at the 11 components we contacted, identified a number of issues that may be contributing to the lack of use of the pilot program, including limited awareness of the pilot program, challenges in meeting all the criteria required to use the pilot program, and the ability to use other flexibilities to obtain needed items. DOD is aware of a number of issues but has no ongoing efforts to address them. The following examples illustrate these issues. Limited awareness of the pilot program: In several instances, DOD officials from commands and contracting activities that we interviewed were generally unaware of the pilot program prior to our review, noting that the program had not been well publicized or could only cite its inclusion into DFARS. For example, the program officials from the Army’s Rapid Equipping Force told us that they were notified of the pilot program on October 1, 2014 as a result of our review. Similarly, program officials from the Joint Improvised Explosive Device Defeat Organization were unaware of the pilot program until we had contacted them for information. Further, the Air Force noted in its response to the fiscal year 2014 DPAP data call on the pilot program that the program had not been well publicized within the department and identified this issue as one of several reasons why the program had not been used. Challenges in meeting all the criteria required to use the pilot program: Program and contracting officials from commands and contracting activities we interviewed stated that it was difficult to identify proposed acquisitions that met all the requirements for using the pilot program. Officials from 5 of the 11 offices that we spoke with provided examples or told us that in their experience the items they acquire generally need to be modified for government use and therefore may not meet the requirement that the item was developed exclusively at private expense. For example, officials from the Army Rapid Equipping Force told us about a 2011 need to identify and field a sensor package that could measure, collect, and store data on improvised explosive device blast pressure experienced by soldiers inside and outside of vehicles. These officials noted that doing so would enable the Army to advance research and treatment on mild traumatic brain injuries. The Army determined that no existing nondevelopmental items suitably measured such forces, so they modified an existing commercial item to meet the need, which in turn was deployed to Afghanistan in June 2012. In another example, a contracting official from the Air Force Materiel Command identified a commercially-available airplane landing system that was modified by the government for military-use. In its response to the fiscal year 2014 DPAP data call, the Air Force noted that the many requirements of the pilot program that must be met, such as delivery within nine months, use of nontraditional contractors, the required use of competitive procedures, and the restriction not to exceed $50 million, limited the applicability of the program. Additionally, several DOD officials cited the requirement to use competitive procedures as a limiting factor. DPAP officials noted that Section 866 requires the use of “competitive procedures” without further definition. These officials noted that 10 U.S.C. 2302 defines competitive procedures as acquisitions conducted under full and open competition—that is, under which all responsible bidders or offerors are eligible to compete. As such, DPAP officials did not believe that the use of Section 866 allowed acquisitions to be conducted using one of the exceptions to competitive procedures, such as awarding a contract on a sole-source basis. However, some DOD officials stated that they thought the program may be more useful if exceptions to competition could be used. They noted that the ability to use exceptions to competition would make one of the key features of the pilot program—the exemption from the need to provide certified cost and pricing data—more applicable because certified cost and pricing data would generally apply to contracts that are awarded non- competitively. The ability to use other flexibilities to obtain needed items: Contracting officials from the military departments with whom we spoke identified other existing authorities—such as commercial item acquisition procedures—that they would use to acquire items that they identified as potentially covered by the pilot program. In several cases, officials provided examples of nondevelopmental items developed at private expense that they acquired through competitive commercial item acquisition procedures. As such, DOD would generally be precluded from obtaining certified cost or pricing data or from requiring the contractor to adhere to federal cost accounting standards, two benefits that the pilot program was to provide to attract commercial firms. For example, during our interview with the Naval Surface Warfare Center, contracting officials initially identified data recorders as potentially meeting the requirements of the pilot program but ultimately concluded that acquisition of these recorders would most likely be acquired as a commercial item. Further, in another example, DPAP officials told us that military purpose aviation fuel tanks were acquired as a commercial item rather than under the pilot program, because DOD determined the fuel tanks met the definition of a commercial item. As we found in our February 2014 report on DOD’s commercial item test program, DOD contracting officers have many tools in their toolkit and the decision regarding the appropriate contracting method for a commercial item is left to the contracting officers’ discretion. We found that several factors influence the contracting officer’s decision, such as the estimated value of the contract at award, the urgency of the requirement, the availability of existing contracts or contracting vehicles, as well as the nature of the item or service being acquired. GAO has issued several reports on DOD’s urgent needs processes. See, for example, GAO, Warfighter Support: DOD’s Urgent Needs Processes Need a More Comprehensive Approach and Evaluation for Potential Consolidation, GAO-11-273 (Washington, D.C.: Mar. 1, 2011); and GAO, Warfighter Support: Improvements to DOD’s Urgent Needs Processes Would Enhance Oversight and Expedite Efforts to Meet Critical Warfighter Needs, GAO-10-460 (Washington, D.C.: Apr. 30, 2010). some modifications to the design. As a result, these officials were not certain whether the items could have been acquired using the pilot program. DPAP officials noted that they are aware of many of these issues, but have no ongoing efforts to specifically address them. GAO’s prior work has identified several sound management practices when developing, implementing, and assessing pilot programs, including developing objectives that link to the goals of the pilot and ensuring the results of the In the case of the MPNDI pilot pilot are communicated to stakeholders.program, DOD has not proactively identified opportunities to use the pilot program in areas useful to DOD—a goal of the pilot—such as by identifying how the authority might help DOD attract nontraditional contractors to fill needs in specific industries, technologies, or for certain capabilities that are not met by existing authorities. The pilot program was also intended to test whether streamlined acquisition procedures, similar to those available for commercial items, can serve as an incentive for “nontraditional defense contractors” to innovate in areas useful to DOD. DOD has not determined whether the pilot program provides new flexibilities or the opportunity to use streamlined acquisition procedures that are not already available under other authorities. Lastly, DOD’s prior annual reports to Congress have not identified whether there are specific requirements under the pilot program, such as the need to award contracts competitively, that might hinder its use. Taking action to identify how the pilot program authority may assist in (1) attracting nontraditional contractors, (2) testing the use of new flexibilities or streamlined procedures, and (3) identifying and reporting to Congress on specific requirements of the pilot program that may hinder its use, could better position DOD to determine whether the pilot program provides meaningful value to the department. DOD has had a longstanding concern to better involve commercial and small business companies so that it can acquire innovative solutions to meet military requirements. Congress created and later extended the MPNDI pilot program as a way of providing additional flexibilities to assist DOD in acquiring needed items, to spur innovation and participation from nontraditional defense contractors, such as by using streamlined acquisition procedures or eliminating certain requirements that had been identified as barriers to attracting firms that traditionally did not do business with DOD. However, DOD has not yet used the program in the 3 years since it was initiated. Determining whether the pilot program provides meaningful value to the department requires that DOD do more than make the authority available for use by its personnel. In that regard, DOD has not provided assistance to its program and contracting officials to help identify opportunities to use the pilot program as currently structured, nor has it reported to Congress on issues that hinder its use, such as the requirement to use competitive procedures. Further, DOD identified a number of existing authorities that enabled them to acquire needed goods and services quickly from the private sector. Identifying whether there are targets of opportunities in terms of industries, technologies or capabilities that remain untapped, or gaps in existing authorities or procedures that could be met, or limitations in the pilot program’s current structure that hinder its use can help shape the future of the pilot program. Unless DOD takes such action, the remaining 5 years of the authority may not produce results that differ from those reported over the past 3 years. If so, DOD will have missed an opportunity to make an informed decision as to whether authority provided under the pilot program would provide value to the department. On the other hand, if DOD concludes, on the basis of a robust pilot program, that the authority does not add value, then that conclusion should stand. To maximize the potential value of the MPNDI pilot program, we recommend that the Under Secretary of Defense for Acquisition, Technology and Logistics take the following three actions: identify how this authority, as currently structured, may assist DOD in attracting nontraditional contractors in specific industries, technologies, or capabilities; identify whether there are opportunities to test flexibilities or streamlined procedures that are not otherwise available under existing authorities; and if DOD believes changes are needed to the current structure of the pilot program to increase its utility, to identify such issues in its subsequent annual reports to Congress. We provided a draft of this report to DOD for comment. In its written comments, which are reprinted in appendix II, DOD concurred with each of our recommendations. DOD stated that it found meeting all the criteria needed to use the authority, and in particular, the need to use “competitive procedures,” as limiting the department’s ability to effectively use the pilot program authority and its ability to test flexibilities or streamlined procedures not otherwise available to the department. DOD stated it would identify such issues in future reports to Congress. DOD also stated it would continue to examine how the pilot program may assist in attracting nontraditional contractors, but did not specify how it would do so. As we indicated in the report, identifying potential targets of opportunity, such as specific industries, technologies, or capabilities gaps where the program’s use may provide an additional incentive for nontraditional contractors to do business with DOD, can help shape the future of the pilot program. DOD also provided technical comments, which we incorporated in the report as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense for Acquisition, Technology and Logistics, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Section 866 of the National Defense Authorization Act (NDAA) for Fiscal Year 2011 mandated that GAO assess DOD’s use of the pilot program. Specifically, Section 866 mandated that GAO assess whether the pilot program (1) enabled DOD to acquire items that otherwise might not have been available to DOD; (2) assisted the department in the rapid acquisition and fielding of capabilities needed to meet urgent operational needs; and (3) protected the interests of the United States in paying fair and reasonable prices for the item or items acquired. This report addresses the extent to which DOD awarded contracts that met these goals and issues potentially affecting use of the pilot program. To determine the extent to which DOD awarded contracts under the pilot program that met these goals, we reviewed Section 866 of the NDAA and other applicable laws, the Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), DOD’s annual reports to Congress on the pilot program from fiscal years 2011 to 2013 (the most recent fiscal year for which DOD submitted a report at the time of our review), DOD’s preliminary data gathered in preparation for its fiscal year 2014 report, and DOD’s implementing guidance. To test whether DOD’s annual reports accurately reflected the use of the pilot program, we requested data from the military departments (Office of the Assistant Secretary of the Air Force (Acquisition); Office of the Assistant Secretary of the Army for Acquisition, Logistics and Technology; and the Office of the Deputy Assistant Secretary of the Navy (Acquisition and Procurement)) on contracts that included the DFARS clause 252.212- 7002, Pilot Program for Acquisition of Military-Purpose Nondevelopmental Items, which is to be included on contracts awarded under the pilot program. This effort identified 105 contracts awarded from fiscal years 2011 to 2013 that included the clause. The military departments, however, subsequently determined that none of the contracts identified had used the pilot program authority, and provided us information on how they identified the contracts that included the clause, the steps they took to verify the information in their contracting systems with cognizant contracting officials, and the steps they were taking to correct these errors, including modifying the contracts to delete the clause and issuing additional guidance. Based on the actions taken by the military departments in response to our request for data, we determined that the data, as originally provided to the defense committees, of DOD’s reported use of the authority from fiscal years 2011 to 2013 were sufficiently reliable for the purposes of this report. We interviewed DOD and military department officials to determine how they implemented the pilot program, including the extent to which the pilot program enabled DOD to acquire items that otherwise might not have been available to DOD and assisted DOD in the rapid acquisition and fielding of capabilities to meet urgent operational needs. To identify issues that potentially affected the use of the pilot program, we reviewed the input provided by the military departments and defense agencies to the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics-Defense Procurement and Acquisition Policy (DPAP) to help support the preparation of the fiscal year 2013 annual report to Congress and reviewed the input to the fiscal year 2014 report that had been submitted to DPAP as of December 5, 2014. We also collected information and interviewed officials from DOD, the military departments, a command and contracting activity within each military department, and other defense organizations. Selected commands, activities, and defense organizations included the Air Force Materiel Command; Air Force Life Cycle Management Center; Army Program Executive Office for Command, Control and Communications-Tactical; Army Program Manager Tactical Radios; Naval Sea Systems Command; Naval Surface Warfare Center-Port Hueneme Division; Army Rapid Equipping Force; the Joint Improvised Explosive Device Defeat Organization; the Joint Rapid Acquisition Cell; Special Operations Command-Special Operations Research, Development, and Acquisition Center; and Central Command-Joint Theatre Support Contracting Command. These 11 components were selected based on various factors, including potential use of the pilot program, knowledge of the pilot program, and fulfillment of urgent operational needs. Further, we collected information and met with officials from Department of the Navy- Office of Small Business Programs and the Program Executive Office for Simulation, Training and Instrumentation. We also met with representatives from an industry group to gather their views on the pilot program. Section 866 of the NDAA also required that we assess the extent to which the pilot program protected the interests of the U.S. in paying fair and reasonable prices for the item(s) acquired, but we determined that there was not sufficient information available to make such an assessment. To help determine whether DOD followed sound management practices when developing, implementing and evaluating the pilot program, we used GAO’s prior work on pilot programs as criteria. These practices include developing objectives that link to the goals of the pilot and ensuring the results of the pilot are communicated to stakeholders. We conducted this performance audit from September 2014 to January 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. In addition to the contact named above, Janet McKelvey (Assistant Director), James Kim, Dina Shorafa, Marie Ahearn, Virginia Chanley, Julia Kennon, Pete Anderson, and Cary Russell made key contributions to this report. | Section 866 of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 established a pilot program authorizing DOD to award contracts for MPNDI to nontraditional defense contractors—companies that had not contracted with DOD for at least a year. The pilot program was designed to streamline acquisition procedures and to serve as an incentive for nontraditional defense contractors to innovate in areas useful to DOD. Section 866 mandated that GAO assess DOD's use of the pilot program to acquire items that otherwise might not have been available to DOD, assisted in meeting urgent operational needs, and protected the interests of the U.S. in paying fair and reasonable prices. This report addresses the extent to which DOD awarded contracts that met these goals and issues potentially affecting use of the pilot program. To conduct this work, GAO reviewed applicable laws, the Federal Acquisition Regulation, the Defense Federal Acquisition Regulation Supplement, DOD's annual reports to Congress on the pilot program from fiscal years 2011 to 2013, and DOD's implementing guidance. GAO collected information from DOD, the military departments, and selected defense organizations. Since the Department of Defense (DOD) implemented a pilot program in 2011 to award contracts for military purpose nondevelopmental items (MPNDI), it has not awarded any contracts using the authority. An MPNDI is generally an item that meets a validated military requirement and has been developed exclusively at private expense. GAO's analysis identified a number of issues that may be contributing to the lack of use of the pilot program, including the following: Limited awareness of the pilot program : In several instances, DOD officials from commands and contracting activities that GAO interviewed were unaware of the pilot program prior to GAO's review. Further, the Air Force noted that the program had not been well publicized within the department. Challenges in meeting all the criteria required to use the pilot program : DOD program and contracting officials that GAO contacted stated that it was difficult to identify proposed acquisitions that could meet all the criteria for using the pilot program, which include that the items must be developed at private expense, the initial lot of items be delivered within nine months after contract award, contractors be nontraditional defense contractors, competitive procedures be used, and contracts are $50 million or less. The ability to use other flexibilities to obtain needed items: Contracting officials from the military departments with whom GAO spoke identified other existing authorities—such as commercial item acquisition procedures—that they would use to acquire items they identified as potentially covered by the pilot program. DOD officials told GAO that they were aware of these issues but had no ongoing efforts to address them. GAO's prior work has identified several sound management practices to effectively implement or assess pilot programs, including developing objectives that link to the goals of the pilot and ensuring the results of the pilot are communicated to stakeholders. In the case of the MPNDI pilot program, DOD has not proactively identified opportunities to use the pilot program in areas useful to DOD—a goal of the pilot—such as by identifying specific industries, technologies or capability gaps where its use may provide an additional incentive for nontraditional defense contractors to do business with DOD. Additionally, DOD has not determined whether the pilot program provides new flexibilities or the opportunity to use streamlined acquisition procedures that are not already available under other authorities. Lastly, DOD's annual reports to Congress have not identified whether there are specific requirements under the pilot program, such as the need to award contracts competitively, that might hinder its use. Determining whether the pilot program provides meaningful value to the department requires that DOD do more than make the authority available for use by its personnel. Unless DOD takes action to identify opportunities to use the authority and report on issues hindering its use, DOD may miss an opportunity to make an informed decision as to whether the authority provided under the pilot program would provide value to the department. GAO recommends that DOD identify how the pilot program can help DOD attract nontraditional contractors, to test flexibilities or streamlined procedures not otherwise available under existing authorities, and include issues hindering its use in its annual reports to Congress. DOD concurred with GAO's recommendations. |
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DOD defines a UAV as a powered aerial vehicle that does not carry a human operator; can be land-, air-, or ship-launched; uses aerodynamic forces to provide lift; can be autonomously or remotely piloted; can be expendable or recoverable; and can carry a lethal or nonlethal payload. Generally, UAVs consist of the aerial vehicle, a flight control station, information and retrieval or processing stations, and sometimes wheeled land vehicles that carry launch and recovery platforms. UAVs have been used in a variety of forms and for a variety of missions for many years. After the Soviet Union shot down a U-2 spy plane in 1960, certain UAVs were developed to monitor Soviet and Chinese nuclear testing. Israel used UAVs to locate Syrian radars and was able to destroy the Syrian air defense system in Lebanon in 1982. The United States has used UAVs in the Persian Gulf War, Bosnia, Operation Enduring Freedom, and Operation Iraqi Freedom for intelligence, surveillance, and reconnaissance missions and to attack a vehicle carrying suspected terrorists in Yemen in 2002. The United States is also considering using UAVs to assist with border security for homeland security or homeland defense. Battlefield commanders’ need for real time intelligence has been a key reason for the renewed interest in UAVs. According to the Congressional Research Service, UAVs are relatively lightweight and often difficult to detect. Additional advantages include longer operational presence, greater operations and/or procurement cost-effectiveness, and no risk of loss of life of U.S. service members. DOD operates three UAV types—small, tactical, and medium altitude endurance—in its force structure. The Air Force has operated the MQ-1 Predator since 1996 in intelligence, surveillance, and reconnaissance missions, using a variety of sensors and satellite data links to relay information, and in an offensive combat role using Hellfire missiles. The Air Force also operates a small UAV called Desert Hawk, a 5-pound aerial surveillance system used by security personnel to improve situational awareness for force protection. The Army, Navy, and Marine Corps have at various times operated the RQ-2 Pioneer since 1986. Only operated by the Marine Corps today, the Pioneer provides targeting, intelligence, and surveillance. The Marine Corps also operates a small UAV called Dragon Eye for over-the-hill reconnaissance. This small, 4.5-pound UAV is currently in full-rate production. Originally envisioned to be a joint Army/Navy/Marine Corps program, the RQ-5 Hunter was cancelled in 1996 after low-rate initial production. The Army currently operates the residual Hunters for intelligence, surveillance, and reconnaissance. The Army also has selected the RQ-7 Shadow to provide intelligence, surveillance, and reconnaissance at the brigade level, and full-rate production was approved in 2002. Another system, the Raven, a small, 4-pound UAV is being purchased commercially off the shelf by both the Army for regular unit support and the Air Force for special operations. Numerous other UAVs of various sizes remain in development. These include the RQ-4 Global Hawk, a nearly 27,000-pound, jet-powered UAV with a wing span of over 116 feet used for intelligence, surveillance, and reconnaissance over an area of up to 40,000 square nautical miles per day; the RQ-8 Fire Scout, a vertical takeoff and landing UAV weighing nearly 2,700 pounds; and the Neptune, weighing under 100 pounds with a wingspan of 7 feet and optimized for sea-based operations. In addition, congressional action in recent years has been directed toward promoting an increase in the number and type of missions on which UAVs can be used. For example, section 220 of the Department of Defense Authorization Act for Fiscal Year 2001 specifies that it shall be a goal of the armed forces that one-third of the aircraft in the operational deep strike aircraft fleet be unmanned by 2010. Moreover, in section 1034 of the National Defense Authorization Act for fiscal year 2004, Congress mandated a DOD report of the potential for UAVs to be used for a variety of homeland security and counter drug missions. Finally, the fiscal year 2004 Defense Appropriations Conference Report directs that DOD prepare a second report by April 2004 detailing UAV requirements that are common to each of the uniformed services. Most of our prior work has focused on the development, testing, and evaluation of unmanned aerial vehicles. As recently as September 2000, we reported that DOD was deciding to procure certain UAV systems before adequate testing had been completed. We found that buying systems before successfully completing their testing had led repeatedly to defective systems that were later terminated or required costly retrofits or redesigns to achieve satisfactory performance. Conversely, when DOD focused UAV acquisition on mature technologies that proved the military utility of a given vehicle, the department had an informed knowledge base upon which to base a decision. For example, even though the Predator UAV was based on the existing Gnat 750 UAV, the department required Predator’s performance to be validated. As a result, Predator moved quickly to full-rate production and, at the time of our current review, had performed a variety of operational missions successfully. Through our prior work, we have also periodically raised the question of the potential for duplication of efforts among the services and the effectiveness of overarching strategy documents and management approaches to avoid duplication and other problems. For example, in June 2003 we reported that the Air Force and Navy, which previously were independently developing unmanned combat aerial vehicles, had agreed to jointly develop a new system for offensive combat missions that met both of their needs. However, we also pointed out that while one program is more efficient than two, the participation of two services would increase the challenges of sustaining funding and managing requirements. Similarly, as early as 1988, we raised concerns about a variety of management challenges related to UAV development. At that time, various congressional committees had expressed concern about duplication in the services’ UAV programs and stressed the need to acquire UAVs that could meet the requirements of more than one service, as the Air Force and Navy have recently agreed to try. In response to congressional direction, DOD developed a UAV master plan, which we reviewed at that time. We identified a number of weaknesses in the 1988 master plan, including that it (1) did not eliminate duplication, (2) continued to permit the proliferation of single-service programs, (3) did not adequately consider cost savings potential from manned and unmanned aircraft trade-offs, and (4) did not adequately emphasize the importance of common payloads among different UAV platforms. DOD generally concurred with that report and noted that it would take until 1990 to reconcile service requirements for acquiring a common family of UAVs. Since our 1988 report, the overall management of defense UAV programs has gone full circle. In 1989 the DOD Director of Defense Research and Engineering set up the UAV Joint Project Office as a single DOD organization with management responsibility for UAV programs. With the Navy as the Executive Agency, within 4 years the Joint Project Office came under criticism for a lack of progress. Replacing the office in 1993, the Defense Airborne Reconnaissance Office was created as the primary management oversight and coordination office for all departmentwide manned and unmanned reconnaissance. In 1998, however, this office also came under criticism for its management approach and slow progress in fielding UAVs. In that same year, this office was dissolved and UAV program development and acquisition management were given to the services, while the Assistant Secretary of Defense for Command, Control, Communications and Intelligence was assigned to provide oversight for the Secretary of Defense. Overall, Congress has provided funding for UAV development and procurement that exceeds the amounts requested by DOD during the past 5 fiscal years, and the services to date have obligated about 99 percent of these funds. From fiscal year 1999 through fiscal year 2003, DOD requested approximately $2.3 billion, and Congress, in its efforts to encourage rapid employment of UAVs by the military services, has appropriated nearly $2.7 billion to develop and acquire UAVs. In total, the services have obligated $2.6 billion of the appropriated funds. (See table 1.) Generally, the additional funding provided by Congress was targeted for specific programs and purposes, enabling the services to acquire systems at a greater rate than originally planned. For example, in fiscal year 2003 the Air Force requested $23 million to acquire 7 Predators, but Congress provided over $131 million—an increase of approximately 470 percent— enough to acquire 29 Predators to meet operational demands in the war against terrorism. The Air Force has obligated 71 percent of the Predator 2003 funding during its first program year. About $1.8 billion (67 percent) of the money appropriated during the fiscal year 1999-2003 period went for research, development, test and evaluation of the various models, as shown in table 2. The programs were generally divided into efforts to develop tactical UAVs and medium-to-high-altitude endurance UAVs and, until 2002 when the Predator was armed, were focused on meeting surveillance and reconnaissance needs. Only three systems—the Army’s Shadow and the Air Force’s Predator and Global Hawk—have matured to the point where they required procurement funding during fiscal years 1999 through 2003. By fiscal year 2003, appropriations totaled nearly $880 million, as shown in table 3. DOD estimates that an additional $938 million in procurement funding will be needed through fiscal year 2005. DOD’s planning for developing and fielding UAVs does not provide reasonable assurance that UAVs will be integrated into the force structure efficiently, although the department has taken certain positive steps to improve its management of the UAV program. Specifically, DOD created a joint UAV Planning Task Force and developed a key planning document, the UAV Roadmap 2002-2027. However, neither the Joint Task Force nor the Roadmap is sufficient to provide DOD with reasonable assurance that it is efficiently integrating UAVs into the force structure. Consequently, the individual services are developing their own UAVs without departmentwide guidance, thus increasing the risk of unnecessarily duplicating capabilities and leading to potentially higher costs and greater interoperability challenges. Since 2000 DOD has taken positive steps to improve the management of the UAV program. In October 2001 the Under Secretary of Defense for Acquisition, Technology, and Logistics created the joint UAV Planning Task Force to function as the joint advocate for developing and fielding UAVs. The Task Force is the focal point to coordinate UAV efforts throughout DOD, helping to create a common vision for future UAV- related activities and to establish interoperability standards. For example, the Task Force is charged with developing and coordinating detailed UAV development plans, recommending priorities for development and procurement efforts, and providing the services and defense agencies with implementing guidance for common UAV programs. Moreover, the development of the 2002 Roadmap has been the Task Force’s primary product to communicate its vision and promote UAV interoperability. The Roadmap is designed to guide U.S. military planning for UAV development from 2002 to 2027 and describes current programs, identifies potential missions for UAVs, and provides guidance on developing emerging technologies. The Roadmap is also intended to assist DOD decision makers in building a long-range strategy for UAV development and acquisition to support defense plans contained in such future planning efforts as the Quadrennial Defense Review. While the creation of the joint Task Force and the UAV Roadmap are important steps to improve management of the UAV program, they are not enough to provide reasonable assurance that DOD is developing and fielding UAVs efficiently. The UAV Roadmap does not constitute a comprehensive strategic plan for developing and integrating UAVs into force structure. Moreover, the Joint Task Force’s authority is generally limited to program review and advice but is insufficient to enforce program direction. While DOD has some elements of a UAV strategic-planning approach in place, it has not established a comprehensive strategic plan or set of plans for developing and fielding UAVs across DOD. The Government Performance and Results Act of 1993 provides a framework for establishing strategic-planning and performance measurement in the federal government, and for ensuring that federal programs with the same or similar goals are closely coordinated and mutually reinforcing. The strategic planning requirement of this framework consists of six key components, described in table 4. When applied collectively and combined with effective leadership, the components can provide a management framework to guide major programs, efforts, and activities, including the development and integration of UAVs into the force structure. However, neither the UAV Roadmap nor other DOD guidance documents represent a comprehensive strategy to guide the development and fielding of UAVs that complement each other, perform the range of priority missions needed, and avoid duplication. DOD officials acknowledged that the Office of the Secretary of Defense has not issued any guidance that establishes an overall strategy for UAVs in DOD. While high-level DOD strategic-planning documents provide some general encouragement to pursue transformational technologies, including the development of UAVs, these documents do not provide any specific guidance on developing and integrating UAVs into the force structure. Nonetheless, the Roadmap represents a start on a strategic plan because it incorporates some of the key components of strategic planning provided by the Results Act framework as shown by the following: Long Term Goals—The Roadmap states its overall purpose and what it hopes to encourage the services to attain. The Roadmap refers to the Defense Planning Guidance’s intent for UAVs as a capability and indicates that the guidance encourages the rapid advancement of this capability. At the same time, it does not clearly state DOD’s overall or long-term goals for its UAV efforts. Similarly, while it states that it wants to define clear direction to the services, it does not clearly identify DOD’s vision for its UAV force structure from 2002 through 2027. Approaches to Obtain Long-Term Goals—The Roadmap’s Approach section provides a strategy for developing the Roadmap and meeting its goal. This approach primarily deals with identifying requirements and linking them to needed UAV payload capabilities, such as sensors and associated communication links. The approach then ties these requirements to forecasted trends in developing technologies as a means to try to develop a realistic assessment of the state of the technology in the future and the extent to which this technology will be sufficient to meet identified requirements. At the same time, however, the Roadmap does not provide a clear description of a strategy for defining how to develop and integrate UAVs into the future force structure. For example, the Roadmap does not attempt to establish UAV development or fielding priorities nor does it identify the most urgent mission-capability requirements. Moreover, without the sufficient identification of priorities, the Roadmap cannot link these priorities to current or developing UAV programs and technology. Beyond strategic planning, the Results Act calls for agencies to establish results-oriented performance measures and to collect performance data to monitor progress. The Roadmap addresses, in part, key elements of performance measurement, as shown in the following: Performance Goals—The Roadmap established 49 specific performance goals to accomplish a variety of tasks. Some of these goals are aimed at fielding transformational capabilities without specifying what missions will be supported by the new capabilities. Others are to establish joint standards and control costs. Nonetheless, of the 49 goals, only 1 deals directly with developing and fielding a specific category of UAV platform to meet a priority mission-capability requirement—suppression of enemy air defenses or strike electronic attack. The remaining goals, such as developing heavy fuel aviation engines suitable for UAVs, are predominantly associated with developing UAV or related technologies, and UAV-related standards and policies to promote more efficient and effective joint UAV operations. Thus, the Roadmap does not establish overall UAV program goals. Performance Indicators—Some of the 49 performance goals have performance indicators that could be used to evaluate progress, such as the reliability goal for decreasing the annual mishap rate for large UAVs. However, many other goals have no established indicators, such as developing standards to maximize UAV interoperability. Furthermore, the Roadmap does not establish indicators that readily assess how well the program will meet the priority mission capabilities needed by the services and theater commanders. While the Roadmap has incorporated some key strategic-planning components, it only minimally addresses the other key components. According to officials in the Office of the Secretary of Defense, the UAV Roadmap was not intended to provide an overarching architecture for UAVs departmentwide. It does, however, provide some significant guidance for developing UAV and related technologies. In addition to the 49 separate goals, the Roadmap also provides a condensed description of DOD’s current UAVs, categorizing them as operational, developmental, and other (residual and conceptual) UAV systems. The Roadmap further sought to identify current and emerging requirements for military capabilities that UAVs could address. In addition to the Roadmap, the Joint Requirements Oversight Council has reviewed several UAVs and issued guidance for some systems, such as the Army’s Shadow and the Air Force’s Predator. According to Joint Staff officials, however, neither the Joint Staff nor the council has issued any guidance that would establish a strategic plan or overarching architecture for DOD’s current and future UAVs. In addition, in June 2003 the Chairman of the Joint Chiefs of Staff created the Joint Capabilities Integration and Development System to provide a top-down capability-based process. Under the system, five Functional Capabilities Boards have been chartered, each representing a major warfighting capability area as follows: (1) command and control, (2) force application, (3) battle space awareness, (4) force protection, and (5) focused logistics. Each board has representatives from the services, the Combatant Commanders, and certain major functions of the Under Secretary of Defense. Each board is tasked with developing a list of capabilities needed to conduct joint operations in its respective functional area. Transformation of these capabilities is expected, and the boards are likely to identify specific capabilities that can be met by UAVs. Nonetheless, according to Joint Staff officials, these initiatives will also not result in an overarching architecture for UAVs. However, the identification of capabilities that can be met by UAVs is expected to help enhance the understanding of DOD’s overall requirement for UAV capabilities. As a joint advocate for UAV efforts, the joint UAV Planning Task Force’s authority is limited to program review and advice. The Task Force Director testified in March 2003 that the Task Force does not have program directive authority, but provides the Under Secretary of Defense for Acquisition, Technology, and Logistics with advice and recommended actions. Without such authority, according to the Director, the Task Force seeks to influence services’ programs by making recommendations to them or proposing recommended program changes for consideration by the Under Secretary. Nonetheless, according to DOD officials, the Task Force has attempted to influence the joint direction of service UAV efforts in a variety of ways, such as reviewing services’ budget proposals, conducting periodic program reviews, and participating in various UAV- related task teams. For example, the Task Force has encouraged the Navy to initially consider an existing UAV rather than develop a unique UAV for its Broad Area Marine Surveillance mission. The Task Force has also worked with the Army’s tactical UAV program, encouraging it to consider using the Navy’s Fire Scout as an initial platform for the Future Combat Systems class IV UAV. The Task Force also regularly reviews services’ UAV program budgets and, when deemed necessary, makes budget change proposals. For example, the Task Force, in conjunction with other Secretary of Defense offices, was successful in maintaining the Air Force’s Unmanned Combat Aerial Vehicle program last year when the Air Force attempted to terminate it. The Task Force was also successful in overturning an attempt by the Navy to terminate the Fire Scout rotary wing UAV program. However, the Task Force cannot compel the services to adopt any of its suggestions. For example, according to the Director, no significant progress has been made in achieving better interoperability among the Services in UAV platform and sensor coordination, but work continues with the services, intelligence agencies, Department of Homeland Security, and U.S. Joint Forces Command to this end. As they pursue separate UAV programs, the services and DOD agencies risk developing UAVs with duplicate capabilities, potentially leading to greater costs and increased interoperability challenges. The House Appropriation Committee, in a 2003 report, expressed concern that without comprehensive planning and review, there is no clear path toward developing a UAV force structure. Thus, the committee directed that each service provide an updated UAV roadmap. These reports were to address the services’ plans for the development of UAVs and how current UAVs are being employed. Officials from each of the services indicated that their UAV roadmap was developed to primarily address their individual service’s requirements and operational concepts. However, in their views, high-level DOD guidance—such as the Joint Vision 2020, National Military Strategy, and Defense Planning Guidance—did not constitute strategic plans for UAVs that would guide the development of their individual service’s UAV roadmap. These officials further stated that the Office of the Secretary of Defense’s 2002 UAV Roadmap provided some useful guidance, especially in regard to UAV technology, but was not used to guide their UAV roadmap’s development. Moreover, they did not view the Office of the Secretary of Defense’s Roadmap as a departmentwide strategic plan nor an overarching architecture for integrating UAVs into the force structure. Moreover, according to the service officials developing the service-level UAV roadmaps, there was little collaboration with other services’ UAV efforts. Thus, DOD has little assurance that the current approach to developing and fielding UAVs in the services will result in closely coordinated or mutually reinforcing program efforts, as recommended by the Results Act. While the Office of the Secretary of Defense and the Joint Chiefs of Staff have tried to coordinate these efforts through the Joint UAV Planning Task Force, the absence of a guiding strategy and sufficient authority has made it difficult to have reasonable assurance that development and fielding are being done efficiently. If not managed effectively, this process can potentially lead to the development and fielding of UAVs across DOD and the services, which may unnecessarily duplicate each other. For example, the Army, Marine Corps, and Air Force are individually developing small, backpackable, lightweight UAVs for over-the-horizon and force protection reconnaissance missions. Likewise, both the Marine Corps and Army are individually pursuing various medium-sized tactical UAVs with both fixed and rotary wings to accomplish a variety of missions, including tactical reconnaissance, targeting, communications relay, and force protection. Without a strategic plan and an oversight body with sufficient program directive authority to implement the plan, DOD has little assurance that its investment will result in UAV programs being effectively integrated into the force structure. Consequently, DOD risks poorly integrating UAVs into the force structure, which could increase development, procurement, and logistics costs; increase the risk of future interoperability problems; and unnecessarily duplicate efforts from one service to the next. To enhance management control over the UAV program, we recommend that the Secretary of Defense take the following two actions: establish a strategic plan or set of plans that are based on mission requirements to guide UAV development and fielding by modifying the Roadmap or developing another document or documents and, at a minimum, ensure that the plan links operational requirements with development plans to ensure that the services develop systems that complement each other, will perform the range of missions needed, and avoid duplication and designate the UAV Task Force or another appropriate organization to oversee the implementation of a UAV strategic plan; provide this organization with sufficient authority to enforce the plan’s direction, and promote joint operations and the efficient expenditure of funds. In written comments on a draft of this report, DOD partially concurred with our first recommendation and disagreed with the second. DOD partially concurred with our recommendation that the Secretary of Defense establish a strategic plan or set of plans to guide the development and fielding of UAVs by modifying the Roadmap or developing another appropriate document. DOD stated that its preferred way to address UAV planning was through the Joint Capabilities Integration and Development System, which is a capability-based planning process at the Joint Staff level that will identify UAV capabilities as needed across the five major joint warfighting areas through the use of the Functional Capabilities Boards. We continue to believe that DOD needs a departmentwide strategic plan establishing the mission capabilities required of UAVs and the detailed strategy for effectively developing and acquiring these capabilities. DOD acknowledged that its UAV Roadmap is not a broad strategic plan. Moreover, as we pointed out in our report, DOD recognized in its UAV Roadmap the need for a focused strategic plan for UAV capabilities, stating that the Roadmap was “to assist Department of Defense decision makers in developing a long-range strategy for UAV development and acquisition in future Quadrennial Defense Reviews and other planning efforts”—a strategy that has yet to be created. Such a strategic plan would provide the Office of the Secretary of Defense, the joint UAV Planning Task Force, or other appropriate authorities with the additional leverage and guidance to ensure effective oversight of the services’ development and integration of UAV capabilities into the joint warfighting force structure. The Joint Capabilities Integration and Development System process, which DOD referred to, may be a useful tool for DOD to implement its capabilities-based planning approach. However, we continue to believe that a strategic plan for UAVs would be an important element in assuring UAV decisions and development reflect decisions made within the Joint Capabilities Integration and Development System process and are consistent with the strategic plan’s intent. DOD did not concur with our recommendation to designate the UAV Planning Task Force or another appropriate organization to oversee the implementation of a UAV strategic plan and provide this organization with sufficient authority to enforce the plan’s direction. In its response, DOD indicated that the Secretary of Defense already has the authority needed to accomplish the intent of our recommendation. To buttress its point, DOD identified four actions taken to influence service development, evaluation, acquisition, and fielding of certain UAVs. We acknowledge in our report that the formation of the Task Force represents a step in the right direction for DOD and that the Task Force has achieved some successes in coordinating some UAV programs. In our recent report on the Unmanned Combat Aerial Vehicle, in fact, we gave the Task Force credit for bringing the Air Force and Navy programs together into a joint program. However, the Task Force has not always been successful. For example, no significant progress has been made in achieving better interoperability among Service UAVs and sensors. Our concern is that with UAVs assuming ever-greater importance as key enabling technologies, and with increasing sums of money being allocated for a growing number of UAV programs, DOD needs more than a coordination mechanism. It needs an organization with authority to achieve the most cost-effective development of UAVs. Consequently, we continue to believe that the recommendation is sound, and that to effectively implement a strategic plan for UAVs, the Secretary needs to designate an appropriate office with the authority to oversee and implement the strategy. DOD’s comments are included in their entirety in appendix II. DOD provided technical comments, which we included in our report as appropriate. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days from its issue date. At that time,we will send copies of this report to other appropriate congressional committees; the Secretary of Defense; and the Director, Office of Management and Budget, and it 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) 512-4914. Key contributors to this report are listed in appendix III. To determine the extent to which the Department of Defense (DOD) requested, received, and used funds for major unmanned aerial vehicle (UAV) development efforts during fiscal years 1999-2003, we reviewed department and service documentation for major operational UAV programs, programs that are in procurement, and programs that are under development and to be procured by 2010. Funding data were obtained from various sources. We obtained the funding levels that DOD requested for UAV programs from the justification books used to support DOD’s budget requests and the DOD Comptroller’s Congressional Funding tracking database. We also obtained the funding levels appropriated to service UAV programs by analyzing the services’ Appropriation Status by Fiscal Year Program and Subaccounts reports. Additionally, we analyzed these reports to determine the extent to which these appropriated funds were obligated within their allowed program years. We did not conduct a comprehensive audit to reconcile the differences in appropriated and obligated funds. To assess whether DOD’s approach to developing and employing UAVs ensures that UAVs will be efficiently integrated into the force structure, we reviewed key departmentwide strategic documents, such as the Defense Planning Guidance, to identify the level of DOD’s strategic planning for UAVs and its impact on service planning. We discussed the level of strategic planning for UAVs with key DOD and service officials from organizations with key roles in DOD’s g development, such as the Office of the Secretary of Defense’s Joint UAV Planning Task Force; the Office of the Assistant Secretary of Defense for Command, Control, Communications and Intelligence; the Joint Requirements Oversight Council; and U.S. Joint Forces Command. We reviewed each service’s current UAV roadmap and held discussions with officials from service activities involved in planning and developing their UAV force structure roadmaps. We also reviewed in detail the Office of the Secretary of Defense’s Unmanned Aerial Vehicles Roadmap 2002-2027, and assessed the extent to which it establishes an overall DOD management framework for developing and employing UAVs departmentwide. We used the principles embodied in the Government Performance and Results Act of 1993 as criteria for assessing the UAV Roadmap. We performed our work from June 2003 to February 2004 in accordance with generally accepted government auditing standards. In addition to the person named above, Fred Harrison, Lawrence E. Dixon, James Mahaffey, James Driggins, R.K. Wild, and Kenneth Patton also made major contributions to this report. Nonproliferation: Improvements Needed for Controls on Exports of Cruise Missile and Unmanned Aerial Vehicles. GAO-04-493T. Washington, D.C.: March 9, 2004. Nonproliferation: Improvements Needed to Better Control Technology Exports for Cruise Missiles and Unmanned Aerial Vehicles. GAO-04-175. Washington, D.C.: January 23, 2004. Defense Acquisitions: Matching Resources with Requirements Is Key to the Unmanned Combat Air Vehicle Program’s Success. GAO-03-598. Washington, D.C.: June 30, 2003. Unmanned Aerial Vehicles: Questionable Basis for Revisions to Shadow 200 Acquisition Strategy. GAO/NSIAD-00-204. Washington, D.C.: September 26, 2000. Unmanned Aerial Vehicles: Progress of the Global Hawk Advanced Concept Technology Demonstration. GAO/NSIAD-00-78. Washington, D.C.: April 25, 2000. Unmanned Aerial Vehicles: DOD’s Demonstration Approach Has Improved Project Outcomes. GAO/NSIAD-99-33. Washington, D.C.: August 30, 1999. Unmanned Aerial Vehicles: Progress toward Meeting High Altitude Endurance Aircraft Price Goals. GAO/NSIAD-99-29. Washington, D.C.: December 15, 1998. Unmanned Aerial Vehicles: Outrider Demonstrations Will Be Inadequate to Justify Further Production. GAO/NSIAD-97-153. Washington, D.C.: September 23, 1997. Unmanned Aerial Vehicles: DOD’s Acquisition Efforts. GAO/T-NSIAD— 97-138. Washington, D.C.: April 9, 1997. Unmanned Aerial Vehicles: Hunter System Is Not Appropriate for Navy Fleet Use. GAO/NSIAD-96-2. Washington, D.C.: December 1, 1995. Unmanned Aerial Vehicles: Performance of Short Range System Still in Question. GAO/NSIAD-94-65. Washington, D.C.: December 15, 1993. Unmanned Aerial Vehicles: More Testing Needed Before Production of Short Range System. GAO/NSIAD-92-311. Washington, D.C.: September 4, 1992. Unmanned Aerial Vehicles: Medium Range System Components Do Not Fit. GAO/NSIAD-91-2. Washington, D.C.: March 25, 1991. Unmanned Aerial Vehicles: Realistic Testing Needed Before Production of Short Range System. GAO/NSIAD-90-234. Washington, D.C.: September 28, 1990. Unmanned Vehicles: Assessment of DOD’s Unmanned Aerial Vehicle Master Plan. GAO/NSIAD-89-41BR. Washington, D.C.: December 9, 1988. | The current generation of unmanned aerial vehicles (UAVs) has been under development for defense applications since the 1980s. UAVs were used in Afghanistan and Iraq in 2002 and 2003 to observe, track, target, and strike enemy forces. These successes have heightened interest in UAVs within the Department of Defense (DOD) and the services. GAO was asked to (1) determine how much funding DOD requested, was appropriated, and was obligated for major UAV development efforts during fiscal years 1999-2003 and (2) assess whether DOD's approach to planning for UAVs provides reasonable assurance that its investment in UAVs will facilitate their integration into the force structure. During the past 5 fiscal years, Congress provided more funding for UAV development and procurement than requested by DOD, and to date the services have obligated most of these funds. To promote rapid employment of UAVs, Congress has provided nearly $2.7 billion for UAV development and procurement compared with the $2.3 billion requested by DOD. Because Congress has appropriated more funds than requested, the services are able to acquire systems at a greater rate than planned. For example, in fiscal year 2003, the Air Force requested $23 million to buy 7 Predator UAVs, but Congress provided over $131 million--enough to buy 29 Predators. DOD's approach to planning for developing and fielding UAVs does not provide reasonable assurance that its investment in UAVs will facilitate their integration into the force structure efficiently, although DOD has taken positive steps to improve the UAV program's management. In 2001 DOD established a joint Planning Task Force in the Office of the Secretary of Defense. To communicate its vision and promote commonality of UAV systems, in 2002, the Task Force published the UAV Roadmap, which describes current programs, identifies potential missions, and provides guidance on emerging technologies. While the Roadmap identifies guidance and priority goals for UAV development, neither it nor other key documents represent a comprehensive strategic plan to ensure that the services and DOD agencies develop systems that complement each other, perform all required missions, and avoid duplication. Moreover, the Task Force serves in an advisory capacity to the Under Secretary of Defense for Acquisition, Technology, and Logistics, but has little authority to enforce program direction. Service officials indicated that their service-specific planning documents were developed to meet their own needs and operational concepts without considering those of other services. Without a strategic plan and an oversight body with sufficient authority to enforce program direction, DOD risks fielding a poorly integrated UAV force structure, which could increase costs and the risk of future interoperability problems. |
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Ally Financial is one of the country’s largest financial holding companies, with total assets of $148.5 billion as of March 31, 2014. Its primary line of business is automotive financing—both consumer financing and leasing and dealer floor-plan financing. Ally Financial (when it was known as GMAC) formerly served as General Motors Company’s (GM) captive automotive finance company. GMAC’s subsidiaries offered financial services such as auto insurance and residential mortgages. In 2006, Cerberus Capital Management purchased 51 percent of the company (GM retained 49 percent). As the housing market declined in the late 2000s, the previously profitable GMAC mortgage business unit began producing significant losses. For example, the company’s Residential Capital LLC (ResCap) subsidiary lost approximately $17 billion from 2007 through 2009. During the same period, U.S. automobile sales dropped from 16.4 million to 10.4 million cars and light trucks, negatively affecting the company’s core automobile financing business. On May 14, 2012, ResCap and certain of its wholly owned direct and indirect subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court). The bankruptcy created uncertainties about Ally Financial’s financial obligations. As a financial holding company, Ally Financial is regulated and supervised by the Federal Reserve. Under the Dodd-Frank Act and implementing regulations, the Federal Reserve conducts an annual supervisory stress test of bank holding companies with $50 billion or more in total consolidated assets to evaluate whether the companies have sufficient capital to absorb losses resulting from adverse economic conditions. For the stress tests, the Federal Reserve projects revenue, expenses, losses, and resulting post-test capital levels, and regulatory capital ratios, including the tier 1 capital ratio and the tier 1 common ratio, under three economic scenarios (baseline, adverse, and severely adverse).holding companies to conduct an annual company-run stress test using the same macroeconomic scenarios that the Federal Reserve uses to conduct its supervisory stress test. In addition, the Federal Reserve requires the same bank The Federal Reserve also conducts an annual exercise, CCAR, to help ensure that large bank holding companies have robust, forward-looking capital planning processes that take into account their unique risks and set aside sufficient capital to operate during periods of economic and financial stress. The Federal Reserve evaluates capital adequacy; internal processes for assessing capital adequacy; plans for capital distributions, such as dividend payments or stock repurchases; and other actions that affect capital. The Federal Reserve may object to a capital plan because of significant deficiencies in the planning process or because one or more capital ratios would fall below required levels under the assumption of stress and planned distributions. If the Federal Reserve objects to a proposed capital plan, the bank holding company is permitted to make capital distributions only if the Federal Reserve indicates in writing that it does not object. The company also must resubmit the capital plan after remediating the deficiencies. In March 2013, the Federal Reserve reported the results of its 2013 supervisory stress test and of the CCAR exercise. The Federal Reserve found that Ally Financial’s tier 1 common capital ratio fell below the required 5 percent under the severely adverse scenario. Ally Financial was the only one of the 18 bank holding companies tested that fell below this required level. The Federal Reserve objected to Ally Financial’s capital plan during the 2013 CCAR. According to the Federal Reserve, Ally Financial’s capital ratios did not meet the required minimums under the proposed capital plan. Specifically, the Federal Reserve reported that under stress conditions, Ally Financial’s plan resulted in a tier 1 common ratio of 1.52 percent, which is below the required level of 5 percent under the capital plan rule. According to the Federal Reserve CCAR results paper, these results assumed that Ally Financial remained subject to contingent liabilities associated with ResCap. The Federal Reserve required Ally Financial to resubmit its capital plan, which Ally Financial did in September 2013. Ally Financial owns Ally Bank, an Internet- and telephone-based bank. Ally Bank is a state-chartered nonmember bank supervised by FDIC and the Utah Department of Financial Institutions. Ally Bank had more than $55.9 billion in total deposits as of March 31, 2014. To help stabilize the automotive industry and avoid further economic disruptions, Treasury disbursed $79.7 billion through AIFP from December 2008 through June 2009. The assistance was used to support two automakers, Chrysler and GM, and their automotive finance companies, Chrysler Financial and GMAC.outlined guiding principles for the investments, including In July 2009, Treasury exiting its investments as soon as practicable in a timely and orderly manner that minimizes financial market and economic impact; protecting taxpayer investment and maximizing overall investment returns within competing constraints; improving the strength and viability of GM and Chrysler so that they could contribute to economic growth and jobs without government involvement; and managing its ownership stake in a hands-off, commercial manner, including voting its shares only on core governance issues, such as the selection of a company’s board of directors and major corporation events or transactions. In late December 2008, as a part of AIFP, Treasury agreed to purchase $5 billion in senior preferred equity from GMAC and received an additional $250 million in preferred shares through warrants that Treasury exercised immediately. Treasury subsequently provided GMAC with additional assistance through TARP. In May 2009, Treasury purchased $7.5 billion of mandatory convertible preferred shares from GMAC. Also, in May 2009, Treasury exercised its option to exchange an $884 million loan to GM for a 35.4 percent common ownership share in GMAC. In December 2009, Treasury made additional investments in Ally Financial—$2.5 billion of trust preferred securities and approximately $1.3 billion of mandatory convertible preferred shares.December 2009, Treasury converted $3 billion of existing mandatory convertible preferred shares into common stock, increasing its common equity ownership from 35 to 56.3 percent. In December 2010, Treasury converted $5.5 billion of existing mandatory convertible preferred shares into common stock, increasing its common equity ownership to approximately 74 percent of Ally Financial. Ally Financial announced a plan in 2012 to repurchase Treasury’s mandatory convertible preferred shares, worth $5.9 billion, to reduce Treasury’s investment in the company. However, this plan stalled after the Federal Reserve objected to Ally Financial’s initial 2013 capital plan submission, partly because of uncertainty about the company’s obligations associated with the ResCap bankruptcy. Two key regulatory and legal developments allowed Ally Financial and Treasury to move ahead with plans to reduce Treasury’s investments in the company in late 2013. First, in November 2013, the Federal Reserve did not object to Ally Financial’s resubmitted capital plan. Second, in December 2013, the bankruptcy proceedings of Ally Financial’s mortgage subsidiary, ResCap, were substantially resolved. Following the resolution of these issues, Treasury significantly reduced its ownership stake in Ally Financial—primarily through sales of common stock—from 74 to 16 percent as of June 30, 2014. Also as of June 30, 2014, Treasury had received $17.8 billion (including interest and dividends), which exceeds the total Treasury assistance to the company of $17.2 billion. Two key regulatory and legal developments in the second half of 2013 helped Treasury accelerate the wind-down of its investments in Ally Financial. Federal Reserve did not object to Ally Financial’s resubmitted capital plan: In November 2013 Ally Financial received a “nonobjection” from the Federal Reserve to its resubmitted 2013 CCAR capital plan, which enabled Ally Financial to move forward on its repurchase of $5.9 billion of the remaining Treasury-owned mandatory convertible preferred shares. As we previously reported, Treasury and Ally Financial agreed in August 2013 that Ally would repurchase the mandatory convertible preferred shares, conditioned on receiving a nonobjection on the resubmitted capital plan and the closing of a private placement securities transaction. Ally Financial resubmitted its plan in September 2013 and the Federal Reserve approved it on November 15, 2013. The Federal Reserve nonobjection enabled Ally Financial to complete the private placement of common shares valued at $1.3 billion announced in August 2013. The private placement, intended in part to help finance the repurchase of the $5.9 billion remaining Treasury-owned mandatory convertible preferred shares, was completed in November 2013, as was the repurchase of the Treasury shares. More recently, Ally Financial received a nonobjection from the Federal Reserve in March 2014 on its annual capital plan. Completion of the ResCap bankruptcy: In December 2013, the bankruptcy of Ally Financial’s ResCap subsidiary was substantially resolved. The Bankruptcy Court entered an order confirming a bankruptcy plan on December 11, 2013, which became effective on December 17, 2013. The final bankruptcy agreement included a settlement, which the bankruptcy court judge had approved in June 2013, releasing Ally Financial from any and all legal claims by ResCap and, subject to certain exceptions, all other third parties, in exchange for $2.1 billion in cash from Ally Financial and its insurers. According to Ally Financial, its mortgage operations were a significant portion of its operations and were conducted primarily through ResCap. With the completion of the ResCap settlement, Ally Financial largely exited the mortgage origination and servicing business. Pub. L. No. 84-511, § 4(a)(2), 70 Stat. 133, 135 (codified at 12 U.S.C. § 1843(a)(2)). Ally Financial settled allegations of violations of the Equal Credit Opportunity Act by paying $98 million relating to the execution of consent orders issued by the Department of Justice and the Consumer Financial Protection Bureau. After the legal and regulatory developments in late 2013, the pace of Treasury’s reduction in its ownership share of Ally Financial accelerated. From December 2013 through June 2014, Treasury reduced its ownership share of Ally Financial by almost 80 percent (see fig. 1). In November 2013, Ally Financial made cash payments totaling $5.9 billion to repurchase all remaining mandatory convertible preferred shares outstanding and terminate an existing share adjustment provision.Additionally, Ally Financial issued $1.3 billion of common equity to third- party investors, reducing Treasury’s ownership share from 74 to 63 percent. In January 2014, Treasury completed a private placement of Ally Financial common stock valued at approximately $3 billion, further reducing Treasury’s ownership share of Ally Financial to 37 percent. According to Treasury, the decision to undertake a private placement at that time was based on market conditions, as well as information Treasury received about increasing investor interest from the underwriter of two previous private placements of Ally Financial shares—the $1.3 billion private placement Ally Financial completed in November 2013 and an approximate $900 million private offering by GM of its remaining Ally Financial stock in December 2013. These transactions contributed to building an investor base for the stock, according to Treasury and Ally Financial. Treasury said the positive results of the March 2014 Federal Reserve stress test and CCAR contributed to the decision to further reduce its ownership share. The day after the release of the CCAR results in March 2014, Treasury announced that it would sell Ally Financial common stock in an initial public offering (IPO) and in April 2014, completed the IPO of 95 million Treasury shares at $25 per share. The $2.4 billion sale reduced Treasury’s ownership share to approximately 17 percent. Following the IPO, Ally Financial became a publicly held company. In May 2014, Treasury received $181 million from the sale of additional shares after underwriters exercised the option to purchase an additional 7 million shares from Treasury at the IPO price. This additional sale reduced Treasury’s ownership share to approximately 16 percent. As of June 30, 2014, Treasury had received $17.8 billion in sales proceeds and interest and dividend payments on its total assistance to Ally Financial of $17.2 billion. Based on the stock prices, as of June 30, 2014, Treasury’s remaining investment in Ally Financial, which consists of common stock, was valued at almost $1.8 billion. Treasury stated that it would like to divest its ownership stake in Ally Financial in a manner that balances the speed of recovery with maximizing returns for taxpayers. Treasury officials told us that Treasury does not have a specific date by which it intends to fully divest from the company, but that its decision on timing will be based on market conditions. These market conditions, in part, will reflect Ally Financial’s financial performance. Since 2013, Ally Financial has continued its evolution into a publicly held, monoline finance company in the automotive sector with an Internet bank. Ally Financial’s financial condition continued to stabilize in late 2013 and early 2014 and the company raised significant levels of common equity through private and public share offerings. According to recent rating agency analyses, Ally Financial is competitive in automotive financing, particularly in the floor-plan business segment, but faces potential competitive challenges, such as its reliance on GM and Chrysler auto financing relationships. Ally Financial’s business structure has been simplified and clarified over the past year, according to rating agency analyses and federal regulatory officials. Specifically, the completion of the ResCap bankruptcy marked the company’s exit from the mortgage origination and servicing business. Ally Financial became a financial holding company in December 2013, which, according to the company, enabled it to retain its insurance and auction lines of business and maintain its full suite of products for dealers. Ally Financial also completed sales of its European and Latin American automotive finance operations to GM Financial, GM’s captive financing Ally company, and its Canadian operations to Royal Bank of Canada.Financial expects to complete GM Financial’s acquisition of its remaining international operation—its China joint venture, in which the company is a 40 percent owner—in 2014, subject to government approvals in China. Since our last review in 2013, Ally Financial’s financial performance has continued to stabilize as illustrated by multiple capital, profitability, and liquidity measures. Taking into account the resolution of ResCap, the sale of international operations, and other factors, the three largest credit rating agencies upgraded Ally Financial’s ratings, although the ratings remain below investment grade. Ally Financial’s capital position has remained the same or improved since 2009—the year it became subject to regulatory and reporting requirements following its conversion to a bank holding company in December 2008. Capital can be measured in several ways, but we focused on tier 1 capital because it is currently the strongest form of capital (see table 1). We examined Ally Financial’s tier 1 capital ratio and tier 1 leverage ratio and compared them to minimums required under the Federal Reserve’s capital adequacy guidelines for bank holding companies. We also examined Ally Financial’s tier 1 common ratio. The Federal Reserve has long held the view that bank holding companies generally should operate with capital positions well above the minimum regulatory capital ratios, with the amount of capital held commensurate with a bank holding company’s risk profile. Tier 1 capital and tier 1 common capital ratios: Higher tier 1 capital and common capital ratios may indicate that a bank holding company is in a better position to absorb financial losses. A tier 1 capital ratio measures tier 1 capital as a percentage of risk-weighted assets. As shown in table 1, Ally Financial’s tier 1 capital ratio increased from 2009 to 2010 but has declined slightly since 2011. Federal Reserve Capital Adequacy Guidelines require bank holding companies to have a tier 1 risk-based capital ratio of at least 4 percent. Ally Financial’s tier 1 capital ratio exceeded the required minimum each year from 2009 through 2013. In 2013, Ally Financial reported that the tier 1 capital ratio declined, in part, because of the repurchase of Treasury’s mandatory convertible preferred shares, which qualified as tier 1 capital. A tier 1 common capital ratio measures common capital—that is, the common equity component of tier 1 capital as a share of risk- weighted assets. Ally Financial’s tier 1 common ratio has increased from 4.85 percent at the end of 2009 to 8.84 percent at the end of 2013. Tier 1 leverage ratio: A tier 1 leverage ratio shows the relationship between a banking organization’s core capital and total assets. The tier 1 leverage ratio is calculated by dividing the tier 1 capital by the firm’s average total consolidated assets. Generally, a larger tier 1 leverage ratio indicates that a company is less risky because it has more equity to absorb losses in the value of its assets. As shown in table 1, Ally Financial’s leverage ratio has been reduced by 20 percent since 2009 but remains well above the regulatory minimum guideline of 3 or 4 percent, depending on the bank holding company’s composite rating. 12 C.F.R. 225, Appendix D, § II. profitability, including net income (loss), net interest spread, return on assets, and nonperforming asset ratio. Net income (loss): Ally Financial suffered a net loss in 2009 of $10 billion, but has reported net income for 4 of the last 5 years. As shown in figure 2, the 2009 loss was driven by substantial losses in its mortgage business operating unit. Ally Financial reported net income of $361 million in 2013, down from net income of $1.2 billion in 2012. The company attributed the decline to circumstances including a tax valuation adjustment of $1 billion in 2012; the 2013 payment of $1.4 billion as part of the ResCap settlement agreement; and the $98 million payment in connection with the Department of Justice and Consumer Financial Protection Bureau consent orders. Net interest spread: The net interest spread is the difference between the average rate on total interest-earning assets and the average rate on total interest-bearing liabilities, excluding discontinued operations for the period. In general, the larger the spread, the more a company is earning. Ally Financial’s net interest spread increased from a reported 0.31 percent at the end of 2009 to 1.75 percent at the end of 2013, meaning that Ally Financial is earning more interest on its assets than it is paying interest on its liabilities (see table 2). Return on assets (ROA): ROA is calculated by dividing a company’s net income by its total assets. It is an indication of how profitable a company is relative to its total assets and gives an idea of management’s efficiency in using its assets to generate earnings. A higher ROA suggests that a company is using its assets efficiently. Ally Financial reported improved ROA from 2009 to 2013, with a reported negative 5.81 percent ROA for 2009 and a positive 0.23 percent in 2013. Nonperforming asset ratio: This ratio measures asset quality by dividing the value of nonperforming assets by the value of total assets. The lower the ratio, the fewer poorly performing assets a company holds. Ally Financial’s nonperforming asset ratio fell from 4.36 percent in 2009 to 1.19 percent in 2013 (see table 2). Ally Financial’s liquidity position generally has stabilized since 2009. To examine Ally Financial’s liquidity position, we examined the company’s total liquidity ratio, bank deposits, and operating cash flow. Total liquidity ratio: Liquidity ratios measure a bank’s total liquid assets against its total liabilities. Generally, the ratios indicate a bank’s ability to sell assets quickly to cover short-term debts—with a higher ratio providing a larger margin of safety. Overall, Ally Financial’s liquidity ratio remained fairly stable from the third quarter of 2009 through the fourth quarter of 2013 (see fig. 3). Declines in liquidity levels in 2012 and 2013 were associated with repayments of government assistance. For example, according to Ally Financial, the decline in liquidity in 2013 was due to the repurchase of the Treasury mandatory convertible preferred shares and the redemption of certain high-coupon, callable debt. For the quarter ending March 31, 2014, Ally Financial reported a total liquidity ratio of 16.01 percent. Bank deposits: Bank deposits are the funds that consumers and businesses place with a bank, and growth in deposits is an important factor in the bank’s liquidity position. From December 2008 to March 2014, deposits at Ally Bank, Ally Financial’s Internet bank, grew almost 190 percent, from $19.3 billion to $55.9 billion, of which approximately $45.2 billion were retail (consumer) deposits. Deposits accounted for 43 percent of Ally Financial’s total funding as of the first quarter of 2014, providing the company with a low-cost source of funding that is less sensitive to interest rate changes and market volatility than other sources of funding. Operating cash flow: From the first quarter of 2010 through the third quarter of 2013, Ally Financial generated positive cash flow from operating activities (see fig. 4). Since the third quarter of 2013, cash flows have varied, with Ally reporting negative cash flow in the fourth quarter of 2013 and positive cash flow at the end of the first quarter of 2014. According to Ally Financial, 2013 declines in operating cash flow (compared with the prior year) were driven by the settlement of derivative transactions, but were partially offset by sales and repayments of mortgage and automotive loans. Ally Financial’s changing financial condition is reflected in its credit rating. Although Ally’s credit rating remains below investment grade, its long- term credit rating with the three largest credit rating agencies has been upgraded multiple times since 2009. Most recently, Ally’s long-term ratings with Moody’s, Standard and Poor’s, and Fitch Ratings were upgraded to Ba3, BB, and BB+, respectively. According to rating agency analyses, Ally Financial is a strong competitor in automotive financing, although the company faces competitive challenges. Analysts have said that Ally Financial is competitive in automotive financing, particularly in the floor-plan business segment. In addition, as mentioned previously in this report, Ally Bank has continued to increase its level of retail deposits. Analysts have pointed to potential competitive challenges for Ally Financial, such as its reliance on GM and Chrysler automotive financing relationships. As we previously reported, GM and Chrysler have established captive financing units. Ally’s exclusive lending relationships with GM and Chrysler have ended as the two automakers have begun to rely on their captive financing units. For example, the agreement between GM and Ally Financial on dealer and consumer lending was revised in early 2014. Among other changes, Ally Financial no longer enjoys The captive exclusivity with regard to GM lending arrangements.financing units of GM and Chrysler have begun to increase their financing activities. However, according to Ally Financial representatives, the company is the only automotive finance company that offers a suite of products to dealers (financing, insurance, and auction services) and as a result, the company expects to continue to be competitive in this segment. Moreover, Ally Financial representatives told us that the company has been focusing more on increasing profitability than on market share—consistent with its goals as a publicly held company, which include maximizing return to shareholders. Company representatives also have said in public statements that Ally Financial has been focusing on reducing its noninterest expenses and lowering its cost of funds. Ally Financial also faces competition from other large bank holding companies in consumer automobile financing. We compared the amount of Ally Financial consumer automobile financing with that of four large bank holding companies (Bank of America Corporation, Capital One Financial Corporation, JPMorgan Chase & Company, and Wells Fargo & Company) that reported consumer automobile loans. These data do not include all types of automobile financing, such as automobile leasing and dealer financing, but only retail consumer automobile loans for the time period.lending exceeded that of Ally Financial (see fig 5). The dollar amount of consumer automobile loans that Wells Fargo, JPMorgan Chase, and Capital One made increased from March 2011 through March 2014, while the dollar amount of Ally Financial financing has declined since the fourth quarter of 2012. According to Federal Reserve officials, this decline likely reflects the sale of the international automotive finance operations. We provided a draft of this report to FDIC, the Federal Reserve, and Treasury for their review and comment. In addition, we provided a copy of the draft report to Ally Financial to help ensure the accuracy of our report. Treasury provided written comments that are reprinted in appendix II. Ally Financial provided technical comments, which we have incorporated, as appropriate. FDIC and the Federal Reserve did not provide comments. In its written comments, Treasury generally concurred with our findings. Treasury noted that approximately $17.8 billion has been recovered to date from Ally Financial through repayments, a private placement, and an initial public offering. Treasury also noted that it will unwind its remaining ownership stake in a way that balances the speed of recovery with maximizing returns to taxpayers. We are sending copies of this report to FDIC, the Federal Reserve, and Treasury, and the appropriate congressional committees. This report will also be available at no charge on our website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 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. This report is based on our continuing analysis and monitoring of the Department of the Treasury’s (Treasury) activities in implementing the Emergency Economic Stabilization Act of 2008 (EESA), which provided us with broad oversight authorities for actions taken under the Troubled Asset Relief Program (TARP). This report examines (1) the status of Treasury’s investments in Ally Financial Inc. (Ally Financial) as of June 30, 2014, and its efforts to wind down those investments; and (2) the financial condition of Ally Financial through March 31, 2014. To examine the status of Treasury’s investments, we reviewed TARP reports, which included monthly reports to Congress and daily TARP updates regarding the Automotive Industry Financing Program (AIFP) program data. Using the AIFP program data, we analyzed Treasury’s equity ownership and recovery of funds in Ally Financial for the time period from January 2009 through June 2014. We have previously assessed the reliability of the AIFP program data from Treasury. For example, we tested the Office of Financial Stability’s internal controls over financial reporting as they related to our annual audit of the office’s financial statements and found the information to be sufficiently reliable based on the results of our audit of the TARP financial statements for fiscal years 2009—2013. AIFP was included in these financial audits. addition, for this review, we reviewed the data for completeness and obvious errors such as outliers. Based on this review, we determined that the data were sufficiently reliable for our purposes. EESA, which was signed into law on October 3, 2008, established the Office of Financial Stability within Treasury and provided it with broad, flexible authorities to buy or guarantee troubled mortgage-related assets or any other financial instruments necessary to stabilize the financial markets. § 101(a), 122 Stat. at 3767 (codified at 12 U.S.C. § 5211(a)). Review 2014: Assessment Framework and Results.interviewed officials from Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and representatives from Ally Financial. To assess the financial condition of Ally Financial, we measured the institution’s capital ratios, net income, net interest spread margin, return on assets, nonperforming asset ratio, liquidity ratio, bank deposits, and operating cash flow, generally from 2009 through the first quarter (March 31) of 2014. We obtained these data from SNL Financial, a provider of financial information. We have determined that SNL Financial data are sufficiently reliable for past reports, and we reviewed past GAO data reliability assessments to ensure that we, in all material respects, used the data in a similar manner and for similar purposes. We also reviewed reports by several credit rating agencies on how they rate Ally Financial’s financial strength. Although we have reported on actions needed to improve the oversight of rating agencies, we included these ratings because the ratings are widely used by Ally Financial, Treasury, and market participants. To obtain information on the financial ratios and indicators used in the analyses of Ally Financial’s financial condition, we reviewed relevant documentation and interviewed officials from FDIC, the Federal Reserve, Treasury, and representatives from Ally Financial. For the comparison of retail (consumer) automotive lending for five large bank holding companies, including Ally Financial, we used Federal Reserve regulatory filings (Form FR-Y9C). For each data source we reviewed the data for completeness and obvious errors and determined that these data were sufficiently reliable for our purposes. We conducted this performance audit from March 2014 to August 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Karen Tremba (Assistant Director), Catherine Gelb (Analyst-in-Charge), Bethany Benitez, William Chatlos, Risto Laboski, Terence Lam, Barbara Roesmann, and Jena Sinkfield made significant contributions to this report. | As part of its Automotive Industry Financing Program, funded through the Troubled Asset Relief Program (TARP), Treasury provided $17.2 billion of assistance to Ally Financial (formerly known as GMAC). Ally Financial is a large financial holding company, the primary business of which is auto financing. TARP's authorizing legislation mandates that GAO report every 60 days on TARP activities. This report examines (1) the status of Treasury's investments in Ally Financial and its efforts to wind down those investments and (2) the financial condition of Ally Financial. To address these issues, GAO reviewed and analyzed available industry, financial, and regulatory data from 2009 through June 2014. GAO also reviewed rating agency analyses, Treasury reports and documentation detailing Treasury's investments in Ally Financial and its divestments from the company, as well as Ally Financial's financial filings and reports. GAO also interviewed officials from the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Treasury, and representatives from Ally Financial. GAO provided a draft of this report to FDIC, the Federal Reserve, Treasury, and Ally Financial. Treasury generally concurred with GAO's findings. Ally Financial provided technical comments, which GAO has incorporated, as appropriate. FDIC and the Federal Reserve did not provide comments. GAO makes no recommendations in this report. The Department of the Treasury (Treasury) reduced its ownership stake in Ally Financial Inc. (Ally Financial) from 74 percent in October 2013, to 16 percent as of June 30, 2014. As shown in the figure below, the pace of Treasury's reduction in its ownership share of Ally Financial accelerated in 2013 and corresponds with two key events. First, in November 2013, the Board of Governors of the Federal Reserve System (Federal Reserve) did not object to Ally Financial's resubmitted 2013 capital plan, which allowed Ally Financial to repurchase preferred shares from Treasury and complete a private placement of common shares. Second, in December 2013 the bankruptcy proceedings of Ally Financial's mortgage subsidiary, Residential Capital LLC (ResCap), were substantially resolved. The confirmed Chapter 11 plan broadly released Ally Financial from any and all legal claims by ResCap and, subject to certain exceptions, all other third parties, in exchange for $2.1 billion in cash from Ally Financial and its insurers. As of June 30, 2014, Treasury had received $17.8 billion in sales proceeds and interest and dividend payments on its total assistance to Ally Financial of $17.2 billion. Ally Financial's financial condition has continued to stabilize in late 2013 and early 2014 as illustrated by multiple capital, profitability, and liquidity measures. For example, Ally Financial's capital ratios have remained above regulatory minimum levels since 2009, which indicates that it is in a better position to absorb financial losses. In addition, the company raised significant levels of common equity through private and public share offerings. According to recent credit rating agency analyses, Ally Financial is competitive in automotive financing, particularly in the floor-plan business segment, which focuses on dealer financing. However, analysts reported that the company faces potential competitive challenges, such as the loss of certain exclusive relationships with General Motors Company and Chrysler Group LLC. |
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The use of federal procurement to promote environmental goals has gained increasing emphasis since the 1976 RCRA legislation. Under RCRA section 6002, each procuring agency purchasing more than $10,000 of an item (in a fiscal year) that EPA has designated as available with recycled content must have an affirmative procurement program in place. This program is to ensure that the agency purchases recycled-content products to the maximum extent practicable. This requirement applies both to purchases made directly by the agency and to purchases made indirectly by their contractors and grantees. To comply with RCRA and the executive order, an agency’s affirmative procurement program must consist of four elements: a preference program that requires the agency to institute practices and procedures favoring the specification and procurement of recycled- content products; internal and external programs to actively promote the purchase program for recycled-content products; procedures for obtaining pre-award estimates and post-award certifications of recovered materials content in the products to be supplied under any contracts over $100,000 and, where appropriate, reasonably verifying those estimates and certifications; and procedures for monitoring and annually reviewing the effectiveness of the affirmative procurement program to ensure the use of the highest practicable percentage of recycled-content materials available. The 1998 executive order strengthened the RCRA requirements for an effective affirmative procurement program for recycled-content products and added two new product types—environmentally preferable products and biobased products. The 1998 executive order further clarified some previous requirements and defined more clearly the duties of the Federal Environmental Executive and the responsibilities of agency environmental executives in implementing certain initiatives and actions to further encourage the “greening” of the government through federal procurement. The order did not require agencies to purchase environmentally preferable and biobased products, but encouraged them to do so. A recent change to the Federal Acquisition Regulations (FAR) formalized the 1998 executive order by making it a requirement for all executive agencies and contracting officers to follow when buying products, including supplies that are furnished under a service contract. The changes to the FAR also emphasized executive branch policies to purchase products containing recycled content material and other environmentally preferable products and services when feasible. The Office of the Federal Environmental Executive has overarching responsibilities to advocate, coordinate and assist federal agencies in acquiring recycled-content, environmentally preferable, and biobased products and services. In 1999 the White House Task Force on Greening the Government, chaired by the Federal Environmental Executive, issued a strategic plan that calls upon all executive agencies to demonstrate significant increases in the procurement of recycled-content products from each preceding year through 2005. Each agency’s environmental executive is responsible for overseeing the implementation of the agency’s affirmative procurement program and for setting goals to increase purchases of recycled-content products in accordance with the White House Task Force’s strategic plan. Although all procuring agencies are required to have an affirmative procurement program and to track their purchases of recycled-content products, the Office of Federal Procurement Policy and the Office of the Federal Environmental Executive limit their annual reporting requirement to the top six procuring agencies. These six agencies are the departments of Defense, Energy, Transportation, and Veterans Affairs; GSA; and NASA. Two of these agencies, Defense and GSA, have a dual role—first, as procuring agencies subject to RCRA and the executive order and second, as major suppliers of goods and services to other federal agencies. As such, both use recycled-content products and supply other federal agencies with recycled-content products. The Office of Federal Procurement Policy and the Office of the Federal Environmental Executive issue a joint report to the Congress every 2 years on these agencies’ progress in purchasing the EPA-designated products. Federal agencies must also comply with acquisition reform legislation enacted during the 1990s. In response to concerns about the government’s ability to take advantage of the opportunities offered by the commercial marketplace, these reforms streamlined the way that the federal government buys its goods and services. For example, the reforms introduced governmentwide commercial purchase cards, similar to corporate credit cards, to acquire and pay for goods and services of $2,500 or less. The cards, known as federal purchase cards, are issued to a broad range of personnel. EPA accelerated its efforts in the 1990s to identify and issue guidance on procuring products with recycled content, but the extent to which the major federal procuring agencies, with the exception of Energy, have purchased these products cannot be determined because they do not have data systems that clearly identify purchases of recycled-content products. In addition, these agencies do not receive complete data from their headquarters and field offices or their contractors and grantees. As a result, they generally provide estimates, not actual purchase data, to the Office of Federal Procurement Policy and the Office of the Federal Environmental Executive. According to three of the major procuring agencies—including Defense, which accounts for over 65 percent of federal government procurements—even these estimates are not reliable. In addition, agencies’ efforts to promote awareness of purchase requirements for recycled-content products have had limited success, and their efforts to monitor progress have principally relied on the estimated data they report. A White House task force has made a number of recommendations to improve data collection, particularly from federal purchase card users and contractors. In the early 1980s, the Congress directed EPA to issue guidance for five products with recycled content, three of which the Congress designated: cement and concrete containing fly ash, recycled paper and paper products, and retread tires. Between 1983 and 1989, EPA issued guidance for these three products and also issued guidance for re-refined lubricating oil and building insulation. EPA did not issue guidance for any more products until 1995. Between 1995 and 2000, EPA increased the total number of designated products to 54 and issued comprehensive procurement guidance to use in purchasing these products. Figure 1 shows the increases in the number of designated products with recycled content. EPA has identified eight categories of recycled-content products. These are listed below, with examples of products in each category. Construction products: building insulation containing recycled paper or fiberglass; carpeting containing recycled rubber or synthetic fibers; floor tiles made with recycled rubber or plastic. Landscaping products: landscaping timbers and posts containing a mix of plastic and sawdust or made of fiberglass; hydraulic mulch containing paper; compost made from yard trimmings and/or food waste. Nonpaper office products: trash bags containing recycled plastic; waste receptacles containing recycled plastic or steel; and binders containing recycled plastic or pressboard. Paper and paper products: copier paper, newsprint, file folders, and paper towels and napkins, all of which have recycled fiber content. Park and recreation products: picnic tables and park benches containing recycled plastics or aluminum; playground equipment containing recycled plastic or steel; fencing using recycled plastic. Transportation products: parking stops containing recycled plastic or rubber; traffic barricades containing steel or recycled fiberglass; traffic cones containing recycled PVC or rubber. Vehicular products: engine coolants (antifreeze), re-refined motor oil and retread tires, all of which contain recycled content materials. Miscellaneous products: awards and plaques containing glass, wood, or paper; drums containing steel or plastic; signs and sign posts containing plastic steel or aluminum. EPA officials have also identified 10 additional recycled-content products for designation and expect to issue purchasing guidelines for them in 2001. They also plan to designate more products as they become available. According to EPA officials, the list of possible products continues to evolve because new products are always being developed and existing products may be changed, adding more recycled material. RCRA outlines criteria for determining which items to designate as recycled-content products. EPA’s guidance expands on these criteria, which include the following: the availability of the item, including whether it is obtainable from an adequate number of sources to ensure competition; the effect of the procurement on the amount of solid waste diverted from landfills; the capability of the item to meet the agency’s needs and the item’s cost in relationship to products that do not have recycled content; and the determination of whether the item will have a negative impact on (1) other recycled-content products by displacing one recovered material for another recovered material–resulting in no net reduction in materials requiring disposal; (2) the supply of recovered materials due to the diversion of recovered materials from one product to another–resulting in shortages of materials for one or both products; and (3) the availability of supplies to manufacture the product–resulting in insufficient supplies over time. In reviewing EPA’s files for all products designated since 1995, we found that EPA had considered these criteria. Furthermore, EPA had not failed to list any major product containing recycled materials that was likely to be purchased by federal agencies, according to the four major procuring agencies and the National Recycling Coalition, an organization that represents recycling groups, large and small businesses, and federal, state, and local governments. However, the four major procuring agencies said that the list contains more items than they can feasibly track the purchases of and that targeting their tracking efforts on the major items they purchase would be a better use of their resources. For example, NASA officials told us that they annually purchase only about 100 traffic cones—one of the designated items—but have to bear the burden of tracking these purchases to prove that they do not exceed the $10,000 threshold, which would trigger the annual reporting requirement. The four agencies also told us that it is costly and burdensome to update their tracking programs each time EPA adds new items and to document whether or not their purchases of these products meet the $10,000 threshold. Defense and GSA officials added that instead of continuing to add products to the designated list, EPA should work with the agencies to assist them in buying products already identified. Although EPA has a Web site that provides some information regarding a product’s availability, agency officials indicated that the information is not easily accessible or kept up to date. For example, Defense and GSA officials said that (1) EPA should provide more information on the availability of the individual products, since listed products may not be available in all regions of the country, and (2) EPA should identify the manufacturers and costs of the recycled-content products and take the lead in promoting them, thus making it easier for federal agencies to buy these products. Officials at the Office of the Federal Environmental Executive agreed with Defense’s and GSA’s assessment regarding purchasing difficulties. Three of the four major procuring agencies do not provide credible and complete information on their purchases of recycled-content products because (1) they do not have automated tracking systems for these products, and (2) the information they do collect and report does not include a significant portion of their procurements, such as those made by contractors. As a result, they estimate the extent of their purchases in reporting to the Office of Federal Procurement Policy and the Office of the Federal Environmental Executive. However, agency officials acknowledge that these estimates are not reliable. Defense, GSA, and NASA reported that they cannot use their automated procurement systems to track recycled-content products purchased by officials in their headquarters and field offices and by their contractors and grantees. As a result, they collect information manually, a process they find costly and time-consuming. This is particularly the case for agencies with large field structures. For example, Defense said that to satisfy the Office of Federal Procurement Policy and the Office of the Federal Environmental Executive reporting requirements, it must collect information manually from the thousands of installations managed by the Army, Navy, Air Force, and Defense Logistics Agency. Defense requests the necessary information from these units, but does little if they do not provide the data. Similarly, GSA reported that it manually collects purchase data on recycled-content products from its headquarters and field offices. However, Defense and GSA reported that they can electronically track actual purchases of recycled-content products made through their automated central supply systems, which also records purchases made by other agencies, if the products are included in Defense and GSA stock inventories. The systems do not track items purchased from vendor lists. According to Defense and GSA officials, recent improvements to these central supply systems include electronic catalogues of environmentally friendly products linked to an automated shopping system, which will allow the agencies to better track and report on other agencies’ purchases of recycled-content products. NASA and Energy offices also manually collect purchase data on recycled- content products but enter the information into automated systems for tracking and reporting. However, they have not integrated these automated systems with their agencywide procurement systems. Despite this lack of integration, Energy officials indicated that, with their current tracking system, they are able to determine the extent to which most of their offices and contractors are purchasing recycled-content products. NASA officials reported that their system provides more limited data on some contractors. Defense and GSA officials acknowledged that their data collection would improve if they had on-line electronic systems for recycled-content products linked to agencywide procurement systems. However, the additional cost of developing such an integrated system would not be worthwhile, according to these officials. For example, Defense believes that the cost of developing and maintaining a reliable system to produce the data needed to comply with current reporting requirements would far exceed the value of the information produced. The data the agencies collect and report to the offices of Federal Procurement Policy and of the Federal Environmental Executive generally exclude several sources of information. One source is federal purchase card acquisitions, which are increasing and now account for about 5 percent of all federal purchases. The four procuring agencies reported that they cannot track federal card purchases of recycled-content products made in the private sector, such as desk accessories, tires, and lubricating oil, unless they establish an internal system that relies on the card users to keep records. Defense and GSA reported that they do not have such systems. Defense officials noted that requiring purchase card users to keep logs is in conflict with acquisition reforms intended to simplify the procurement process for purchases below $2,500 (micropurchases).Energy and NASA officials stated they do track and report purchases of recycled-content products through federal purchase cards and have established processes for staff to keep records for entry into their database for the recycled content program. The agencies’ data are also incomplete because they may exclude information on purchases made by some of their component organizations. For example, Defense reported that the military services provide mostly estimated data, which they do not verify to determine accuracy and completeness. Furthermore, these estimates do not include all of the services. For example, the Army provided no information for Defense’s report to the Office of Federal Procurement Policy and the Office of the Federal Environmental Executive for fiscal years 1998 and 1999, and the Air Force and Navy provided limited purchase data. The lack of reliable data from Defense is of particular concern in evaluating the effectiveness of the RCRA program because Defense’s procurements account for over 65 percent of total federal procurements reported for fiscal year 1999. Defense reported that it purchased recycled-content products worth about $157 million out of total fiscal year 1999 procurements of about $130 billion. (The total fiscal year procurement figure of $130 billion includes $20 billion for research and development and $50 billion for major weapons systems, which are unlikely to involve the procurement of recycled-content products. In addition, $53 billion for service contracts may or may not involve the purchase of recycled-content products. Defense officials indicated that some of these figures may overlap.) Finally, the agencies lack complete data on purchases made by contractors and grantees. This data gap is potentially significant because contracts over $25,000 account for almost 90 percent of all federal procurements. The agencies reported the following: Defense has no information on contractors’ purchases. GSA has limited information on some contractors’ purchases. Energy, which spends about 94 percent of its appropriations on contractors, collects purchase information from about 86 percent of its contractors. NASA collects purchase data from on-site contractors but receives little or no data from off-site contractors. RCRA requires federal contractors to estimate the percentage of recycled- content material used to fulfill their contracts (not the specific products) and to certify that they have met the minimum requirements for recycled content. The Federal Acquisition Streamlining Act established that the estimation requirement under RCRA applies only to contracts exceeding $100,000. However, for individual purchases by federal agencies that exceed $10,000, the Office of Federal Procurement Policy requires the agencies to track and report the total dollar amount by product and, in some cases, to report the volume of recycled-content products. The agencies reported that it is difficult, if not impossible, for them to separate information on products with recycled content from information on other products without such content (virgin materials). For example, according to GSA, when it lets a contract for remodeling offices, the contract does not necessarily distinguish between the cost of carpeting containing recycled content and of virgin-content carpet. It may provide information on only the total cost of carpeting. The contractor might have to purchase virgin-content carpeting for certain areas (e.g., high-traffic hallways) and might be able to use carpeting with recycled content in other areas (e.g., staff offices). In such a case, GSA would provide only an estimate to the Office of Federal Procurement Policy of the value of carpet with recycled material. GSA officials also pointed out that performance-based contracts do not include detailed product estimates. For example, a contract to construct a building may not indicate either the amount or cost of the recycled- content concrete used. Finally, the agencies lack data on grantee purchases. State and local agencies receiving federal grants may be “procuring agencies” under RCRA. If they meet the $10,000 threshold—that is, if they spend more than $10,000 on a designated item—they are subject to the affirmative procurement program requirement and to buying the recycled-content products on EPA’s list. However, grantees are not required to report their purchases of EPA-designated products with recycled content. Also, executive orders do not apply to grantees. Because of overall federal efforts to reduce the paperwork (reporting) burden on grantees, federal agencies stated that they cannot request information from grantees without OMB approval. Consequently, six of the agencies we reviewed, including the major grant making agencies—DOT and HUD—reported that they do not obtain any information on grantees’ purchases. A White House task force workgroup on streamlining and improving reporting and tracking, cochaired by the Federal Environmental Executive and OMB’s Office of Federal Procurement Policy, has made a number of recommendations to improve data collection from federal purchase card users and contractors. It recommended that it begin a pilot project with banks and willing vendors to identify and report recycled-content product purchases made with federal purchase cards. We believe that this effort would provide useful additional information regarding purchase card users’ compliance with the RCRA requirements. With respect to contractors, the task force workgroup and various agencies recommended revisions to the Federal Procurement Data System—a system that collects information on procurements on a governmentwide basis for contracts over $25,000. The revised data system would require the procuring official to indicate whether the contract includes (1) recycled-content products and identifies the reasons for granting waivers, and (2) appropriate language from the Federal Acquisition Regulations to ensure that the contractor is notified of the requirements for purchasing recycled-content products. These proposed revisions are currently being circulated to the agencies for comment. If these changes are implemented, the agencies will no longer have to manually collect and report on their individual purchases of recycled- content products. Although the revised system will not provide information on the products themselves or of the dollar amount associated with them, it would allow agencies for the first time to identify contracts subject to purchases of recycled-content products and to measure their annual progress in increasing the percentage of contracts containing affirmative procurement clauses. The four major procuring agencies have ongoing efforts, and are developing strategies, to promote awareness of the requirement to purchase recycled-content products, but several studies indicate that the success of these efforts to date has been limited. In addition, although RCRA requires federal agencies to review and monitor the effectiveness of their RCRA program efforts, only Energy has taken any steps beyond the data collection efforts discussed earlier. Studies of the agencies’ affirmative procurement programs report that the agencies are not effectively educating procurement officials about the requirement to buy EPA-designated recycled-content products. This lack of awareness is a major or contributing factor to inaccurate data and noncompliance with implementing affirmative procurement programs, according to our survey of the agencies, as well as the reports by the GSA and NASA inspectors general, the Air Force’s Internal Audit Agency, and a fiscal year 2000 EPA survey of 72 federal facilities. Efforts to promote the purchase of recycled-content products by government agencies, their contractors, and grantees can occur government- or agencywide. Governmentwide efforts include those conducted by the Office of the Federal Environmental Executive, which actively promotes, coordinates, and assists federal agencies’ efforts to purchase EPA-designated items. For example, the Office of the Federal Environmental Executive has helped increase agency purchases of EPA- designated products by encouraging GSA, the Defense Logistics Agency, and the Government Printing Office to automatically substitute recycled- content products in filling orders for copier paper (begun in 1992) and lubricating oil (begun in 1999). This effort has increased sales of recycled- content copier paper from a level of 39 percent to a level of 98 percent at GSA and the Government Printing Office, according to the Office of the Federal Environmental Executive. GSA now carries only recycled-content copier paper. The Defense Logistics Agency reported that its sales of re- refined lubricating oil increased over 50 percent from fiscal year 1999 to fiscal year 2000. Given the success of the automatic substitution program for these products, the Office of the Federal Environmental Executive is strongly encouraging agencies to identify other recycled-content products for which automatic substitution policies might be appropriate. However, this program does not apply to purchases made outside of the federal supply centers. GSA and Defense have also placed symbols in their printed and electronic catalogues and in their electronic shopping systems to identify recycled- content products. Using the electronic catalogue, agencies can then go directly into the electronic shopping system to order these products. They will also be able to track and report these purchases–including those made with purchase cards. Defense and GSA are also working jointly to modify the Federal Logistics Information System to add environmental attribute codes to the products listed in that system to more easily identify environmentally friendly products. The modification’s usefulness may be limited, however, because this system does not automatically link the user to a system for purchasing the products identified, according to agency officials. In addition to governmentwide promotion efforts, agencies reported using a variety of techniques to make their decentralized organizations aware of the RCRA requirements. The agencies provide classroom and computer- assisted training on purchasing recycled-content products and on incorporating the RCRA purchasing requirements into program manuals. The four major procuring agencies also reported that they promoted the procurement of EPA-designated products through such mechanisms as their Web sites, telephone and videoconferences, videotapes, electronic newsletters, workshops, and conferences. As indicated by the Inspectors Generals’ reports and agency studies, and our own analysis, even though the agencies have used many techniques to inform their staff of these requirements, staff awareness, particularly in field offices, remains a problem. Agencies generally must rely on methods less direct than providing classroom training, or having workshops or conferences, for making their contractors aware of the requirement to purchase recycled-content products. Accordingly, Energy, GSA, and Defense’s Air Force, Navy, and Army Corps of Engineers have initiated alternative efforts to inform contractors of these requirements. Energy makes its major facility management contractors part of its affirmative procurement program team to help implement the program. Moreover, in May 2000, Energy established “green acquisition advocates” at each of its major contracting facilities. Among their duties, these advocates are to promote the RCRA program to the contractors. GSA and the three Defense components have developed “green” construction and/or lease programs that promote the use of EPA-designated products. In addition, all the agencies we reviewed have incorporated the Federal Acquisition Regulation clauses pertaining to the RCRA program into their contracts. GSA also reported that it plans to modify its acquisition manual to include a review of the list of EPA- designated products with contractors in post-award conferences. In addition, GSA’s regional offices have begun evaluating the effectiveness of their affirmative procurement programs. The agencies we examined have generally not developed agency-specific mechanisms for advising grantees of their responsibility to purchase recycled-content products. Instead, they rely on OMB Circular A-102. This circular refers to RCRA and contains a general statement on the requirement for grantees to give preference in their purchases to the EPA- designated products. It does not inform them of the specific requirements they need to follow, such as developing affirmative procurement programs. Three of the four procuring agencies and the two major grant- awarding agencies that we reviewed—the departments of Housing and Urban Development and Transportation—rely on either this circular or a similar general statement to inform grantees of the RCRA requirements. Only Energy, in its financial assistance regulations, requires its grant- awarding program offices to inform grantees of the RCRA requirement. According to officials at the Office of the Federal Environmental Executive, grantees could obtain specific information about RCRA requirements if OMB included that information in the “common rule” under Circular A-102. The common rule, directed by a March 1987 presidential memo and adopted in individual agency regulations, provides supplemental information, generally in the form of more detailed instructions on processes grantees should follow in implementing the circular’s requirements. However, it does not mention RCRA’s requirements for an affirmative procurement program. Officials at the departments of Transportation and Housing and Urban Development did not know whether their grantees had an affirmative procurement program or whether grantees were aware of the requirements to purchase recycled- content products. Officials said that unless they were specifically directed by OMB, seeking this information could be interpreted as an additional burden on grantees and an unfunded mandate. In April 2000, the Federal Environmental Executive recommended to the President that OMB revise the Circular A-102 common rule to “require recipients of federal assistance monies to comply with the RCRA buy-recycled requirements.” She added that federal agencies administering grant programs should educate state and local government recipients about the requirements. RCRA requires federal agencies to review and monitor the effectiveness of their recycled-content programs; however, it does not define what this review and monitoring should consist of. With the exception of Energy, which has established purchasing goals that its contractors must meet, the major procuring agencies limit their required annual review and monitoring functions to compiling data on their purchases of recycled- content products in order to report to the Office of the Federal Environmental Executive and the Office of Federal Procurement Policy. But as the agencies admit, these data are unreliable and incomplete. Consequently, these data do not allow the agencies to assess their progress in purchasing recycled-content products or review the effectiveness of their recycled-content purchase programs. However, Defense procurement officials believe that legislation like RCRA, because of its review and monitoring requirements, is in conflict with the streamlining reforms that are intended to ease the administrative burden associated with government purchases. An indication of the agencies’ lack of monitoring is the scarcity of information on exemptions or waivers. Agencies may waive the RCRA requirement to purchase recycled-content products if the recycled product is too costly, does not meet appropriate performance standards, or is not available. The number of waivers approved, when compared with purchases of products both with and without recycled content, would tell the agencies how far they are from meeting the goal of purchasing only recycled-content products designated by EPA. In addition, a review of these waivers will allow the agencies to identify the reasons for not purchasing these products and identify potential problems. Although the four major procuring agencies said that they do require this justification, only Energy has analyzed the waivers to determine reasons for not purchasing recycled-content products and how close it is to meeting the goal of purchasing only recycled-content products, where appropriate. Energy has concluded that it is making steady progress in its purchases of recycled-content products. However, as EPA adds new items to the list, Energy officials told us that progress tends to level off until staff become familiar with the new products. The procuring agencies reported little progress in purchasing environmentally preferable products, in part because both EPA and USDA have taken longer to issue guidance than provided for by the executive orders. Moreover, while EPA has issued final guidance to help agencies identify environmentally preferable products, it is not required to develop a list of these products. According to the agencies, implementing the EPA guidance for determining what constitutes an environmentally preferable product is difficult and time-consuming. In addition, USDA has not published a list of biobased products for procuring agencies’ consideration, as required by the executive order. USDA plans to have a list available by fiscal year 2002, but this effort is only one of a number of projects competing for the same resources. Although the purchase of these products is not required by statute, the agencies we reviewed plan to modify their procurement programs to encourage the purchase of such products after the list is published. EPA published final guidance for federal procuring agencies to use in purchasing environmentally preferable products in 1999, 5 years later than directed by the 1993 executive order. EPA’s Office of Pollution Prevention and Toxics, which is charged with issuing the guidance, stated that it delayed issuance until it had results from some agencies’ pilot projects. These projects tested concepts and principles for their applicability to actual purchasing decisions. EPA noted that because an environmentally preferable product can have multiple attributes—such as having recycled content, conserving water and/or energy, and/or emitting a low level of volatile organic compounds—defining environmental preferability depends on the product’s use. The guidance is not intended to be a step-by-step plan or “how to” guide for agencies’ use in deciding to purchase specific products; nor is it intended to provide a list of products. Instead, it is intended to help executive agencies systematically integrate the purchasing of these products into their buying decisions. Under the process outlined, the agencies are to use the guidance in choosing which products are environmentally preferable and meet their needs. This process involves assessing a product’s life-cycle, which may include a comprehensive examination of a product’s environmental and economic aspects and potential impacts throughout its lifetime, including raw material transportation, manufacturing, use, and disposal. EPA has also focused on identifying approaches for purchasing environmentally preferable products by encouraging agencies to participate in pilot projects. In selecting pilot projects, agencies are encouraged to use a list that EPA has developed of the top 20 product and service categories, which represent a large volume of federal procurement or have significant environmental impacts. For example, a U.S. Army installation conducted a pilot on paint products, which are on the list and are known to contain significant quantities of volatile organic compounds. Accordingly, the intent of the pilot was to identify paints that had a lesser adverse environmental impact on air quality, which is a particular concern for this installation. In addition, EPA has enlisted the assistance of two standard-setting organizations—Underwriters Laboratory and NSF International—to develop environmental standards that may be used in federal purchasing. Underwriters Laboratory is helping to identify consensus-based industry standards for a more environmentally friendly stretch wrap for packing and shipping, while NSF International is working with EPA to develop standards for institutional cleaners and carpeting. Federal agencies’ development and implementation of programs to encourage purchases of environmentally preferable products has not resulted in significant changes to agencies’ procurement practices. The procuring agencies in our review participated in pilot projects and, with the exception of Defense, have changed, or are in the process of changing, their affirmative procurement programs to include the executive order requirements regarding environmentally preferable products. However, agency officials said it is difficult to incorporate EPA’s guidance into procurement activities. This difficulty occurs in part because implementing the guidance is a time-consuming process that procuring officials are unlikely to undertake because they lack knowledge in this area. In addition, EPA has not provided a clear definition or list of environmentally preferable products. For example, in purchasing environmentally friendly paint, a number of products are available—one may be a paint with recycled content, resulting in a reduced environmental impact on the waste stream, while another may have lower volatile organic compounds and thus lessen the adverse impact on air quality. Agencies are not statutorily required to purchase environmentally preferable products and the difficulties associated with this process are a disincentive. EPA officials acknowledge that there is a scarcity of information about the environmental performance of products and services, particularly regarding the various life-cycle stages of manufacturing, distribution, use and disposal related to a product. They also acknowledge that progress is somewhat slow in getting federal procurement agencies to adopt the “environmentally preferable” process as part of their procurement practices. However, over time and with the dissemination of more information and tools for agencies to use, considering environmentally preferable products in purchasing decisions will become more routine, EPA officials believe. EPA has developed a Web site to provide some of the support and tools that procuring agencies need. The Web site provides information on agencies’ pilot projects; environmental standards; product information, such as the results of assessments of life-cycle and case studies; and lessons learned by agencies that have purchased environmentally preferable products and services. EPA has also developed an interactive training module and a guide with examples of specific contract language that purchasing agencies have used. USDA has not published a list of biobased products for agencies to consider in their purchasing practices, as directed by the 1998 executive order. It has, however, published a notice for comment (in the August 1999 Federal Register) on suggested criteria for listing biobased products. Agency officials explained that the delay in publishing the list is due, in part, to the lack of funding for this effort and that the work to develop the list must compete with other projects for the same resources. A list should be available in fiscal year 2002, according to USDA officials. All four procuring agencies said that they will include the published list of biobased products in their affirmative procurement programs. However, although a list of biobased products will make it easier to identify these products for purchasing, officials at Defense, GSA, and NASA indicated that the list will not necessarily ensure that staff will purchase them. Officials noted that these purchases are not mandatory under the executive order, which only calls for agencies to modify their affirmative procurement programs to give consideration to the biobased products. The officials added that the lack of knowledge and education about biobased products is a major barrier to ensuring that staff will consider and purchase these products. As a result, they have not made any significant changes in their procurement practices. However, Energy, GSA, and NASA have taken steps to amend their regulations to include the updated Federal Acquisition Regulations published in June 2000, which, among other things, encourages the purchasing of biobased products. Also, both GSA and Energy have included information on these products in their training programs to make staff aware of biobased products and the upcoming list. USDA officials told us that they would like the biobased program to be statutorily based, like the recycled-content program. Agencies would then be mandated to purchase these products. In addition, they believe that the program will be much more effective if there is an assessment of a product’s life-cycle and such products are required to meet performance standards set by independent standard setting or testing organizations. The officials believe that the absence of life-cycle and performance information will be a major barrier to the agencies’ purchasing biobased products unless they have the information to show the long-term benefits of the items. However, because of resource constraints, USDA is instead relying on manufacturers to self-certify their products. The officials added that biobased products are considered risky purchases by federal agencies because of the lack of information available on their performance and are generally purchased by agencies only after they hear about the product anecdotally—an inefficient way to bring products to the market. Twenty-five years after RCRA was to launch a revolution in federal purchases of recycled-content products, the success of this effort is largely uncertain. For many years, until the 1990s, little action was taken to promote such purchases on a governmentwide or agencywide basis. Even today, many procuring officials and other federal purchasers either do not know about or implement the RCRA requirements for establishing affirmative procurement programs, particularly promotion and review and monitoring. Although some progress in implementing the RCRA requirements has occurred, such as EPA’s accelerating its designation of recycled-content products, procuring agencies report that EPA’s designation of these products, by itself, is not sufficient to ensure that they are purchased. The agencies told us that staff often are either not aware of these products or not able to locate them in their area. Furthermore, the agencies have made little effort to ensure that grantees are aware of their obligations to purchase recycled-content products. Even if recycled-content products were more widely available and promoted more effectively, most agencies–with the exception of Energy– cannot determine the success of their efforts to increase the purchases of such products. They have not developed systems to track their purchases of such products, relying instead on inadequate estimates. Nor have they put programs in place to review and monitor progress. Moreover, most agencies lack data about purchases of recycled-content products by contractors and grantees. These agencies do not have any reliable means of even identifying contracts that call for the use of recycled-content products. In this regard, we support the White House task force recommendation to revise the Federal Procurement Data System to identify such contracts. While this revision will not provide agencies with information on specific purchases, it will enable them to periodically review and monitor their contractors for compliance with the RCRA requirements. Demonstrating that an agency is meeting the RCRA requirements can be administratively difficult. The major procuring agencies noted that it is costly and burdensome to update their purchase tracking programs each time EPA designates recycled-content products; each relies on costly and time-consuming manual data collection. Defense, the largest procuring agency, believes efforts to monitor and report on recycled-content product purchases conflict with the streamlining goals of procurement reform. We recognize that review and monitoring of recycled-content products entails administrative costs. Nonetheless, RCRA requires such information. To help agencies purchase recycled content products, we recommend that the Federal Environmental Executive and the Administrator of EPA work with officials at the major procuring agencies to develop a process to provide the procuring agencies with current information on the availability of the designated recycled-content products. In addition, these officials should determine how these products can be more effectively promoted. To help agencies implement the RCRA requirement to annually monitor and review the effectiveness of affirmative procurement programs, we recommend that the Director, OMB, instruct the Director of the Office of Federal Procurement Policy to provide procuring agencies with more specific guidance on fulfilling the RCRA review and monitoring requirements and, in conjunction with the Federal Environmental Executive, use the results of the agencies’ efforts in their reports to the Congress and the President. If the White House Task Force recommendation revising the Federal Procurement Data System (or its replacement) is implemented, then the Director, OMB, should instruct the Director of the Office of Federal Procurement Policy to provide guidance to the federal procuring agencies on using the information added to the system to periodically review contractors’ compliance with the RCRA requirements for purchasing recycled-content products. To ensure that grantees purchase recycled-content products as required by RCRA, the Director of the Office of Federal Financial Management, OMB, in coordination with federal agencies, should amend the common rule so that it incorporates the RCRA requirements, as recommended in the Federal Environmental Executive’s Report to the President entitled Greening the Government. We provided a draft of this report to the following agencies for their review and comment: EPA, OMB, the Office of the Federal Environmental Executive, GSA, NASA, and the departments of Agriculture, Defense, Energy, Housing and Urban Development, and Transportation. EPA and the departments of Agriculture, Housing and Urban Development, and Transportation declined to formally comment on the report. However, some of these agencies provided technical suggestions that we incorporated into the report as appropriate. The remaining agencies generally agreed with the facts presented in the report. Specifically, with the exception of Energy, they agreed that the current data systems do not identify the extent of their purchases of recycled-content products. OMB, to whom three of the four recommendations are directed, expressed general agreement with them. However, Energy pointed out that in several instances in the report, we did not make clear that it does have a data system that identifies actual data purchases of recycled-content products made by the agency or its contractors. We have clarified the report where appropriate. OMB, the Office of the Federal Environmental Executive, GSA, NASA, and the departments of Energy and Defense’s comments and our responses are in appendixes II-VII. We conducted our review between June 2000 and April 2001 in accordance with generally accepted government auditing standards. A detailed discussion of our objectives, scope, and methodology is presented in appendix I. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it for 30 days. We will then send copies of this report to appropriate congressional committees and other interested Members of Congress; the Administrator of EPA; the Director of OMB; the Office of the Federal Environmental Executive; the Secretaries of Agriculture, Defense, Energy, HUD, and Transportation; and the Administrators of NASA and GSA. We will also make copies available to others upon request. If you or your staff have any further questions about this report, please call me at (202) 512-6878. Key contributors to this report were James Donaghy, Patricia Gleason, Maureen Driscoll, William Roach Jr., Paul Schearf, and Carol Herrnstadt Shulman. In January 2000, Senators Max Baucus, Tom Harkin, James Jeffords, and Carl Levin sent us a series of questions related to federal government agencies’ purchases of recycled-content products, environmentally preferable products, and biobased products. After discussing these issues with their offices, we agreed to address the status of, and barriers to, federal agencies efforts to (1) implement the Resource Conservation and Recovery Act’s requirements for procuring products with recycled content, and (2) procure environmentally preferable and biobased products. In conducting this review, we focused on four agencies that account for about 85 percent of all federal procurements—the departments of Defense and Energy, General Services Administration, and the National Aeronautics and Space Administration. In addition to interviewing appropriate officials at these agencies, we conducted a written survey in which we asked them a series of questions related to their purchases of products with recycled content, environmentally preferable products, and/or biobased products. We also surveyed two major grant-awarding agencies—the departments of Transportation and of Housing and Urban Development—to determine the extent of such purchases made by their grantees. In addition, we contacted the Environmental Protection Agency (EPA), the Office of Federal Procurement Policy within the Office of Management and Budget, and the White House Office of the Federal Environmental Executive to determine their effectiveness in managing and overseeing the agencies’ implementation of the programs for procuring products with recycled content and environmentally preferable and biobased products. We also reviewed EPA’s progress in designating products with recycled content and in issuing guidance on environmentally preferable products to other agencies, as well as the Department of Agriculture’s progress in identifying and publishing information on biobased products. We obtained and analyzed information on the procurement of products with recycled content, as designated by EPA, and barriers to full implementation of the affirmative procurement programs of the four largest federal procuring agencies. We also contacted the Office of the Inspector General for each of the federal agencies in our review to identify whether the offices had conducted any formal reviews or audits of the agencies’ affirmative procurement programs. Finally, we contacted industry and environmental groups to obtain their perspectives and to identify whether any additional data existed related to the procurement of the EPA-listed products with recycled content. The following is GAO’s comment on the Office of Management and Budget’s letter dated May 17, 2001. 1. This section of the report has been revised to include the latest information on the changes to the FPDS system. The following are GAO’s comments on GSA’s letter dated May 15, 2001. 1. On p.11 of the report, we state that GSA can electronically track purchases of recycled-content products made through their automated central supply system. 2. This information has been included in the report on p. 17. 3. The report has been clarified to identify the difficulties that procurement officials face in assessing a product’s life cycle. The following are GAO’s comments on the Department of Energy’s letter dated May 21, 2001. 1. The report has been revised as appropriate to clarify that Energy tracks and reports actual purchases of recycled-content products for the agency and its contractors. 2. The word “toxic” has been added as suggested. | The federal government buys about $200 billion worth of goods and services each year. Through its purchasing decisions, the federal government can signal its commitment to preventing pollution, reducing solid waste, increasing recycling, and stimulating markets for environmentally friendly products. The Resource Conservation and Recovery Act of 1976 (RCRA) directs the Environmental Protection Agency (EPA) to identify products made with recycled waste materials or solid waste by-products and to develop guidance for purchasing these products. The act also requires procuring agencies to establish programs for purchasing them. This report examines efforts by federal agencies to (1) implementation of RCRA requirements for procuring products with recycled content and (2) the purchase of environmentally preferable and bio-based products. EPA accelerated its efforts in the 1990s to identify recycled-content products, but the status of agencies' efforts to implement the RCRA purchasing requirements for these products is uncertain. The four major procuring agencies report that, for many reasons, their procurement practices have not changed to increase their purchases of environmentally preferable and bio-based products. One reason for the lack of change is that EPA and the U.S. Department of Agriculture have been slow to develop and implement the programs. |
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Since the 1960s, the United States has operated two separate operational polar-orbiting meteorological satellite systems: the Polar-orbiting Operational Environmental Satellite (POES) series, which is managed by NOAA, and the Defense Meteorological Satellite Program (DMSP), which is managed by the Air Force. These satellites obtain environmental data that are processed to provide graphical weather images and specialized weather products. These satellite data are also the predominant input to numerical weather prediction models, which are a primary tool for forecasting weather 3 or more days in advance—including forecasting the path and intensity of hurricanes. The weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help prevent and mitigate its effects. Polar satellites also provide data used to monitor environmental phenomena, such as ozone depletion and drought conditions, as well as data sets that are used by researchers for a variety of studies such as climate monitoring. Polar satellites gather a broad range of data that are transformed into a variety of products. Satellite sensors observe different bands of radiation wavelengths, called channels, which are used for remotely determining information about the earth’s atmosphere, land surface, oceans, and the space environment. When first received, satellite data are considered raw data. To make them usable, the processing centers format the data so that they are time-sequenced and include earth location and calibration information. After formatting, these data are called raw data records. The centers further process these raw data records into channel-specific data sets, called sensor data records and temperature data records. These data records are then used to derive weather and climate products called environmental data records (EDR). EDRs include a wide range of atmospheric products detailing cloud coverage, temperature, humidity, and ozone distribution; land surface products showing snow cover, vegetation, and land use; ocean products depicting sea surface temperatures, sea ice, and wave height; and characterizations of the space environment. Combinations of these data records (raw, sensor, temperature, and environmental data records) are also used to derive more sophisticated products, including outputs from numerical weather models and assessments of climate trends. Figure 2 is a simplified depiction of the various stages of satellite data processing, and figure 3 depicts examples of two different weather products. With the expectation that combining the POES and DMSP programs would reduce duplication and result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and DOD to converge the two satellite programs into a single satellite program capable of satisfying both civilian and military requirements. The converged program, NPOESS, is considered critical to the United States’ ability to maintain the continuity of data required for weather forecasting and global climate monitoring. To manage this program, DOD, NOAA, and NASA formed the tri-agency Integrated Program Office. Within the program office, each agency has the lead on certain activities: NOAA has overall program management responsibility for the converged system and for satellite operations; the Air Force has the lead on the acquisition; and NASA has primary responsibility for facilitating the development and incorporation of new technologies into the converged system. NOAA and DOD share the cost of funding NPOESS, while NASA funds specific technology projects and studies. In addition, an Executive Committee—made up of the administrators of NOAA and NASA and the Under Secretary of Defense for Acquisition, Technology, and Logistics—is responsible for providing policy guidance, ensuring agency support and funding, and exercising oversight authority. Figure 4 depicts the organizations that make up the NPOESS program and lists their responsibilities. NPOESS is a major system acquisition that was originally estimated to cost about $6.5 billion over the 24-year life of the program from its inception in 1995 through 2018. The program is to provide satellite development, satellite launch and operation, and ground-based satellite data processing. These deliverables are grouped into four main categories: (1) the space segment, which includes the satellites and sensors; (2) the integrated data processing segment, which is the system for transforming raw data into EDRs and is to be located at the four processing centers; (3) the command, control, and communications segment, which includes the equipment and services needed to support satellite operations; and (4) the launch segment, which includes the launch vehicle services. When the NPOESS engineering, manufacturing, and development contract was awarded in August 2002, the cost estimate was adjusted to $7 billion. Acquisition plans called for the procurement and launch of six satellites over the life of the program, as well as the integration of 13 instruments— consisting of 10 environmental sensors and 3 subsystems. Together, the sensors were to receive and transmit data on atmospheric, cloud cover, environmental, climatic, oceanographic, and solar-geophysical observations. The subsystems were to support nonenvironmental search and rescue efforts, sensor survivability, and environmental data collection activities. The program office considered four of the sensors to be critical because they provide data for key weather products; these sensors are in bold in table 1, which describes each of the expected NPOESS instruments. In addition, a demonstration satellite, called the NPOESS Preparatory Project (NPP), was planned to be launched several years before the first NPOESS satellite in order to reduce the risk associated with launching new sensor technologies and to ensure continuity of climate data with NASA’s Earth Observing System satellites. NPP was to host three of the four critical NPOESS sensors, as well as one other sensor and to provide the program office and the processing centers an early opportunity to work with the sensors, ground control, and data processing systems. When the NPOESS development contract was awarded, the schedule for launching the satellites was driven by a requirement that the NPOESS satellites be available to back up the final POES and DMSP satellites should anything go wrong during the planned launches of these satellites. Early program milestones included (1) launching NPP by May 2006, (2) having the first NPOESS satellite available to back up the final POES satellite launch then planned for March 2008, and (3) having the second NPOESS satellite available to back up the final DMSP satellite launch then planned for October 2009. If the NPOESS satellites were not needed to back up the final predecessor satellites, their anticipated launch dates would have been April 2009 and June 2011, respectively. Over several years, we reported that NPOESS had experienced continued cost increases, schedule delays, and serious technical problems. By November 2005, we estimated that the cost of the program had grown from $7 billion to over $10 billion. In addition, the program was experiencing major technical problems with the VIIRS sensor and expected to delay the launch date of the first satellite by almost 2 years. These issues ultimately required difficult decisions to be made about the program’s direction and capabilities. The Nunn-McCurdy law requires DOD to take specific actions when a major defense acquisition program growth exceeds certain cost thresholds. Key provisions of the law require the Secretary of Defense to notify Congress when a major defense acquisition is expected to overrun its current baseline by 15 percent or more and to certify the program to Congress when it is expected to overrun its current baseline by 25 percent or more. In November 2005, NPOESS exceeded the 25 percent threshold, and DOD was required to certify the program. Certifying a program entails providing a determination that (1) the program is essential to national security, (2) there are no alternatives to the program that will provide equal or greater military capability at less cost, (3) the new estimates of the program’s cost are reasonable, and (4) the management structure for the program is adequate to manage and control costs. DOD established tri- agency teams—made up of DOD, NOAA, and NASA experts—to work on each of the four elements of the certification process. In June 2006, DOD (with the agreement of both of its partner agencies) certified a restructured NPOESS program, estimated to cost $12.5 billion through 2026—an increase of $4 billion more than the prior life cycle cost estimate. This restructuring decision delayed the launch of NPP and the first 2 satellites by roughly 3 to 5 years—a deviation from NOAA’s requirement to have NPOESS satellites available to back up the final POES and DMSP satellites should anything go wrong during those launches. The restructured program also reduced the number of satellites to be produced by relying on European satellites for the midmorning orbit and planning to use NPOESS satellites in the early morning and afternoon orbits. In addition, in order to reduce program complexity, the Nunn-McCurdy certification decision decreased the number of NPOESS sensors from 13 to 9 and reduced the functionality of 4 sensors. In addition, a new executive position—called the Program Executive Officer—was established to oversee the NPOESS program office and to report directly to the Executive Committee. The Program Executive Officer obtains weekly and monthly reports on the program’s cost, schedule, performance, and risks from the System Program Director, and in turn, provides monthly and quarterly updates to the Executive Committee. Table 2 summarizes the major program changes made by the Nunn-McCurdy certification decision, and figure 5 denotes the configuration of the planned polar-operational satellite program in the future. While the Nunn-McCurdy certification decision decreased the number of NPOESS sensors and reduced the functionality of others, it allowed for the reintegration of the canceled sensors if other parties choose to fund them. Table 3 describes the changes to NPOESS instruments. The changes in NPOESS sensors affected the number and quality of the resulting weather and environmental products, called EDRs. In selecting sensors for the restructured program during the Nunn-McCurdy process, decision makers placed the highest priority on continuing current operational weather capabilities and a lower priority on obtaining selected environmental and climate measuring capabilities. As a result, the revised NPOESS system has significantly less capability for providing global climate measures than was originally planned. Specifically, the number of EDRs was decreased from 55 to 39, of which 6 are of a reduced quality. The 39 EDRs that remain include cloud base height, land surface temperature, precipitation type and rate, and sea surface winds. The 16 EDRs that were removed include cloud particle size and distribution, sea surface height, net solar radiation at the top of the atmosphere, and products to depict the electric fields in the space environment. The six EDRs that are of a reduced quality include ozone profile, soil moisture, and multiple products depicting energy in the space environment. After the 2006 Nunn-McCurdy decision, the NPOESS Executive Committee decided to add selected sensors back to individual satellites in order to address concerns from the climate community about the loss of key climate data. In January 2008, the Committee approved plans to include a replacement for the Earth radiation budget sensor (called the Clouds’ and the earth’s radiant energy system sensor) on the NPP satellite. In addition, in May 2008, the Committee approved plans to include a Total solar irradiance sensor on the C1 satellite. Table 4 shows which instruments are currently planned for NPP and the four satellites of the NPOESS program, called C1, C2, C3, and C4. Program officials acknowledged that these configurations could change if other parties decide to develop the sensors that were canceled. After the program was restructured, NPOESS continued to experience schedule delays and cost growth. In June 2008, we reported that poor workmanship and testing delays caused an additional 8-month slip to the expected delivery date of the Visible/infrared imager radiometer suite (VIIRS) sensor. This late delivery caused a corresponding delay in the expected launch date of the NPP demonstration satellite, moving it to June 2010. In addition, we reported that the program life cycle costs, estimated at $12.5 billion, were expected to rise by approximately $1 billion because of problems experienced in the development of the VIIRS and Cross-track infrared sounder (CrIS) sensors, the need to revise outdated operations and support cost estimates, and the need to modify information security requirements on ground systems. Program officials subsequently modified their life cycle cost estimate to $13.95 billion, which included about $1.15 billion for revised pre- and post-launch operations and support costs and about $300 million to address development issues. The revised cost estimate did not include funds to modify information security requirements. In recent years, we have made a series of recommendations to mitigate risks on the NPOESS program. In April 2007, we reported that the program lacked a process and plan for identifying and filling key staffing shortages and that DOD’s plans to reassign the Program Executive Officer would unnecessarily increase risks to an already risky program. We also reported that while the program office had made progress in restructuring NPOESS after the June 2006 Nunn-McCurdy certification decision, important tasks leading up to finalizing contract changes remained to be completed. Specifically, the program had made progress in drafting key acquisition documents, including the system engineering plan, the test and evaluation master plan, and the memorandum of agreement between the agencies. However, executive approval of those documents was about 6 months late at that time—due in part to the complexity of navigating three agencies’ approval processes. To address these issues, we recommended that NPOESS program officials develop and implement a written process for identifying and addressing human capital needs and establish a plan to immediately fill needed positions; that DOD delay the reassignment of the Program Executive Officer until all sensors were delivered to NPP; and that the appropriate agency executives finalize key acquisition documents by the end of April 2007. Following up on these recommendations, in May 2008, we reported that program officials had documented the program’s staffing process and made progress in filling selected budgeting and system engineering vacancies. DOD, however, reassigned the Program Executive Officer in July 2007 and replaced this person with a new Program Executive Officer. We also reported that executive approval of key acquisition documents was more than a year late at that time and reiterated our prior recommendation that the agencies immediately complete these activities. The last of these acquisition documents was approved in December 2008. Over the past year, selected components of the NPOESS program— including the ground segment and selected sensors—have made progress. However, the program’s approved cost and schedule baseline is not achievable, and problems with two critical sensors continue to drive the program’s cost and schedule. Costs are expected to grow by about $1 billion from the current $13.95 billion cost estimate, and the schedules for NPP and the first two NPOESS satellites are expected to be delayed by 7, 14, and 5 months, respectively. These delays endanger the continuity of weather and climate satellite data because there will not be a satellite available as backup should a satellite fail on launch or in orbit. Program officials reported that they are assessing alternatives for mitigating risks, and that they plan to propose a new cost and schedule baseline by June 2009. With over $4 billion expended on the program through the end of fiscal year 2008, the program is well under way. Over the past year, selected components of the NPOESS program have made progress. Specifically, three of the five instruments slated for NPP have been delivered and integrated on the spacecraft; the ground-based satellite data processing system has been installed and tested at both of the locations that are to receive NPP data; and the satellites’ command, control, and communications system has passed acceptance testing. Details on the status of key components are provided in table 5. While the program has made progress, problems with two critical sensors continue to drive the program’s cost and schedule. Specifically, ongoing challenges with VIIRS development, design, and workmanship have led to additional cost overruns and delayed the instrument’s delivery to NPP. In addition, problems discovered during environmental testing on CrIS led the contractor to further delay its delivery to NPP and added further unanticipated costs to the program. To address these issues, the program office halted or delayed activities on other components (including the development of a sensor planned for the C1 satellite) and redirected those funds to fixing VIIRS and CrIS. As a result, those other activities now face cost increases and schedule delays. Program officials acknowledge that NPOESS will cost more than the $13.95 billion previously estimated, but they have not yet adopted a new cost estimate. Program officials estimated that program costs will grow by about $370 million due to recent technical issues experienced on the sensors and the costs associated with halting and then restarting work on other components of the program. In addition, the costs associated with adding new information security requirements to the program could reach $200 million. This estimate also does not include approximately $410 million for operations and support costs for the last two years of the program’s life cycle (2025 and 2026). Thus, we anticipate that the overall cost of the program could grow by about $1 billion from the current $13.95 billion estimate—especially given the fact that difficult integration and testing of the sensors on the NPP and C1 spacecrafts has not yet occurred. Program officials reported that they plan to revise the program’s cost estimate over the next few weeks and to submit it for executive-level approval in June 2009. As for the program’s schedule, program officials estimate that the delivery of VIIRS to the NPP contractor will be delayed, resulting in a further delay in the launch of the NPP satellite to January 2011, a year later than the date estimated during the program restructuring—and seven months later than the June 2010 date that was established last year. In addition, program officials estimated that the first and second NPOESS satellites would be delayed by 14 and 5 months, respectively, because selected development activities were halted or slowed to address VIIRS and CrIS problems. The program’s current plans are to launch C1 in March 2014 and C2 in May 2016. Program officials notified the Executive Committee and DOD’s acquisition authority of the schedule delays, and under DOD acquisition rules, are required to submit a new schedule baseline by June 2009. See table 6 for changes in key program milestones over time. These launch delays have endangered our nation’s ability to ensure the continuity of polar-orbiting satellite data. The final POES satellite, called NOAA-19, is in an afternoon orbit and is expected to have a 5-year lifespan. Both NPP and C1 are planned to support the afternoon orbit. Should the NOAA-19 satellite fail before NPP is launched, calibrated, and operational, there would be a gap in satellite data in that orbit. Further, the delays in C1 mean that NPP will not be the research and risk reduction satellite it was originally intended to be. Instead, it will have to function as an operational satellite until C1 is in orbit and operational—and if C1 fails on launch or in early operations, NPP will be needed to function until C3 is available, currently planned for 2018. The delay in the C2 satellite launch affects the early morning orbit. There are three more DMSP satellites to be launched in the early and midmorning orbits. DOD is revisiting the launch schedules for these satellites to try to extend them as long as possible. An independent review team, established to assess key program risks, recently reported that the constellation of satellites is extremely fragile and that a single launch failure of DMSP or of the NPP satellite could result in a gap in satellite coverage from 3 to 5 years. Figure 6 shows the current and planned satellites and highlights gaps where the constellation is at risk. Although the program’s approved cost and schedule baseline is not achievable and the polar satellite constellation is at risk, the Executive Committee has not yet made a decision on how to proceed with the program. Specifically, the Committee has not approved a new program schedule and a realistic cost estimate or determined whether it will mitigate or accept the risk of a potential gap in satellite continuity. Program officials plan to propose new cost and schedule baselines in June 2009. However, the Executive Committee does not have an estimate for when it will make critical decisions on cost, schedule, and risk mitigation. Program officials reported that they are addressing immediate funding constraints by deferring selected activities to later fiscal years in order to pay for VIIRS and CrIS problems, delaying the launches of NPP, C1, and C2, and assessing alternatives for mitigating the risk that VIIRS will continue to experience problems—including the possibility of purchasing a legacy imaging sensor to replace VIIRS on C1. Without an executive-level decision to do so, the program is proceeding on a course that is deferring cost growth, delaying launches, and risking its underlying mission of providing operational weather continuity to the civil and military communities. While the NPOESS Executive Committee has made improvements over the last several years in response to prior recommendations, it has not effectively fulfilled its responsibilities and does not have the membership and leadership it needs to effectively or efficiently oversee and direct the NPOESS program. Specifically, the DOD Executive Committee member with acquisition authority does not attend committee meetings—and sometimes contradicts the Committee’s decisions, the Committee does not aggressively manage risks, and many of the Committee’s decisions do not achieve desired outcomes. Independent reviewers, as well as program officials, explained that the tri-agency structure of the program makes it very difficult to effectively manage the program. Until these shortfalls are addressed, the Committee is unable to effectively oversee the NPOESS program—and important issues involving cost growth, schedule delays, and satellite continuity will likely remain unresolved. In November 2005, we reported that the Executive Committee did not meet on a regular basis and that most of its meetings did not result in major decisions, but instead triggered further analysis and review. In addition, in May 2006, the Department of Commerce’s Inspector General reported that the Committee did not effectively challenge the program’s optimistic assessments and recommended that it provide more vigilant oversight. Since then, the Committee has met regularly on a quarterly basis and held interim teleconferences as needed. The Committee has also sought and reacted to advice from external advisors by, among other actions, authorizing a government program manager to reside onsite at the VIIRS contractor’s facility to improve oversight of the sensor’s development on a day-to-day basis. More recently, the Executive Committee sponsored a broad-based independent review of the NPOESS program and is beginning to respond to its recommendations. The independent review team’s findings and recommendations are provided in appendix II. As established by the 1995 and 2008 memorandums of agreement signed by all three agencies, the members of the NPOESS Executive Committee are (1) the Under Secretary of Commerce for Oceans and Atmosphere; (2) the Under Secretary of Defense for Acquisition, Technology, and Logistics; and (3) the NASA Administrator. Because DOD has the lead responsibility for the NPOESS acquisition, the Under Secretary of Defense for Acquisition, Technology, and Logistics, was also designated as the milestone decision authority—the individual with the authority to approve a major acquisition program’s progression in the acquisition process, as well as any changes to the cost, schedule, and functionality of the acquisition. The intent of the tri-agency memorandums was that acquisition decisions would be agreed to by the Executive Committee before a final acquisition decision is made by the milestone decision authority. However, DOD’s acquisition authority has never attended an Executive Committee meeting. This individual delegated the responsibility for attending the meetings—but not the authority to make acquisition decisions—to the Under Secretary of the Air Force. Therefore, none of the individuals who attend the Executive Committee meetings for the three agencies have the authority to approve the acquisition program baseline or major changes to the baseline. As a result, agreements between committee members have been overturned by the acquisition authority, leading to significant delays. For example, the details of the program’s acquisition program baseline were agreed to by members of the Executive Committee, but were overruled by the office of the Under Secretary of Defense for Acquisition, Technology, and Logistics. This required several months of extensive renegotiation. In addition, after the Executive Committee members agreed to a revised tri-agency memorandum of agreement and it was signed by the Secretary of Commerce and the Administrator of NASA, the Under Secretary of Acquisition, Technology, and Logistics refused to approve the document, and it took over a year to finalize it. Crucially, this year-long disagreement focused on whether the Under Secretary should consult with or coordinate with members of the Executive Committee on matters related to NPOESS. In August 2008, the Under Secretary of Commerce for Oceans and Atmosphere wrote to the Under Secretary of Defense for Acquisition, Technology, and Logistics, expressing concern that DOD did not recognize the management role of the tri-agency NPOESS Executive Committee or its responsibility, authority, and accountability to make decisions that represent the respective agency positions. At the conclusion of our review, DOD agency officials stated that the absence of the Under Secretary of Defense for Acquisition, Technology, and Logistics at Executive Committee meetings is not the root cause of the Executive Committee’s problems, but acknowledged that this individual’s presence at the meetings could be helpful in streamlining the flow of information and the decision-making process. Best practices note that oversight of large investments is a critical part of the investment life cycle and call for oversight boards to take corrective actions at the first sign of cost, schedule, and performance problems. They also call for oversight boards to ensure that corrective actions and related efforts are executed by the project management team and tracked until the desired outcomes occur. To provide this oversight, the Executive Committee holds quarterly meetings during which the program’s progress is reviewed using metrics that provide an early warning of cost, schedule, and technical risks. Although the Executive Committee meets quarterly to review program progress and risks, and the results of those meetings are recorded in meeting minutes, the Committee does not routinely document action items or track those items to closure. Specifically, in the four meetings held between March 2007 and January 2008, the Committee explicitly documented 12 action items, but did not explicitly document action items in the three meetings from May to December 2008. Instead, 5 actions were implied in the text of the meeting minutes and at least 1 action item to proceed with a modified schedule for VIIRS was not recorded at all. Further, the Executive Committee did not routinely track the closure of its action items. Some action items were not discussed in later meetings and in cases where an item was discussed, it was not always clear what action was taken, whether it was effective, and whether the item was closed. Specifically, of the 18 action items we identified between March 2007 and December 2008, 7 were clearly closed and 11 were not. For example, in May 2008, the Executive Committee asked DOD’s Cost Analysis Improvement Group and the program office to reconcile their cost estimates, but it is not clear from the meetings that took place after this one whether this action was taken and what the result was. Also in May 2008, the Committee directed the prime contractor and others to investigate the root causes of technical issues; again, it is not clear whether this was completed or what the results were. According to the Program Executive Officer, the closing of an action item is not always explicitly tracked because it typically involves gathering information that is presented during later Committee meetings. Nonetheless, by not rigorously documenting action items—including identifying the party responsible for the action, the desired outcome, and the time frame for completion—and then tracking the action items to closure, the Executive Committee is not able to ensure that its actions have achieved their intended results and to determine whether additional changes or modifications are still needed. This impedes the Committee’s ability to effectively oversee the program, direct risk mitigation activities, and obtain feedback on the results of its actions. Best practices in investment management call for oversight of large investments throughout their life cycles. Government guidance calls for oversight boards to take corrective actions at the first sign of cost, schedule, and performance slippages in order to mitigate risks and achieve successful outcomes. The NPOESS Executive Committee generally took immediate action to mitigate the risks that were brought before them; however, a majority of these actions were not effective—that is, they did not fully resolve the underlying issues or result in a successful outcome. Specifically, of 22 significant risks forwarded to the Executive Committee between January and December 2008, the Committee took some action to mitigate 17 of the risks and decided to monitor the other 5 risks. Committee actions included approving modifications to the VIIRS schedule and directing the program to modify key acquisition documents to resolve disagreements, to establish an onsite government manager at a subcontractor’s facility, and to develop a plan for the way forward for the program once it was determined that the program could not execute its baseline on time within its budget. However, the Committee’s actions either did not result in successful outcomes or were inefficient in achieving successful outcomes. Of the 22 risks presented to the Executive Committee, 18 involved cost, schedule, and technical issues on the VIIRS and CrIS sensors, and 4 involved barriers to gaining approval of key acquisition documents. The Committee’s actions on the sensor development risks accomplished interim successes by improving the government’s oversight of a subcontractor’s activities and guiding next steps in addressing technical issues—but even with committee actions, the sensors’ performance has continued to falter and affect the rest of the program. Independent reviewers reported that the tri- agency structure of the program complicated the resolution of sensor risks because any decision could be revisited by another agency. In addition, while the government’s onsite program manager is responsible for managing deliverables of a critical sensor, this individual reported that the plurality of customers with different expectations and priorities made it difficult to move the sensor development effort forward. As for the 4 risks involving barriers to gaining approval of key acquisition documents, by the end of 2008, all of the acquisition documents had been completed. However, the path to achieving this successful outcome was inefficient. For example, it took over 2 years and countless iterations by multiple levels of management in three different agencies to complete the tri-agency memorandum of agreement. The leader of an independent review team charged with reviewing key program risks recently reported that the Executive Committee is “at best… inefficient.” Program officials explained that interagency disagreements and differing priorities make it difficult to effectively resolve issues. In addition, two independent advisors noted that the tri-agency aspect of the program makes it difficult to make decisions that balance the needs of all three agencies. The Committee’s inability to make effective and efficient decisions is further complicated when difficult risks are not escalated in a timely manner. While most risks are raised to the Committee within months of the time they surface at the program level, selected interagency issues lingered before being brought before the Executive Committee. Specifically, an interagency disagreement regarding the appropriate level of security requirements was discussed and studied for 2 years before the Committee was notified—and the Committee still has not been asked to make a decision on this issue. At the conclusion of our review, DOD officials reported that part of the problem in escalating risks is that, in violation of interagency agreements and inconsistent with DOD acquisition policy, two senior NOAA officials review and limit what the Program Executive Officer provides to the Executive Committee. NOAA officials and the Program Executive Officer strongly disagreed with this statement. NASA officials commented that NOAA’s enhanced oversight provides a healthy set of checks and balances to the program. When NPOESS was restructured in June 2006, the program included two satellites (C1 and C2) and an option to have the prime contractor produce the next two satellites (C3 and C4). In approving the restructured program, DOD’s decision authority noted that he reserved the right to use a different satellite integrator for the final two satellites, and that a decision on whether to exercise the option was to be made in June 2010. To prepare for this decision, DOD required a tri-agency assessment of alternative management strategies. This assessment was to examine the feasibility of an alternative satellite integrator, to estimate the cost and schedule implications of moving to an alternative integrator, and within one year, to provide a viable alternative to the NPOESS Executive Committee. To address DOD’s requirement, the NPOESS Program Executive Officer sponsored two successive alternative management studies; however, neither of the studies identified a viable alternative to the existing satellite integrator. The first study, conducted in 2007, identified three alternatives to the existing satellite integrator, including (1) re-competing the entire prime contract, (2) obtaining an independent system integrator while having the existing prime contractor continue to develop space and ground components, and (3) having the government take over responsibility for the system integration. The study identified the relative strengths and weaknesses of the alternatives and recommended that the program remain with the existing prime contractor for C3 and C4 because doing otherwise would increase cost and schedule risks. It did not quantify these costs or risks. The second alternative management study, conducted in 2008, identified the same alternatives to the current system integrator and assessed their relative cost, schedule, and performance risks to the program. The study determined that the alternatives to the system integrator were not viable options because of their potential costs, and because the prime contractor’s performance had been meeting requirements. This study also recommended staying with the prime contractor for C3 and C4. Both of these studies also assessed other aspects of program management—including the government’s executive and program management and the contractors’ management—and made recommendations to improve them. The Program Executive Officer plans to conduct a final assessment of alternatives prior to the June 2010 decision on whether to exercise the option to have the current system integrator produce the next two NPOESS satellites. Program officials explained that the program’s evolving costs, schedules, and risks could mean that an alternative that was not viable in the past would become viable. For example, if the prime contractor’s performance no longer meets basic requirements, an alternative that was previously too costly to be considered viable might become so. Continued problems in the development of critical NPOESS sensors have contributed to growing costs and schedule delays. Costs are now expected to grow by as much as $1 billion over the prior life cycle cost estimate of $13.95 billion, and problems in delivering key sensors have led to delays in launching NPP and the first two NPOESS satellites—by a year or more for NPP and the first NPOESS satellite. These launch delays have endangered our nation’s ability to ensure the continuity of polar-orbiting satellite data. Specifically, if any planned satellites fail on launch or in orbit, there would be a gap in satellite data until the next NPOESS satellite is launched and operational—a gap that could last for 3 to 5 years. The NPOESS Executive Committee responsible for making cost and schedule decisions and addressing the many and continuing risks facing the program has not yet made important decisions on program costs, schedules, and risks—or identified when it will do so. In addition, the Committee has not been effective or efficient in carrying out its oversight responsibilities. Specifically, the individual with the authority to make acquisition decisions does not attend committee meetings; corrective actions are not identified in terms of desired outcomes, resources, and time frames for completion; these actions are not tracked to closure; and selected risks are not escalated in a timely manner. Until the Committee’s shortfalls are addressed, important decisions may not be effective and issues involving cost increases, schedule delays, and satellite continuity may remain unresolved. To improve the timeliness and effectiveness of acquisition decision- making on the NPOESS program, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to attend and participate in NPOESS Executive Committee meetings. We also recommend that the Secretaries of Defense and Commerce and the Administrator of NASA direct the NPOESS Executive Committee to take the following five actions: establish a realistic time frame for revising the program’s cost and develop plans to mitigate the risk of gaps in satellite continuity; track the Committee’s action items from inception to closure; improve the Committee’s ability to achieve successful outcomes by identifying the desired outcome associated with each of the Committee’s actions, as well as time frames and responsible parties, when new action items are established; and improve the Committee’s efficiency by establishing time frames for escalating risks to the Committee for action so that they do not linger unresolved at the program executive level. We received written comments on a draft of this report from the Secretary of Commerce (see app. III), the Deputy Assistant Secretary of Defense (see app. IV), and the Associate Deputy Administrator of NASA (see app. V). In their comments, NASA and NOAA agreed with our findings and recommendations and identified plans to implement them. For example, NASA noted that it would work closely with DOD and NOAA to ensure that a realistic time frame was established for cost and schedule baselines and to develop plans to mitigate program risks. NOAA noted that it planned to mitigate risk, in part by accelerating the development of environmental products—and planned to use more data from NPP than it had originally planned. Regarding our recommendations to track Executive Committee actions and ensure successful outcomes by identifying the desired outcome associated with each action as well as time frames and responsible parties, both NASA and NOAA noted that they would work with the Program Executive Officer to ensure that these actions happen in a timely and effective manner. Finally, regarding our recommendation to improve the Executive Committee’s efficiency by establishing time frames for escalating risks to the Committee, both NASA and NOAA noted that they would work with the Program Executive Officer to ensure that this was done. NOAA also provided technical comments on the report, which we incorporated as appropriate. In its written comments, DOD concurred with one and partially concurred with our other recommendations. Regarding our recommendation to have the appropriate official attend Executive Committee meetings, the agency partially concurred and noted that the Under Secretary of Acquisition, Technology, and Logistics would evaluate the necessity of attending future Executive Committee meetings. DOD also reiterated that the Under Secretary of the Air Force was delegated the authority to attend the meetings. While we acknowledge that the Under Secretary delegated responsibility for attending these meetings, it is an inefficient way to make decisions and achieve outcomes. In the past, agreements between Executive Committee members have been overturned by the Under Secretary, leading to significant delays in key decisions. In addition, DOD partially concurred with our recommendations that the Executive Committee establish a realistic time frame for revising the program’s cost and schedule baselines, and develop plans to mitigate the risk of data gaps. For both recommendations, DOD noted that the program office should develop the plans, which would then be reviewed by the Executive Committee. We agree that the program is responsible for revising the cost and schedule baselines and developing risk mitigation plans, and that the Executive Committee is responsible for approving these plans. However, our recommendations focused on implementing these activities. Until the Committee establishes a time frame for making decisions on the program’s cost and schedule baseline and endorses risk mitigation plans, there is a continued risk that the program will encounter further delays or gaps in satellite data continuity. DOD concurred with our recommendation that the Executive Committee track action items and noted that it will recommend that the Program Executive Officer establish a Web-based tracking system so that all agencies can review the action items and their status. Regarding our recommendation to identify the desired outcomes, responsible parties, and time frames associated with the Committee’s corrective actions, DOD partially concurred and noted that the tri-agency memorandum of agreement empowers the System Program Director and Program Executive Officer to achieve successful outcomes. While we agree that the memorandum establishes these executives’ responsibilities, it is the responsibility of the Executive Committee to define expectations associated with their directed actions—including desired outcomes, who is accountable, and time frames for completion. In past Executive Committee meetings, these expectations have not been defined. DOD partially concurred with our recommendation to establish time frames for escalating risks to the Executive Committee, and noted that the Program Executive Officer should be able to do so. However, DOD expressed concern that interference by the other agencies had weakened the Program Executive Officer’s ability to perform as intended. We acknowledge that there is a disagreement among the three agencies on the appropriate level of oversight of the program; however, we believe that one of the roles of the Executive Committee members should be to ensure that risks are escalated in a timely manner. Until time frames are established, risks may continue to linger unresolved at the program level. We are sending copies of this report to interested congressional committees, the Secretary of Commerce, the Secretary of Defense, the Administrator of NASA, the Director of the Office of Management and Budget, and other interested parties. In addition, this report will be available on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512- 9286 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in Appendix VI. Our objectives were to (1) identify the status and risks of key National Polar-orbiting Operational Environmental Satellite System (NPOESS) program components, (2) assess the NPOESS Executive Committee’s ability to fulfill its responsibilities, and (3) evaluate efforts to identify an alternative system integrator for later NPOESS satellites. To evaluate the status and risks of key program components, we reviewed briefings and monthly program management reports. We analyzed earned value management data to assess the contractors’ performance against cost and schedule estimates and evaluated reasons for variances in the contractors’ performance. We obtained adequate assurance that these agency-provided data had been tested and were sufficient for our assessment purposes. We reviewed cost reports and program risk management documents and interviewed program officials to determine program and program segment risks that could negatively affect the program’s ability to maintain the current schedule and cost estimates. We also interviewed agency officials from the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and National Oceanic and Atmospheric Administration (NOAA) and the NPOESS program office to determine the status and risks of the key program segments. We interviewed senior-level officials representing the prime contractor and the subcontractor responsible for developing a critical sensor. We also observed senior-level management review meetings to obtain information on the status of the NPOESS program. To assess the NPOESS Executive Committee’s ability to fulfill its responsibilities, we reviewed the presidential directive that established NPOESS and the 1995 and 2008 memorandums of agreement signed by all three agencies to determine the responsibilities and membership of the Executive Committee. We analyzed Executive Committee meeting minutes to determine the attendees of the meetings, the action items that were identified, and whether those action items were tracked to closure. We reviewed monthly briefings from the Program Executive Officer’s Program Management Council to identify the key risks and issues facing the program. We then compared these risks and issues to the matters brought to the Executive Committee’s attention in monthly letters and meeting minutes to determine whether those risks were escalated. In addition, we analyzed the Executive Committee’s response to the identified risks and issues to determine whether and how the Committee responded. Finally, we interviewed senior officials in the NPOESS program office and program executive office. To evaluate efforts to identify an alternative system integrator for later NPOESS satellites, we reviewed the Acquisition Decision Memorandum that identified the need for a study of alternatives. We reviewed briefings from two alternative management studies and analyzed the alternatives presented in those briefings. We reviewed program plans and status for addressing the recommendations of those studies. We interviewed the chair of the 2008 alternative management study and senior officials from the NPOESS program office regarding steps taken to close the studies’ recommendations. We also interviewed the Program Executive Officer to understand the next steps to be taken by the program. We primarily performed our work at the NPOESS Integrated Program Office and at DOD, NASA, and NOAA offices in the Washington, D.C., metropolitan area. In addition, we conducted work at the Los Angeles, California, facilities of the prime contractor, the subcontractor responsible for a critical sensor, and the Defense Contract Management Agency groups overseeing those contractors. We conducted this performance audit from October 2008 to June 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To address programwide risks and challenges, the National Polar-orbiting Operational Environmental Satellite System (NPOESS) Executive Committee sponsored an independent review of the program in Fall 2008. In March 2009, the independent review team reported on its findings to the Executive Committee. Its findings were that the program has a low probability of success in its current configuration; the program, as configured after the Nunn-McCurdy certification, places continuity of data at high risk because of the inability to recover from a launch or spacecraft failure; cost has become the most important parameter, over mission success; the Executive Committee is at best inefficient; the program office suffers from a lack of space acquisition infrastructure typically found at space acquisition centers; the program is making questionable decisions because of the pressure put on it by near-term budget needs; the highest probability of success is with the current contractor team for both NPOESS and the Visible/infrared imager radiometer suite; the NPOESS Preparatory Project (NPP) satellite is an operational asset; the priorities of the Air Force and the National Oceanic and Atmospheric Administration are not aligned; and the current budget is inadequate. To address these findings, the independent review team recommended that the Committee address the continuity issues by defining the “right” program to meet the country’s weather and climate needs; determine how to co-locate the program office at an acquisition center; determine an appropriate budget for the program; accelerate the schedule of the third and fourth NPOESS satellites; use NPP data operationally; assess whether to launch NPP on schedule or on an anticipated need date change the culture to put mission need first; stop looking at options for VIIRS and NPOESS; and either fund the program at an 80 percent confidence level or reduce the content of the program so that it can be funded at an 80 percent confidence instead of a 50 percent confidence level. In addition to the contact named above, Colleen M. Phillips, Assistant Director; Kate Agatone; Carol Cha; Neil Doherty; Kaelin P. Kuhn; Kathleen S. Lovett; and Lee McCracken made key contributions to this report. | The National Polar-orbiting Operational Environmental Satellite System (NPOESS) is a tri-agency acquisition--managed by the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), the Department of Defense (DOD), and the National Aeronautics and Space Administration (NASA)--that has experienced escalating costs, schedule delays, and technical difficulties. As the often-delayed launch of its demonstration satellite draws closer, these problems continue. GAO was asked to (1) identify the status and risks of key program components, (2) assess the NPOESS Executive Committee's ability to fulfill its responsibilities, and (3) evaluate efforts to identify an alternative system integrator for later NPOESS satellites. To do so, GAO analyzed program and contractor data, attended program reviews, and interviewed agency officials. While selected components of the NPOESS program have made progress over the past year, the program is once again over budget and behind schedule. In terms of progress, three of the five instruments slated for a demonstration satellite (called the NPOESS Preparatory Project--NPP) have been delivered and integrated on the spacecraft; the ground-based satellite data processing system has been installed and tested at both of the locations that are to receive NPP data; and the satellites' command, control, and communications system has passed acceptance testing. However, the program's approved cost and schedule baseline are not achievable, and problems with two critical sensors continue to drive the program's cost and schedule. Costs could grow by $1 billion over the current $13.95 billion estimate, and the schedules for NPP and the first two NPOESS satellites are expected to be delayed by 7, 14, and 5 months, respectively. These delays increase the risk of a gap in satellite continuity. An independent review team established to assess key program risks recently reported that the constellation of satellites is extremely fragile, and that there could be a 3 to 5 year gap in satellite coverage if NPP, NPOESS, or other DOD satellites fail on launch. The NPOESS Executive Committee responsible for overseeing the program has made improvements over the last several years, but still has not effectively fulfilled its responsibilities. Responding to past concerns expressed by GAO and the Department of Commerce's Inspector General, the Committee now meets on a regular basis, and has sought and reacted to advice from external advisors to mitigate specific risks. However, the Committee lacks the membership and leadership needed to effectively and efficiently oversee and direct the program. Specifically, the DOD Committee member with acquisition authority does not attend Executive Committee meetings--and sometimes contradicts the Committee's decisions, the Committee does not track its action items to closure, and many of the Committee's decisions do not achieve desired outcomes. Program officials and external independent reviewers explained that it is extremely difficult for the Committee to navigate three agencies' competing requirements and priorities. Until these shortfalls are addressed, the Committee will remain ineffective. The NPOESS program has conducted two successive studies of alternatives to using the existing system integrator for the last two NPOESS satellites, but neither identified a viable alternative to the current contractor. Both studies assessed a variety of alternatives, including re-competing the entire prime contract, obtaining an independent system integrator while having the existing prime contractor continue to develop space and ground components, and having the government take over responsibility for the system's integration. The first study identified strengths and weaknesses and the second study identified high-level costs and benefits. Neither study identified an alternative that is viable. Program officials plan to conduct a final study prior to the June 2010 decision on whether to proceed with the existing prime contractor. |
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Under the Mineral Leasing Act (30 U.S.C. 181 et seq., as amended) (MLA), revenues for federal onshore minerals, which include bonuses, rents, and royalties, are distributed as follows: 50 percent to the state in which the production occurred, 10 percent to the general treasury, and 40 percent to the reclamation fund. Lands leased under other laws have different distribution requirements. In fiscal year 1996, 41 states received a total of about $481 million in revenues from the development of federal onshore minerals. Wyoming, New Mexico, and California received about $206 million, $124 million, and $28 million, respectively. Wyoming, New Mexico, and California also manage mineral development on private and state-owned lands. In these states, revenues from state-owned land are used to fund public educational institutions. Wyoming’s bonus, rental, and royalty revenues from minerals on state-owned land in fiscal year 1996 were $29 million. In New Mexico, these revenues from minerals on state land were $115 million. California’s revenues from state-owned minerals onshore were $3 million. In 1991, with the passage of the Department of the Interior’s appropriation bill, states receiving revenues from federal onshore minerals began paying a portion of the costs to administer the onshore minerals leasing laws—a practice known as “net receipts sharing.” Net receipts sharing became permanent with the passage of the Omnibus Budget Reconciliation Act of 1993 (OBRA), which effectively requires that the federal government recover from the states about 25 percent of the prior year’s federal appropriations allocated to minerals leasing activities. (See app. I for a detailed description of net receipts sharing.) In general, managing federal and state minerals includes some level of resource planning and use authorization, compliance inspections, revenue collection, and auditing. Resource planning may include identifying areas with a potential for mineral resources; planning for future mineral development and how that development will affect other resources on the land (such as recreation, livestock grazing, and wildlife); and geophysical exploration by potential lessees. Use authorization includes lease issuance and the approval of post-leasing activities—including the drilling of oil and gas wells and the extraction of other mineral resources—and such associated activities as the construction of roads, facilities, pipelines, storage tanks, and modifications to operations. Once approved and under way, these operations may be inspected periodically to determine whether they comply with applicable laws, regulations, and lease terms. The revenues from mineral leasing and information about production are collected and may be audited. The federal government allocated $14.6 million of its appropriations for minerals management to Wyoming, New Mexico, and California for fiscal year 1996. This amount, which will be deducted from the states’ 1997 revenue payments, was computed on the basis of allocations of the appropriations for all onshore leasable minerals management activities conducted by the Forest Service, BLM, and MMS—the three key agencies responsible for administering the federal onshore minerals leasing laws. Table 1 shows the fiscal year 1996 net receipts-sharing deductions for Wyoming, New Mexico, and California and the portions attributable to the Forest Service, BLM, and MMS. The Forest Service manages mineral uses occurring in national forests, which includes determining whether forest areas are suitable for leasing, participating with BLM in making leasing decisions for forest land, and managing mineral operations on forest land. These activities are required under several federal laws, including (1) the National Forest Management Act of 1976, which prescribes forest planning processes; (2) the National Environmental Policy Act of 1969 (NEPA), which requires environmental analysis and documentation; and (3) the Federal Onshore Oil and Gas Leasing Reform Act of 1987, which authorized the Secretary of Agriculture to determine which Forest Service lands could be leased for mineral development and to specify the conditions placed on mineral leases. Likewise, BLM manages surface uses and makes leasing decisions on BLM-managed land. BLM also issues leases and manages operations for oil, gas, coal, and other minerals (1) on lands with split ownership, namely where the minerals are federally owned but the surface is not, and (2) on certain lands managed by other federal agencies. BLM is also responsible for performing inspections to verify the quantity of minerals produced on federal leases. In addition to MLA, major federal laws governing BLM’s management of onshore minerals include (1) the Federal Land Policy Management Act of 1976, which gave BLM general management responsibilities for public land, endorsed multiple-use management, and prescribed a planning process similar to the Forest Service’s; (2) NEPA; (3) the Federal Onshore Oil and Gas Leasing Reform Act; (4) the Federal Coal Leasing Amendments Act of 1976; and (5) the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), which was enacted to ensure that the Secretary of the Interior properly accounts for all oil and gas from public lands. MMS collects, audits, and disburses most mineral revenues from production on federal lands. In support of these functions, the agency maintains information on leases and royalty payers. MMS also collects and compares royalty and production information reported by payers and operators. Finally, MMS audits payments received from selected royalty payers. As with some of BLM’s minerals management activities, MMS’ functions stem from requirements in FOGRMA. In fiscal year 1996, Wyoming’s onshore minerals management program cost $2.0 million, New Mexico’s cost $7.2 million, and California’s cost $9.9 million. All three states lease state-owned land within their boundaries for minerals development. Each of the three states has a land office responsible for leasing and for collecting revenues from those leases. The states also have regulatory agencies that oversee mineral operations within their boundaries, including those on state and private land, and where applicable, on federal and other land. Appendix II includes a more detailed description of the three states’ mineral programs. Table 2 shows the costs for the states’ minerals management programs. As land managers, the states’ land offices serve some similar functions for state land as the Forest Service and BLM do for federal land. The states’ land offices decide how state land will be used and issue leases for mineral development. As royalty managers, they perform most of the same functions as MMS does for federal royalties. They collect and account for mineral revenues, including bonuses, rents, and royalties, and audit these payments. As BLM does for federal lands, the states’ regulatory agencies review and approve drilling and extraction permits and operations; inspect operations for compliance with safety, environmental, and operational requirements; and verify and compile data on reported production on state-owned lands. The state regulatory agencies are also authorized to inspect operations for compliance with safety and environmental standards on private land within the state. The agencies are mandated by state laws to perform other minerals management activities on federal, state, private, and other lands. These activities include making spacing determinations, reviewing and approving discharge plans for oil fields, witnessing surface casing and well-plugging, and inspecting and permitting waste disposal for commercial facilities. Because of differences between federal and state programs, the states’ costs for these programs cannot be meaningfully compared. Current laws require the Forest Service and BLM to create land-use plans that evaluate alternative resource uses—including minerals—on federally managed lands. These plans must include public involvement and may be appealed to the agency or challenged in court. The three states we reviewed do not have similar land-use planning processes, and neither Wyoming nor New Mexico has similar requirements for environmental analysis to those for the federal land-managing agencies. In responding to a draft of this report, officials from California’s State Lands Commission commented that the California Environmental Quality Act and other state laws require the protection of the environment, which includes developing environmental information and mitigation requirements; protecting significant environmental values on state lands; and balancing public needs in approving the uses of state lands. A New Mexico state official noted that mineral development in that state does not occur at the expense of archaeological or environmental concerns. Federal law also requires certain royalty management activities that are different from state activities. For example, FOGRMA requires the Secretary of the Interior to have a strategy for inspecting oil and gas operations to ensure that all production is reported. This strategy includes inspections of equipment, specific measurement of oil and production, and site security procedures. In contrast, the states rely primarily upon comparisons of royalty and production reports to verify production amounts rather than on field inspections. (See app. II for more details on the states’ activities.) Other differences are state-specific. For example, federal land in Wyoming contains over twice as many producing coal leases than does state land. By law, BLM must perform an economic evaluation of coal for leasing but not for oil and gas leasing. The scope of the regulatory agencies’ responsibilities also differs from that of the federal program, as these agencies regulate mineral development on state, private, and in some cases, federal and other land. In their response to a draft of this report, officials in California’s Division of Oil, Gas, and Geothermal Resources commented that its regulatory scope is unique among the states, as about 95 percent of its workload involves administering laws and regulations on private and granted lands. We provided the Department of the Interior, the Forest Service, BLM, and MMS with a draft of this report. Wyoming’s State Land and Farm Loan Office and Oil and Gas Conservation Commission, New Mexico’s State Land Office and Oil Conservation Division, and California’s State Lands Commission and Conservation Department’s Division of Oil, Gas, and Geothermal Resources were also provided with a draft of this report. In written comments, the Department of the Interior and MMS generally agreed with the contents of the report. (See app. IV.) BLM provided us with technical clarifications, which we have incorporated as appropriate, and also suggested that we include information on the states’ mining regulatory agencies. However, we did not include this information because we focused on activities comparable to the federal leasable minerals program (for which net receipts sharing is computed), which does not include all mining-related activities. The Forest Service had no comments on the draft. In written comments, Wyoming’s Office of the Governor acknowledged that the federal and state mineral leasing programs are different, but disagreed with our position that the costs cannot be meaningfully compared. (See app. V.) The Governor’s Office commented that a comparison could be made that includes an analysis of the similarities and differences in the programs. Our analysis shows that because of such differences in the programs as land-use planning, environmental, and production verification requirements, a cost comparison would not be meaningful. The Governor’s Office also requested that we expand our report to provide a breakdown of the federal program’s direct and indirect costs by function. However, our report discusses the federal minerals management program from the perspective of net receipts sharing, which is based upon appropriations and not on actual program costs. Accordingly, we describe how the appropriations are allocated but do not provide actual costs; such a discussion would be outside the scope of this report. Furthermore, we believe that regardless of the level of cost detail provided, a comparison between federal costs and state costs would not be meaningful because of the differences in the programs. The Office of the Governor’s comments included comments and technical clarifications from Wyoming’s Oil and Gas Conservation Commission, State Land and Farm Loan Office, and Department of Audit, which we incorporated as appropriate. In commenting on this report, New Mexico’s Oil Conservation Division (for written comments, see app. VI) stated that the states’ regulatory agencies are responsible for minerals management activities beyond the management of state-owned minerals. We adjusted the text of our report to clarify the role of the regulatory agencies in managing state, private, and where applicable, federal and other lands. Furthermore, the Oil Conservation Division commented that many of the net receipts-sharing costs are not justifiable; however, such an assessment was outside the scope of our review. In written comments, California’s State Lands Commission commented that the draft was generally a fair and accurate review of California’s minerals management costs. (See app. VII.) However, Commission officials commented that our reporting of the Division of Oil, Gas, and Geothermal Resources’ costs overstated the cost of managing state lands. We adjusted the text of our report to clarify that the regulatory agencies’ scope of authority extends beyond state lands in all three states and that about 95 percent of California’s Division of Oil, Gas, and Geothermal Resources’ time is devoted to regulating the development of minerals on privately owned and other land. The Commission also commented that it is responsible for implementing the California Environmental Quality Act and is required to develop environmental information and mitigation requirements. Furthermore, it commented that state law requires the Commission to protect significant environmental values on state lands and to balance public needs in approving the uses of state lands. We incorporated this information into the text of this report. The Commission also commented that it has a program of inspections and other audit procedures to verify production amounts and royalty payments that is more extensive than we had described in the draft. We incorporated specific recommended changes into our discussion of California’s minerals management program in appendix II. California’s Division of Oil, Gas, and Geothermal Resources provided technical clarifications, which we also incorporated into the report as appropriate. In conducting our review, we examined relevant reports and other documents prepared by the three federal agencies within the Departments of Agriculture and the Interior that are responsible for (1) managing federal onshore leasable minerals and (2) allocating their appropriations among the states for net receipts sharing. We interviewed program managers and budget officials from these organizations in Washington, D.C., and in regional, state, and local offices, as appropriate. We also obtained cost data and estimates from officials in Wyoming, New Mexico, and California. We interviewed the officials responsible for compiling the cost data and discussed the functions of their agencies and how they compare with the federal program. We conducted our review from June through November 1996 in accordance with generally accepted government auditing standards. A full description of our objectives, scope, and methodology is included in appendix III. As requested, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to appropriate congressional committees, federal agencies, state agencies, and other interested parties. We will also make copies available to others upon request. Please call me at (202) 512-9775 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix VIII. Under the Mineral Leasing Act (30 U.S.C. 181 et seq., as amended), states generally receive 50 percent of the revenues from federal onshore mineral leases, which include bonuses, rents, and royalties. Under the act, onshore federal mineral receipts are distributed as follows: 10 percent goes to the general treasury, 40 percent to the reclamation fund, and 50 percent to the state in which the production occurred. Lands leased under other laws have different distribution requirements. With the passage of the Department of the Interior’s 1991 appropriation bill, the federal government began recovering a portion of the costs to administer the federal onshore minerals leasing laws from the revenues generated—a practice now known as “net receipts sharing.” The 1993 Omnibus Budget Reconciliation Act (OBRA) made net receipts sharing permanent. The agencies whose appropriations are included in the net receipts-sharing calculations are the Department of the Interior’s Bureau of Land Management (BLM) and Minerals Management Service (MMS) and the Department of Agriculture’s Forest Service. OBRA requires that 50 percent of the preceding fiscal year’s appropriations to administer minerals leasing laws be deducted from the mineral revenues from federal lands before they are distributed among the states, the general treasury, and the reclamation fund. As a result, the states bear the cost associated with about 25 percent of the appropriations. To illustrate, if one year’s appropriation were $100, OBRA requires that 50 percent of that appropriation, or $50, be recovered from the revenues in the following year. If the lands were leased under the Mineral Leasing Act, the $50 would be recovered as follows: $25 comes from the states receiving mineral revenues, $5 from the general treasury, and $20 from the reclamation fund. Although MMS is responsible for deducting the amounts from each state’s revenues, the deductions also include amounts for the Forest Service and BLM. The Forest Service and BLM compute and report their allocations to MMS, which then calculates the total amount to be deducted from each state’s revenues. The following sections explain how the Forest Service, BLM, and MMS compute their allocations and how MMS combines the allocations of all three agencies to compute the actual deduction from state revenues for the management of the federal onshore minerals leasing program. For its portion of the net receipts-sharing deduction, the Forest Service calculates and allocates the actual cost of its minerals management program. At the end of each fiscal year, the Forest Service identifies the amounts charged to the minerals management program for each forest and totals these amounts by state to determine each state’s minerals management costs. The Forest Service’s fiscal year 1996 leasable minerals management costs for Wyoming included those for the Bighorn, Shoshone, Bridger-Teton, and Medicine Bow National Forests. The Forest Service’s leasable minerals costs for New Mexico included those for the Carson, Cibola, Gila, Lincoln, and Santa Fe National Forests. The Forest Service’s costs for California included the Angeles, Eldorado, Inyo, Klamath, Lassen, Los Padres, Mendocino, Modoc, Stanislaus, and Tahoe National Forests. The Forest Service adds a percentage to these direct costs for indirect expenses. In fiscal years 1995 and 1996, the Forest Service added 20 percent to the leasable minerals costs for program support and common services, including those provided by the regional and headquarters offices. For Wyoming, New Mexico, and California, the Forest Service’s allocation for the fiscal year 1996 net receipts-sharing computation was about $552,000, $234,000, and $517,000 respectively. For its part of the net receipts-sharing process, BLM allocates its onshore minerals management appropriations to each state. Each BLM state office receives an energy and minerals budget, which includes all funds dedicated to the management of onshore oil, gas, geothermal, and other mineral resources on federally managed lands. From these amounts, BLM subtracts appropriated amounts not specifically related to federal onshore leasable minerals, such as costs to manage Indian minerals and other, nonleasable minerals. To these state office budgets, BLM adds a factor for indirect expenses. In fiscal year 1996, BLM added 19 percent to the energy and minerals appropriations to cover the expense of general administration and information management. For Wyoming, New Mexico, and California, BLM’s allocation for the net receipts-sharing computation was about $19 million, $13 million, and $5 million, respectively. To determine the share of its budget related to onshore activities, MMS begins with the budget for the Royalty Management Program (RMP), which is responsible for managing revenues from federal mineral leasing, both onshore and offshore. Each RMP division identifies the amount of its budget that is related to managing onshore, offshore, and Indian revenues on the basis of workload factors. Then, RMP allocates the federal onshore amount to the states, again, on the basis of workload factors, such as the number of producing leases in the state as a percentage of the total number of federal onshore producing leases. For Wyoming, New Mexico, and California, MMS’s allocation for the net receipts-sharing computation was about $8 million, $10 million, and $3 million, respectively. After the Forest Service, BLM, and MMS have identified the amounts to be allocated for onshore leasable minerals management, MMS calculates the final deduction for each state as follows: 1. MMS divides the sum of the agencies’ allocations in half as required by OBRA. The sum of the Forest Service’s, BLM’s, and MMS’ allocations for fiscal year 1996 was almost $114 million. One-half of this amount was $57 million. 2. The resulting amount ($57 million) is allocated among the states on the basis of each state’s proportion of total revenues for that fiscal year. For example, Wyoming received about 43 percent of the federal onshore leasable mineral revenues in fiscal year 1996. To compute the revenue-based allocation, MMS multiplied $57 million by 43 percent, which resulted in an allocation of about $24 million for Wyoming. 3. However, under OBRA, the allocation to each state cannot exceed one-half of the estimated amount that the agencies attributed to that state. For fiscal year 1996, the total amount that the agencies attributed to Wyoming was about $28 million, which is the sum of the Forest Service’s, BLM’s, and MMS’ allocations to the state. One-half of the $28 million is about $14 million. 4. The lower amount is deducted according to each state’s revenue-distribution formula in the following fiscal year. Because Wyoming receives one-half of the federal mineral receipts, it is charged one-half of this lower amount ($14 million). Thus, Wyoming’s total deduction in fiscal year 1997 will be about $7 million. For all but two states—Wyoming and New Mexico—the allocation based upon each state’s proportion of total revenues resulted in the lower deduction for fiscal year 1996. Table I.1 shows the fiscal year 1996 revenues and net receipts-sharing deductions (which will be deducted in fiscal year 1997) for the states. Final deduction from fiscal year 1997 revenues (continued) Officials in Wyoming, New Mexico, and California described their minerals management programs and provided us with actual and estimated costs of operating these programs. Wyoming receives revenues from the production of oil, gas, coal, and other minerals in the state. In fiscal year 1996, Wyoming received $30 million from production on state lands and $206 million from federal royalties, rents, bonuses, and other revenues. Almost 4 million acres of state-owned land in Wyoming contain 816 producing mineral leases, compared with 5,632 producing leases on more than 27 million acres of Forest Service- and BLM-managed land. Wyoming’s State Land and Farm Loan Office’s Mineral Leasing and Royalty Compliance Division issues leases on state lands for mineral development and collects, verifies, and processes royalty payments and payment information. The Division’s activities are guided by the agency’s mission of optimizing economic return from state lands in the interest of the state’s schools and institutions. The Division’s total costs for fiscal year 1996 were about $750,000. The Mineral Leasing Section’s resource-planning activities do not include formal land-use planning activities similar to those required of federal agencies. Instead, they focus on compatibility of mineral operations with other surface uses. State Land and Farm Loan Office officials estimate that direct costs for resource planning were about $29,000 in fiscal year 1996. The Mineral Leasing Section issues leases for mineral development on state land. Although it has no formal procedure for environmental analysis, the Mineral Leasing Section may place restrictions on leases if necessary to protect the public, the environment, cultural or archaeological resources, or threatened and endangered species. Another agency, the Oil and Gas Conservation Commission, reviews and approves “applications for permit to drill” and other requests for permission to operate on state lands. However, the Mineral Leasing Section records these permits and monitors the status of operations on state land. The Section maintains information about lease assignments, transfers, and units and communitization agreements. The Section’s estimated use authorization costs in fiscal year 1996 were just over $131,000. State Land Office staff do not routinely perform compliance inspections, although the Office has budgeted to hire contractors for some site inspections. State Land Office staff may inspect a previously producing operation if it suddenly reports no production, and work with other state and federal officials to protect state lands from being drained. Costs for inspection-related activities in fiscal year 1996 were an estimated $44,000. Mineral Leasing and Royalty Compliance Division staff maintain and verify data on leases, payers, and royalties. The staff receive and process royalty information, which includes volume and product value information for each well. They also receive, account for, and process royalty payments. Auditing is limited mainly to desk reviews of reported sales data, which include verification that information contained in royalty reports is supported by other source documents. These activities cost the State Land Office an estimated $415,000 in fiscal year 1996. The State Land Office may also be involved in appeals to the Wyoming Board of Land Commissioners, coordination of settlements, and assessments of penalties, and it continually works to develop computer systems for royalty management. These along with administrative and other support activities make up the balance of the Division’s costs for fiscal year 1996. Wyoming’s Oil and Gas Conservation Commission is the state’s oil and gas regulatory agency. The Commission’s activities include permitting geophysical exploration; approving operators’ requests to develop minerals on state, federal, and private leases; inspecting those leases for compliance with operating requirements; and collecting and maintaining production data for all wells in the state. The Commission also administers the Environmental Protection Agency’s (EPA’s) Underground Injection Control program. The Commission is funded through a mill levy tax on all oil and gas production in the state; it also receives a grant from EPA. The Commission’s reported costs for fiscal year 1996 were about $1.58 million. The Commission’s resource-planning activities include both limited land-use planning and permitting of geophysical exploration. Land-use planning focuses on the proximity of proposed oil and gas operations to sensitive areas, such as houses or water wells, and creeks, drainages, rivers, or wetlands. The Commission may require operators to line fluid pits, use a closed system to prevent contamination of these areas, or move the proposed operation. The Commission also works jointly with BLM to approve seismic exploration on state, federal, and private land. Commission officials estimate that these resource-planning activities cost about $175,000 in fiscal year 1996. The Commission’s use authorization activities include establishing minimum distances between oil and gas wells and reviewing and approving proposals to operate on state, federal, and private land. As part of its enforcement of Wyoming’s oil and gas conservation laws, the Commission establishes well-spacing requirements that apply to all wells in the state. The Commission also receives and reviews applications for permit to drill on all state and private lands in the state and reviews and approves units and communitization agreements. These use authorization activities cost an estimated $480,000 in fiscal year 1996. The Commission’s five inspection staff inspect oil and gas wells in response to environmental concerns or resource waste. The staff inspect such things as (1) blowout-preventer equipment, (2) general oil field conditions, (3) well-plugging operations, (4) dry holes on state and private lands to ensure that they are properly plugged, and (5) operations for compliance with surface requirements; they also respond to landowners’ complaints. The Commission does not perform production accountability inspections in the same way that BLM does; inspectors do not usually strap tanks, gauge meters, or witness transfers of oil, unless they suspect that theft has occurred. The Commission spent an estimated $436,000 on compliance inspections in fiscal year 1996. The Commission receives data on production and wells for all wells in the state and maintains a database of the information that is available to Wyoming’s Department of Revenue and the State Land and Farm Loan Office to assist in their audits of royalties and severance taxes. The Commission spent an estimated $218,000 on collecting, verifying, and maintaining information on production and wells in fiscal year 1996. The Commission carries out EPA’s Underground Injection Control program in Wyoming, and has primary responsibility for Class II (noncommercial) injection and enhanced recovery wells on all but Indian-owned lands. Wyoming has almost 6,500 injection wells, and the Commission inspects about 20 percent of the wells per year to make sure the casing is intact to prevent groundwater from being contaminated. The Commission also witnesses the plugging and abandonment of all wells and attends blowout-preventer tests. Its costs for the Underground Injection Control program were about $320,000 in fiscal year 1996. Wyoming’s Department of Audit’s Minerals Audit Division audits revenues from mineral development in the state, including royalties, severance tax, and conservation tax. The Division spends about 5 percent of its time and budget on revenues generated on state lands, and its direct costs for auditing leases on state lands in fiscal year 1996 were about $67,000. New Mexico receives revenues from the production of oil, gas, coal, and other minerals in the state. In fiscal year 1996, the state received a total of $115 million in royalty, rent, and bonus revenues from production on state lands and $124 million in federal royalties, rents, bonuses, and other revenues. About 9.8 million acres of state-owned land in New Mexico contain 5,116 producing mineral leases, compared with 6,160 producing leases on more than 22 million acres of Forest Service- and BLM-managed land. New Mexico’s State Land Office is responsible for leasing state lands for mineral extraction and for collecting and distributing the royalties generated from the production of minerals. The Office’s Oil, Gas, and Minerals Division identifies parcels to be leased, sets the lease terms, and holds lease sales. The Royalty Management Division collects and audits royalties paid for minerals from state lands. The State Land Office’s estimated costs in fiscal year 1996 for managing the mineral program were just over $3 million. The Oil, Gas, and Minerals Division performs resource-planning functions on state trust lands. The Division conducts very limited land-use planning, primarily considering the long-term plans for property that it wants to lease. New Mexico does not require land-use planning nor environmental planning, although the State Land Office determines if endangered species are present on state lands identified for leasing. The Division issues permits for seismic exploration. The State Land Office estimates that resource-planning activities cost $149,000 in fiscal year 1996. Use authorization consists of holding monthly lease sales, reviewing and approving lease assignments and transfers, and reviewing development plans. The State Land Office monitors diligent development by verifying that drilling and production reports show that production is occurring on leases. The Office does not, however, perform physical inspections of sites for the purpose of verifying production quantities. The Office conducts environmental inspections if necessary—if, for example, a leak is reported. It estimates that use authorization and compliance activities cost $366,000 in fiscal year 1996. The State Land Office’s Oil, Gas, and Minerals Division maintains information on leases and agreements and information on payers. The Royalty Compliance Division processes royalty reports and payments, and collects and disburses revenues. The Royalty Compliance Division also compares information on royalties and production and identifies and resolves discrepancies. Oil and gas producers report and pay royalties to the Royalty Management Division monthly on the basis of the volume and price of oil or natural gas produced. The Division reviews the royalty data and evaluates whether the correct royalty was paid. The Division also audits royalty reports to verify that the reported value is correct. The State Land Office estimates that costs for these activities were about $847,000 in fiscal year 1996. Other minerals management activities include the adjudication of appeals; coordination of settlements; litigation support; development of procedures and rules; and system development, implementation, and operation. New Mexico’s Oil and Natural Gas Administration and Revenue Database (ONGARD) is a shared database that includes production, tax, transportation, and royalty information for all oil and gas wells in New Mexico. The database includes information on all state leases and the locations of all 45,000 active wells on federal, Indian, state, and private lands. State officials compare production and transportation reports from the system to verify production amounts reported to the state. According to state officials, this comparison is an important control to ensure that the state receives the correct royalty amounts. Development costs for ONGARD totaled $15 million to $20 million as of July 1996. State Land Office officials estimate that the costs for implementing and operating ONGARD in fiscal year 1996 were about $734,000. New Mexico’s Oil Conservation Division of the Department of Energy, Minerals, and Natural Resources is responsible for regulating oil, gas, carbon dioxide, and geothermal wells on state and private land and in some cases on federal and Indian land. The Division establishes spacing for oil and gas wells in the state and reviews and approves operators’ applications for permission to operate on state and private lands, inspects oil and gas operations, processes production information, and administers EPA’s Underground Injection Control program. The Division’s budget for fiscal year 1996 was about $4.2 million. The Division authorizes uses on state and private lands by reviewing and approving applications for permit to drill and other operator proposals. The Division approves drilling plans before operations can begin on state leases and may place conditions on its approval of drilling plans on all leases; for example, it requires operators to place nets over all fluid pits to keep birds from landing on the oil-soaked water. The Division also reviews and approves abandonment plans for all wells and other facilities. The Oil Conservation Division estimates its fiscal year 1996 costs for these use authorization activities at about $683,000. The Oil Conservation Division requires drainage protection and inspects oil and gas operations to verify that operators are complying with their approved plans and with environmental requirements. The Division is not required by state law to conduct field inspections to verify mineral production quantities. The Division’s fiscal year 1996 costs for drainage protection and operational and environmental inspections are estimated to be $819,000. The Division collects monthly production disposition and well information for each well in the state and makes it available to the oil and gas industry and other state agencies through the ONGARD database; the State Land Office compares it with royalty reports, and the Taxation and Revenue Department compares it with severance tax reports. The Oil Conservation Division also receives volume reports from oil and gas transporters and compares the production amounts with the amounts reported as transported. The Division investigates and attempts to resolve discrepancies. We were not provided with a separate cost estimate for this function. The Division administers EPA’s Underground Injection Control program, in which it has primacy. The Division inspects wells into which water is being injected to ensure that water does not escape into other geologic formations, which could contaminate groundwater. A grant from EPA covers about 10 percent of the Division’s costs to administer the program. California receives revenues from the production of oil, gas, geothermal resources, and other minerals in the state. In fiscal year 1996, the state received about $3 million from onshore mineral production on state landsand $28 million from onshore federal royalties, rents, bonuses, and other revenues. Onshore, California owns over 1.3 million acres of school lands and minerals; these lands contain 13 producing mineral leases, compared with 358 producing leases on almost 38 million acres of Forest Service- and BLM-managed land. California’s State Lands Commission is responsible for leasing revenue-generating lands and collecting revenues for the state and for protecting, preserving, and restoring the natural values of state lands, both onshore and offshore. The Commission evaluates resources on the land; leases state land for mineral development and permits and reviews plans for mineral development on that land; inspects to ensure compliance with laws, regulations, and lease terms; and collects and audits revenues that the mineral development generates. The Commission’s onshore and offshore minerals management costs for fiscal year 1996 totaled about $6 million. The Commission attributes costs of about $390,000 to onshore minerals management. The State Lands Commission’s resource-planning activities include economic evaluation, mineral and geologic work, and reservoir engineering. According to Commission officials, these activities implement planning and environmental requirements imposed by the California Environmental Quality Act and other state laws. The State Lands Commission estimates that its direct costs for onshore and offshore resource-planning activities were about $534,000 in fiscal year 1996. The Commission leases state land for mineral development, both offshore and onshore. Although the Commission is currently issuing leases for navigable stream beds and river land, no offshore leases have been issued since 1968, when the California state legislature instituted a moratorium on offshore leasing because of an offshore oil spill that occurred near Santa Barbara. Despite the leasing moratorium, drilling continues on existing leases under environmental and management control by the Commission. The Commission’s Mineral Resources Management Division reviews and approves drilling and other operation plans on state leases, onshore and offshore. The plans are required to provide for production-monitoring equipment and procedures for the documentation of royalty payments. For offshore development, the Division reviews oil-spill contingency plans. The estimated fiscal year 1996 costs for onshore and offshore use authorization activities were about $824,000. The Commission monitors onshore and offshore operations to ensure diligent development and inspects for compliance with operational and environmental requirements. Because of the environmental sensitivity of operating offshore, the Commission inspects offshore operations at least annually. Inspections involve examining all meters, witnessing every shipment made, and sampling and verifying quality for pricing purposes. The costs for compliance inspections and oil-spill prevention activities both onshore and offshore were estimated to be $925,000 in fiscal year 1996. The Commission maintains information on leases and royalty payers, and verifies royalty statements for value, volume, and quality. The Commission receives monthly reports from mineral operators showing production amounts and estimating royalties due. Commission staff compare this information with quality and pricing information and calculate the amount of royalty that should be paid. The Commission also receives and processes royalty payments, bills for late payments, and disburses royalties to the state general fund. Estimated costs for these activities onshore and offshore in fiscal year 1996 were about $313,000. The Commission’s minerals audits are conducted mainly for the Long Beach operations. The costs for these activities not related to the net-profit-sharing leases were estimated at $1,000 for fiscal year 1996. These and other activities, including appeals adjudication, litigation support, the development of rules, and system operations and development cost an estimated $271,000 in fiscal year 1996. The Department of Conservation’s Division of Oil, Gas, and Geothermal Resources regulates oil, gas, and geothermal resources in California. The Division reviews and approves plans to develop minerals on state and private lands; inspects operations to protect public health and safety; collects and maintains production and well information; and has primary responsibility for administering EPA’s Underground Injection Control program. Officials estimate that 4 percent of the Division’s time is devoted to state-owned land, 1 percent to federally managed land, and the remaining 95 percent to private and granted lands. The Division is funded through a uniform assessment on every barrel of oil and every 10,000 cubic feet of gas produced in California. The Division’s onshore and offshore minerals management costs for fiscal year 1996 totaled about $10 million. The Division attributes about $9.5 million to onshore minerals management—regardless of land ownership. Although the Division is not generally required to perform land-use planning, it reviews counties’ decisions on oil, gas, and mineral exploration and development. The Division is the state’s main source for oil, gas, and geothermal reserve estimates and develops 5-year production forecasts and possible development scenarios. The Division also provides information on the condition of plugged and abandoned wells in areas where future land development will occur and reviews land-development plans for these areas to ensure that wells are properly plugged and abandoned. These resource-planning functions were estimated to cost $150,000 for both onshore and offshore activities in fiscal year 1996. The Division reviews and approves drilling permits, enhanced recovery and rework proposals, and plugging and abandonment plans for all wells in the state. In approving drilling permits, Division staff review well placement so that wells do not drain resources from adjacent leases; operators are required to notify adjacent leaseholders of operations that may affect their leases. Use authorization activities onshore and offshore cost an estimated $2.3 million in fiscal year 1996. Division staff perform field inspections for compliance with operating requirements and monitor leases to determine whether they are being developed diligently. Inspectors are present at blowout-preventer tests and examine the surface area of a lease to verify that the lease and facilities are in order, operations are fenced and signed, pits and sumps are screened to protect wildlife, and there are no leaks from tanks and pipelines. The Division does not normally perform on-site production verification inspections. Compliance inspections and related activities onshore and offshore were estimated to cost $4.5 million in fiscal year 1996. The Division is the state’s repository for well and operations information and receives production reports for all wells in the state monthly and annually. The Division compares annual production reports with monthly reports to check for inconsistencies in reported production. It provides estimates of reserve volumes to counties for their ad valorem tax estimates. The Division also conducts field audits by comparing companies’ run tickets and other source documents with production reports provided to the agency. Production report processing, data resolution, and audit activities were estimated to cost $750,000 in fiscal year 1996. Other activities such as enforcement, appeals adjudication, and legal support, along with systems operations and development costs, are estimated at about $1.1 million in fiscal year 1996. The Division also administers EPA’s Underground Injection Control program. This includes the approval and inspection of all injection wells in the state, including those on federal land. The state receives an annual grant from EPA—about $453,000 in fiscal year 1996—which, according to Division officials, funds about 18 percent of the state’s total cost of the program. In May 1996, we were asked to (1) identify how much Wyoming, New Mexico, and California paid to the federal government for managing minerals on federal lands within their boundaries, (2) identify the costs to the three states for their own minerals management programs, and (3) compare these federal and state program costs. Two of the three states we were asked to include in this study—Wyoming and New Mexico—received the largest state revenue shares from federal mineral onshore leases in fiscal year 1996. The third state we were asked to include—California—provided geographic diversity because it is not in the Rocky Mountain area. California received the fifth largest share of revenues from federal onshore leases in fiscal year 1996. To determine the costs for the three states for federal minerals management, we obtained fiscal year 1996 net receipts-sharing data for the three federal agencies responsible for minerals management activities—the Department of Agriculture’s Forest Service, and the Department of the Interior’s MMS and BLM. We interviewed agency officials responsible for allocating the agencies’ budgets for minerals activities to the states. We also interviewed Forest Service and BLM field staff to discuss the minerals management activities they perform. Specifically, we met with Forest Service officials in Regions 2, 3, and 5, and with BLM officials in the Wyoming, New Mexico, and California State Offices. To determine the costs for the three states’ minerals management programs, we requested and received cost estimates for fiscal year 1996 from the states’ land and conservation offices. Specifically, in Wyoming, we obtained cost data from the Wyoming State Land and Farm Loan Office, the Wyoming Oil and Gas Conservation Commission, and the Wyoming Department of Audit’s Mineral Audit Division. In New Mexico, we obtained data from the State Land Office and from the Oil Conservation Division of the Energy, Minerals, and Natural Resources Department. In California, we obtained data from the State Lands Commission and from the Division of Oil, Gas, and Geothermal Resources of the Department of Conservation. To obtain descriptions of functions associated with these costs, we interviewed officials at each of these offices. Because of key differences in the federal and state programs, a comparison of the programs’ costs would not be meaningful. To assess the differences between the federal and state programs, we reviewed legal and statistical information on each, including federal minerals legislation, state conservation and land laws, and federal and state statistics on mineral activities in each of the three states. The following are GAO’s comments on the Wyoming Office of the Governor’s comments enclosed in a letter dated January 10, 1997. 1. Wyoming’s Office of the Governor acknowledged that the federal and state minerals leasing programs are different but disagreed with our position that the costs cannot be meaningfully compared. The Governor’s Office commented that a comparison could be made that includes an analysis of the similarities and differences in the programs. However, our analysis shows that because of differences in the programs’ land-use planning, environmental, and production verification requirements, as well as state-specific differences, a cost comparison would not be meaningful. 2. The Governor’s Office requested that we expand our report to provide a breakdown of the federal program’s direct and indirect costs by function. However, our report discusses the federal minerals management program from the perspective of net receipts sharing, which is based upon appropriations and not on the program’s actual costs. Accordingly, we describe how the appropriations are allocated but do not provide actual cost breakdowns. To obtain such actual cost breakdowns would require a review of those costs, which is outside the scope of this report. Furthermore, we believe that regardless of the level of cost detail provided, a comparison between federal costs and state costs would not be meaningful because of the differences in the programs described in the report. 3. Wyoming’s Office of the Governor commented that we do not itemize the basis for over $500,000 deducted from Wyoming’s royalty share for the Forest Service. We adjusted the text of appendix I to clarify that the amount referred to in the Governor’s Office’s comments—$552,000— represents the Forest Service’s allocation to Wyoming for its leasable minerals program, which is included in the net receipts-sharing computation and is not the final deduction. As shown in table 1 of the letter, approximately $140,000, which is about 25 percent of the allocation, will actually be deducted from Wyoming’s federal minerals revenues for the Forest Service’s fiscal year 1996 minerals management activities. As we described in appendix I, the basis for the Forest Service’s allocations to the states is the amount charged to the minerals program for each forest; these amounts are totaled for each state to determine each state’s minerals management costs. The Forest Service adds a percentage to these direct costs for indirect expenses which, in fiscal years 1995 and 1996, was 20 percent. The following are GAO’s comments on the New Mexico Oil Conservation Division’s comments enclosed in a letter dated December 19, 1996. 1. New Mexico’s Oil Conservation Division commented that we did not distinguish between minerals management and surface management and the costs associated with each and further commented that many of the costs allocated to the states are not justifiable. We did not distinguish between the costs for minerals management and surface management because our report does not address actual costs for the federal minerals management program; rather, it discusses how appropriations for federal onshore leasable minerals management are allocated among the states. We did not assess whether these costs were “justifiable” because such an assessment is outside the scope of this review. 2. The Division commented that the state programs include many responsibilities that are not mandated under federal laws, such as statewide spacing rules, oil and gas field rules (and exceptions to these rules), discharge plans, and the witnessing of oil-well casing and plugging operations. We revised our report to include additional information about all three states’ minerals management activities. 3. The Division stated that the report leaves one with the impression that federally managed oil and gas programs are intrinsically more expensive than state programs because federal programs are more comprehensive, involving multiple-use management. We did not analyze whether federal programs were “intrinsically more expensive” or less efficient than the states’ programs and did not intend to leave this impression. The following are GAO’s comments on the California State Lands Commission’s comments enclosed in a letter dated December 20, 1996. 1. In written comments and in subsequent discussions, State Lands Commission officials commented that our reporting of the Division of Oil, Gas, and Geothermal Resources’ costs overstated the cost of managing state lands. Commission officials suggested that we clarify that the regulatory agencies’ costs are for managing all lands under its jurisdiction—not just state lands. We adjusted the text of our report to clarify that the regulatory agencies’ scope of authority extends beyond state lands in all three states, stating specifically that about 95 percent of California’s Division of Oil, Gas, and Geothermal Resources’ time is devoted to regulating onshore mineral development on privately owned and other land. 2. In written comments and in subsequent discussions, Commission officials clarified California’s legal requirements for environmental and land-use planning. They commented that the State Lands Commission is responsible for implementing the California Environmental Quality Act and is required to develop environmental information and mitigation requirements and to protect significant environmental values on state lands. We incorporated this information into the text of the report. In written comments, officials stated that the Commission is required to balance public needs in approving the uses of state lands, but in discussing the Commission’s land-use-planning activities, officials agreed that the state land-use-planning processes differ from federal land-use planning. 3. Commission officials commented that the State Lands Commission has a program of inspections and other audit procedures to verify production amounts and royalty payments that is more extensive than our description in the draft. In their specific technical clarifications, they stated that operators are required to submit plans that provide for production- monitoring equipment and procedures for documenting royalty payments. We incorporated the Commission’s specific recommended change into our discussion of California’s minerals management program in appendix II. However, according to Division of Oil, Gas, and Geothermal Resources officials, Division inspectors do not perform production verification inspections because California does not have a severance tax. Because the Division of Oil, Gas, and Geothermal Resources performs the majority of the workload for California’s onshore minerals management program, we did not adjust the text of the report to reflect the Commission’s comment. Jennifer L. Duncan Susan E. Iott Sue Ellen Naiberk Victor S. Rezendes The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed whether the costs borne by Wyoming, New Mexico, and California for managing federal minerals were comparable to these states' own programs, focusing on: (1) how much the three states paid to the federal government for managing minerals on federal lands within their boundaries; (2) the costs to the three states for their own minerals management programs; (3) a comparison of these federal and state program costs; and (4) the activities that are associated with the federal and state programs. GAO found that: (1) in fiscal year (FY) 1996, Wyoming, New Mexico, and California received almost $358 million in revenues from federal onshore leasable minerals and they will pay almost $14.6 million in FY 1997 for a portion of the federal government's FY 1996 onshore mineral leasing program; (2) Wyoming's share of the $14.6 million is $7.02 million, New Mexico's is $5.94 million, and California's is $1.65 million; (3) these amounts were computed on the basis of allocations of the federal appropriations for all activities conducted by the Forest Service, the Bureau of Land Management, and the Minerals Management Service related to managing federal onshore leasable minerals; (4) onshore mineral development on Wyoming's, New Mexico's, and California's state-owned land generated combined royalties, rents, and bonuses of $148 million in FY 1996; (5) the states' combined costs for managing onshore mineral development, which includes development on state and private lands, totalled about $19 million; (6) specifically, the costs for Wyoming's minerals management program were $2.4 million in FY 1996, while New Mexico's were $7.2 million and California's costs were $9.9 million; (7) because of differences between federal and state programs, the states' costs for these programs cannot be meaningfully compared; (8) federal decisions about mineral leasing must involve land-use planning and environmental analysis; (9) the three states GAO reviewed do not have similar land-use planning processes; (10) furthermore, neither Wyoming nor New Mexico requires an environmental analysis similar to that performed by the federal government; (11) according to California State Lands Commission officials, California laws require an environmental analysis and the protection of state lands; (12) other differences are state-specific and can be attributed to a program's size and regulatory scope and number of mineral operations managed; and (13) for example, California's oil and gas conservation agency devotes about 95 percent of its resources to managing mineral development on privately owned land and other lands not owned by the state or federal government. |
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Retail payments are relatively high-volume, low-value payments. Retail payment methods include cash, checks, debit and credit card, and ACHtransactions. While depository institutions provide cash processing services to retailers and other depository institutions, the Federal Reserve provides cash processing services only to depository institutions and the U.S. government. The Federal Reserve and correspondent banks provide check collection and settlement services. The Federal Reserve and private electronic network operators provide clearance and settlement services for ACH transactions. Private electronic network operators also provide clearance and settlement services for debit card, credit card, and automated teller machine (ATM) transactions. For consumers and retailers, cash transactions are settled instantaneously. However, checks require a more complex settlement process and more time to settle. Depository institutions have several alternative methods for clearing and settling checks. Figure 1 illustrates an example of how a check is settled through direct presentment—when depositary banks present checks directly to the paying bank. In practice, local checks generally settle in 1 business day and nonlocal checks generally settle in 1 to 2 business days. Currently, checks are settled on business days, which do not include weekends, resulting in a delay in the settlement of those checks deposited during the latter part of the week. Credit card and debit card payments also require a complex system to clear and settle transactions. A credit transaction is initiated when a customer’s card number is entered into a card reader, followed by the transaction amount. The data are transmitted to the card-issuing bank. The card-issuing bank accepts or denies the transaction. If the transaction is authorized, the customer signs to accept liability for the transaction. In the case of a debit card, the customer enters a personal identification number or sign the sales receipt to accept liability for the transaction. At the end of that day, the retailer submits the customer’s transactions along with all of the other credit card transactions to its depository institution (retailer’s bank), which credits the retailer usually in 1 to 2 business days. The credit card company is then responsible for creating the net settlement positions that result in the transfer of funds from the card-issuing bank to the retailer’s bank. These transfers typically occur by Fedwire funds tranfers through a correspondent bank. The card-issuing bank would then bill the customer. When the customer pays the bill, the cycle is complete, as shown in figure 2. Debit card transactions are authorized and cleared in a similar fashion to credit cards, except that they settle by debiting customers’ accounts and crediting retailers’ accounts on the next business day. Depository institutions use a variety of channels to settle credit and debit card transactions, including accounts at a common correspondent, ACH networks, and Fedwire. Final settlement of ACH transfers processed by the Federal Reserve occurs through debits and credits to the accounts of depository institutions on the books of the Federal Reserve. ACH transfers that are processed only by private-sector ACH operators are net settled through the Federal Reserve. Float is created because of the time it takes to clear and settle payments, which affects retailers, consumers, and depository institutions. Float is generally defined as the lag between the receipt of a check or other payment and the settlement of that payment. This lag differs according to the method of payment. There is no float for cash. Checks are subject to the longest float, primarily due to the need to physically transport checks. Federal law and regulations prohibit depository institutions from paying interest on demand deposits consisting primarily of commercial checking accounts. Many depository institutions, however, offer “sweep” accounts to business customers as a mechanism by which these customers obtain interest earnings on account balances above negotiated account minimums. During the business week, the depository institution transfers, or “sweeps,” commercial checking account balances above an agreed minimum into other accounts on which interest might be paid, such as MMDAs, or into interest-earning nondeposit financial instruments. Depository institutions typically invest these funds in short- term, low-risk assets, such as U.S. Treasury bills and notes, or money market mutual funds, among others. Depository institutions do not pay interest earnings on funds deposited on the weekend because they are unable to invest these funds until the next business day. Overall, U.S. settlement schedules are similar to settlement schedules in most G-10 countries. In some Asian countries, settlement services are available for a limited number of hours on Saturdays. Specifically, in Singapore and Hong Kong settlement occurs Saturday mornings, in addition to Monday through Friday services. Recently, South Korea ended its Saturday settlement hours because many commercial banks are closed on Saturdays. Appendix II further illustrates international payment systems’ operating hours. Weekend settlement of financial transactions would provide small benefits for retailers and consumers, and little, if any, benefit for the economy as a whole. Retail industry representatives identified weekend interest earnings as the main potential benefit for retailers. However, our analysis of grocery industry data indicated that the grocery industry currently forgoes small potential interest income on its weekend sales relative to the grocery industry’s annual sales or the national economy. If weekend settlement were adopted, retailers also could realize some secondary benefits such as reducing the amount of cash held in stores. However, other secondary benefits such as accelerated settlement represent benefit transfers primarily from consumers or banks to retailers, creating no economic stimulus to the economy. Although retail industry representatives identified weekend interest earnings as the main benefit for retailers, our analysis suggested that investing retailers’ balances in sweep accounts and other investment vehicles over the weekend would provide minimal additional earnings to retailers and have virtually no impact relative to the economy as a whole. According to grocery industry publications, the industry had sales of $494 billion in year 2000, as seen in figure 3. Therefore, because depository institutions are unable to invest retailers’ weekend cash deposits until Monday, we estimated, based on grocery industry data, that the grocery industry forgoes approximately $2.6 million each year in after-tax interest earnings, assuming a 2 percent interest rate, and $6.6 million a year, assuming an average 5 percent interest rate. The corresponding forgone after-tax interest earnings for check transactions are $2.8 million and $7 million annually, at 2 percent and 5 percent interest rates, respectively. Finally, for credit and debit cards, the forgone interest earnings are $2.5 million and $6.4 million, at 2 percent and 5 percent interest rates, respectively. Table 1 illustrates the estimates. Appendix III provides details of our estimates. Applying the same assumptions to the entire retail sector, which had sales of $3.4 trillion in the year 2000, we estimated that the annual forgone after-tax interest earnings for that sector would be $53.9 million at a 2 percent interest rate and $134 million at a 5 percent interest rate. However, these benefits might be reduced if depository institutions raised their fees, in a way that passed costs to retailers, to cover the increased costs associated with weekend operations. Weekend settlement could provide a number of secondary benefits to retailers and consumers. For example, retailers noted that weekend settlement would provide secondary benefits, such as reduced amounts of cash in stores, thereby reducing potential losses due to theft and lower insurance costs. The accelerated settlement of transactions would also benefit retailers by lowering accounts receivable balances, as noncash payments owed to retailers settle faster. Grocery officials stated that cash represents a large risk for store employees, and therefore, on a daily basis, grocers tend not to maintain large amounts of cash in stores. Excess sums generally are sent to depository institutions, usually via armored car services. Under the current system, depository institutions are not open to accept retailers’ deposits on Saturday and Sunday evenings; therefore, deposits are generally maintained in store vaults or in bonded safes at the armored car services’ facilities, which is a cost to retailers. Banking industry representatives stated that retailers currently must pay to insure large amounts of cash over the weekend. Finally, accelerated settlement of transactions could also benefit consumers if they are the recipients of check payments by making funds available sooner, assuming that the EFAA and the Federal Reserve Board’s implementing regulations were amended to include weekends in the definition of “business day.” The adoption of weekend settlement would transfer float income among retailers, consumers, and depository institutions rather than create new earnings. For example, retailers would earn interest income previously earned by check and debit card users, but no new interest income or wealth would be created. For credit cards, retailers potentially would obtain faster funds availability, but because card issuing depository institutions offer deferred payment to customers, retailers might earn additional interest income at the expense of depository institutions. For checks and debit cards, if retailers and consumers both had access to interest-bearing accounts or services provided by depository institutions, weekend settlement would move money more quickly out of customers’ accounts and into retail sector accounts. On the other hand, retail industry representatives also stated that a disadvantage of weekend settlement would be that checks they had written would clear faster, thereby reducing interest currently earned on those funds. Faster funds availability from weekend settlement also could present drawbacks for consumers. Consumer advocates stated that consumers might face increased overdrafts if they did not adjust to the accelerated debiting of their checks. Weekend settlement would negatively affect those people who depend on check float to avoid account overdrafts. For example, consumers might write a check on a Friday afternoon for an amount greater than their account balance, knowing that on the following Monday their paycheck would be credited to the account and cover the amount of the check. Further, concerning the economy as a whole, the interest payments that retailers would receive from weekend settlement reflect transfers within the economy rather than the creation of income. For example, additional income that retailers might earn from weekend settlement of checks written or debit card transactions received from customers would be offset by corresponding losses of interest by check writers, debit card users, and depository institutions. Consumers with interest-bearing checking accounts would lose the interest they would have earned on checks written on Friday evenings and Saturdays. If checks were drawn on noninterest-bearing accounts, then depository institutions would lose funds on which they were not paying interest. Corporate treasurers of retail businesses noted that although they potentially could accumulate interest earnings if weekend settlement were adopted and interest-earning accounts were available, depository institutions might pass along some or all of the costs of operating on weekends to retailers and consumers in the form of higher fees, thus lessening the gains to retailers. Depository institutions stated that to pay interest, they would need to have access to short-term investment markets on weekends. Our analysis showed that weekend settlement would be unlikely to provide any stimulus to economic growth. Its only impact would be to make funds available on weekends that would otherwise be available on Monday. Because payment system actors and processes are interdependent, weekend settlement would require payment service providers that clear and settle retail and wholesale payments to open on weekends, resulting in increased capital and operational costs. The greatest concern that payment service providers expressed to us was the cost of additional computer system and staffing resources needed to mitigate the increased risk of operational failures that weekend settlement would present. Although they could not provide exact cost figures for the additional resources they would need, payment service providers stated that costs would be significant and potentially prohibitive for small depository institutions. According to payment service providers, these operational costs would exceed any potential benefits that weekend settlement could create, and likely would reduce productivity in the payment system. Moreover, they stated that alternatives to weekend settlement with lower operational costs currently exist, and that efforts in other areas are under way to increase payment system efficiency. Because the payment system consists of interdependent processes and relationships among payment system actors, weekend settlement would require many payment service providers to open on weekends. For example, private and Federal Reserve cash and check processing centers and check transportation networks would have to be fully operational on weekends so that cash and check transactions could be cleared.However, banking industry representatives pointed out that not all depository institutions’ branches would need to open. National and regional clearing organizations also would need to open so that transactions among depository institutions could be cleared, netted, and settled. According to depository institution officials we spoke with, both Federal Reserve and private ACH networks would have to open on weekends to facilitate settlement of check and debit card transactions. Similarly, private electronic network providers told us that Fedwire would need to open on weekends to facilitate final settlement of credit card transactions. In addition, depository institutions also stated that once retailers’ transactions are settled and their accounts are credited for weekend deposits, they would need government securities and money markets to open on weekends to invest these deposits and pay interest on excess sweep account balances. Federal Reserve and investment market officials told us that Fedwire and clearing organizations for investment markets also would need to open to clear and settle these transactions. Payment service providers we met with generally viewed weekend downtime for computer systems as critical to the smooth provision of clearance and settlement services during the business week. Payment service providers stated that most computer systems are used to test, upgrade, and maintain computer-system activities on weekends when production activities are limited. These ongoing weekend activities reduce the potential for operational failures during the business week. Business continuity testing of computer systems remains a high priority for financial markets after the terrorist attacks of September 11, 2001. These tests generally take place on weekends and sometimes take more than 1 day to complete. Depository institution and clearing organization officials also said that weekend downtime is important for resolving problems that occur when implementing new software applications or upgrades to existing applications. Like other payment service providers, Federal Reserve officials told us that the Federal Reserve uses weekends to maintain and test its payment service applications and its internal accounting system that are used to settle payments. Most payment service providers told us that because tests, upgrades, and maintenance would have to continue if weekend settlement were adopted, they would need additional computer hardware and software to simultaneously perform weekend settlement and regular weekend activities, thereby increasing capital costs. One private electronic payment network that moved from a 5 day production schedule to a 7 day production schedule for transaction processing characterized its costs as substantial. The network had to purchase additional hardware to double computer system capacity so that it could maintain complete redundancy in production, contingency, and testing activities 7 days a week. Representatives for the network said that their case could be an example of the potential hardware resources that other payment service providers could face if weekend settlement were adopted. Officials at a large depository institution and investment market representatives pointed out that payment service providers would have to modify each line of relevant software code to reflect Saturdays and Sundays as valid settlement dates. The depository institution officials said that their retail banking operations would require code changes for the institution’s 80 software applications—with estimated costs in the millions of dollars. Clearing organizations also identified the need for additional software to carry out settlement on weekends and estimated that software costs would exceed potential hardware costs. Additional staff needed to carry out weekend settlement also would increase operational costs for payment service providers. Some payment service providers estimated that staffing costs for weekend settlement could increase current operating budgets by up to 40 percent. For instance, depository institutions would require additional staff in departments that currently are not open on weekends, such as staff to handle check presentments and return checks and staff to manage their general ledgers and Federal Reserve accounts. Banking industry representatives noted that small depository institutions that perform their own clearing and processing activities would need to hire additional staff to prepare cash and checks for weekend shipment to local Federal Reserve Banks and branches. This could be particularly costly for small depository institutions because “back-office” staffs often consist of one person. Similarly, Federal Reserve officials said that additional staff would be needed for check processing, ACH, Fedwire, internal accounting, credit and risk management, and information technology operations, as well as other support functions. Investment market representatives commented that the human capital costs of weekend operations would be high because firms likely would have to pay senior staff at premium rates to work on weekends. Investment market representatives said that operating on weekends would decrease market efficiency and that they generally expected that weekend markets would be inefficient and illiquid because weekend trading activity likely would be low. Investment market representatives pointed out that liquidity in weekend markets would be generated only if there were sufficient numbers of investment firms interested in obtaining retailers’ excess sweep account balances. They noted that investment firms have many other options for short-term investment beyond government securities and money market instruments—typical investment vehicles used by depository institutions for sweep account funds. For these reasons, they noted that they sometimes recommend closing markets early before holidays, such as Good Friday, if trading volumes are low, to preserve market efficiency and create greater liquidity. In general, they did not expect weekend investment market liquidity to offset the potential operating costs. Similarly, depository institution officials and clearing organizations anticipated that weekend settlement would result in the spreading out current 5-day transaction volume over 7 days of operations, thereby decreasing system efficiency. Two proposed variations of 7 day settlement are currently viewed as not practical and too costly. The first variation involves a 6 day settlement schedule, where settlement would occur Monday through Saturday. Payment service providers told us that a 6 day settlement schedule would present lower operational risk and costs relative to a 7 day settlement schedule, but currently would be complicated and too expensive. Some payment providers noted that once technology more generally allows faster computer processing, 6-day settlement could be possible because it would provide 1 day during which computer system maintenance could be performed. The second variation relates to selective processing of transactions by payment method—for example, weekend processing of cash or check transactions. However, according to banking industry representatives, processing and settlement by payment method would be impractical because depository institutions’ demand deposit accounting systems, which debit and credit customer accounts, do not differentiate transactions by payment methods. Rather, representatives from depository institutions stated that large batches of transactions are queued for debiting from and crediting to customer accounts regardless of the payment method associated with the transaction. Federal Reserve officials also said that selective settlement also would require the supporting settlement infrastructure to open on weekends, such as Fedwire funds transfer and securities transfer services. Therefore, such an approach would not lower operational costs of settling transactions on weekends. We identified current banking services that provide business customers with some of the advantages of weekend settlement but do not require payment service providers to incur costs of weekend operations. For example, officials at a large depository institution said that one of its large business customers requested a service whereby, on Mondays, the depository institution provides backdated interest on funds that the customer deposits on Mondays, as if the funds had been deposited and credited to the customer’s account over the weekend. Officials from the depository institution noted that this service is no different than other services in that it is provided to the customer for a fee. Banking industry representatives told us that some depository institutions offer “fully analyzed” accounts, whereby they calculate the average daily account balances of commercial customers and determine daily interest earnings credit based on those figures. They noted that fully analyzed accounts allow account fees and charges to be offset by earnings credit based on the average daily collected account balance. Depository institution officials and banking industry representatives said that these services are offered within the context of existing relationships with commercial customers. They generally viewed these services as alternative methods of providing weekend interest earnings for business customers that do not require other payment service providers to be in operation on weekends. According to Federal Reserve and clearing organization officials, ongoing efforts to increase payment system efficiency relate to extending Fedwire’s hours of operation during the business week to correspond with activity in Asian markets. Although extending Fedwire’s hours of operation would not provide retailers with weekend interest earnings, it could increase efficiency in the payment system by allowing firms to consolidate risk management resources. Payment service providers generally expected that in the short term, increased efficiency in the payment system would come from converting traditionally paper-based payment methods into electronic form. Some payment service providers said that check truncation—the conversion of a paper check into an electronic equivalent that is transmitted in place of the original check— would eliminate the float that transporting checks creates in the check collection process. Officials at one clearing organization said that weekend settlement costs could be lowered if there were an increase in electronic payment instruments and a corresponding decline in paper- based payment instruments within the payment system. Our legal research found no federal law that would specifically prohibit banks, clearing organizations, or other entities from engaging in weekend settlement operations. Some states, however, have laws prohibiting banks from doing business on Sundays or state holidays. OCC has determined that state bank closure laws do not apply to national banks. National banks, therefore, would not be prohibited from engaging in weekend settlement operations. However, in states prohibiting banks from operating on certain days, state-chartered banks would be precluded from conducting such operations on those days unless the closure laws were preempted. The federal financial institution regulators do not specifically regulate the hours of operation of state-chartered institutions, so state closure laws generally have not been preempted with respect to such institutions. We express no opinion regarding the extent to which the Federal Reserve, pursuant to its authority over the payment system, could preempt state closure laws in order to provide for weekend settlement services. It appears that Congress could choose to preempt such laws through legislation. Because they have not been preempted, state closure laws applicable to state banks could interfere with the development of a uniform national weekend settlements system. Our research indicates, however, that a relatively small number of states have Sunday closure laws. In addition to state closure laws, development of a weekend settlement system involves other legal considerations. For example, under the EFAA and the Federal Reserve’s Regulation CC, deposited funds must be made available and checks must be returned within time periods based on “business days” and “banking days.” The term “business day” is defined as a calendar day other than a legal holiday, Saturday, or Sunday; a “banking day” is a business day on which a bank office conducts substantially all of its banking operations. Even if banks were to conduct settlement operations over the weekend, such operations would not necessarily result in corresponding funds availability and check returns because weekends are not counted as business days. Moreover, the settlement process could be complicated by a lack of uniformity and predictability in bank operations that might exist if banks were to conduct their clearing and settlement operations using different timetables. Other legal considerations include the impact of wage and hour laws and matters of safety and soundness. To the extent bank employees involved in settlement operations are subject to federal and state wage and hour laws, institutions would have to ensure that weekend operations did not run afoul of provisions requiring, among other things, the payment of overtime for work in excess of 40 hours per week. Concerning safety and soundness issues, banks would have to ensure that utilizing computer systems and other resources on weekends would not compromise their ability to maintain and update financial and security systems. We received technical comments and corrections on a draft of this report from Treasury and the Federal Reserve that we incorporated, as appropriate. In addition, the Federal Reserve provided written comments in which it agreed that the potential costs of weekend settlement would outweigh the associated benefits. These comments are reprinted in appendix IV. As agreed with your office, we plan no further distribution of this report until 30 days from its issue date unless you publicly release its contents sooner. We will then send copies of this report to the Chairman of the Committee on Financial Services, House of Representatives; the Ranking Minority Member of the Committee on Financial Services, House of Representatives; the Ranking Minority Member of the Subcommittee on Financial Institutions and Consumer Credit, House of Representatives; the Secretary of the Department of the Treasury; and the Chairman of the Board of Governors of the Federal Reserve System. We will make copies available to others on request. In addition, this report is also available on GAO’s Web site at no charge at http://www.gao.gov. Please contact me or Barbara Keller, Assistant Director, at (202) 512-8678 if you or your staff have any questions concerning this letter. To determine the potential benefits of weekend settlement, we interviewed and requested data from consumers groups, retail representatives, and payment service providers. We focused our study on the clearance and settlement of retail payments made by cash (which requires no clearing and settles instantaneously), checks, debit, and credit cards. We spoke with consumer advocacy groups to obtain the consumer perspective, and we interviewed representatives from industries within the retail sector, including grocery industry and home improvement industry representatives. We focused on the grocery industry because the majority of sales take place on weekends and primarily involve cash, check, and debit card transactions. To estimate the forgone interest earnings of the grocery industry, we obtained studies from third-party sources, some of which were conducted by industry participants. We have not assessed the quality of the research methodologies used in these studies. We used calendar year 2000 grocery industry sales data from the Progressive Grocer (PG), an industry publication. This was the latest year for which complete information was available. We also obtained grocery industry sales data from the U.S. Census Bureau for comparison purposes. We used the results of a payments study, performed by a large electronic network provider, that tracked the purchasing behavior of 20,000 consumers to determine what percentage of grocery sales are made with cash, check, and debit cards, respectively. We also used the results of a consumer survey on when consumers shop during the week, published in the Progressive Grocer 2001 Annual Report and short-term interest rate data from the Board of Governors of the Federal Reserve System. Appendix III provides details on our calculation of the forgone interest earnings. We spoke with payment system providers to gain their perspectives on the potential costs and operational issues involving weekend settlement. We interviewed officials from several depository institutions, banking and bond market industry representatives, clearing organizations, and private electronic payment network operators. We interviewed officials from various components of the Federal Reserve involved in the provision of payment system services including cash and check processing, check transportation, ACH services, wholesale payments services, and open market operations. We also spoke with senior staff from the Department of the Treasury about the potential implications of weekend settlement on the Treasury securities market. We obtained information from corporate treasury representatives on the perceived advantages and disadvantages of weekend settlement. Finally, to analyze and compare U.S. settlement schedules, we obtained information from representatives of central banks in selected foreign countries on the operating schedules of their respective settlement systems. We also obtained information from central banks’ Web sites. We focused our analysis of international settlement schedules on countries with relatively modern, industrialized economies in selected geographic areas—specifically, Asia, Europe, North America, Australia, and New Zealand, as depicted in appendix II. We based our analysis of potential legal considerations involving weekend settlement on research of relevant federal and state statutes, regulations, judicial decisions, and other legal databases, and conducted interviews with banking agency attorneys and representatives of payment system providers. We conducted our work in Washington, D.C., Atlanta, Georgia, and New York, New York, between February and September 2002 in accordance with generally accepted government auditing standards. Wholesale System Fedwire CHIPS Bank of Japan – Network (BOJ – NET) Large Value Transfer System (LVTS) Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) Society for Worldwide Interbank Financial Telecommunications – Payment Delivery System (SWIFT – PDS) Exchange Settlement Account System (ESAS) Mon – Fri Sat Mon – Fri Sat Mon – Fri 9:00 am –7:00 pm (GMT +12) 8:00 pm –8:40 am (+1 day) Closed 12:01 am Sat – 11:59 pm Sun 9:00 am – 5:30 pm (GMT +8) 9:00 am – 12:00 pm 9:00 am – 6:30 pm (GMT +8) 9:00 am – 2:45 pm 9:30 am – 4:30 pm (GMT +9) All countries have real-time gross settlement systems except Canada, which has a net-settlement system. The following European Union countries participate in TARGET: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain. Grocery industry representatives said that because the settlement system is not open on weekends, retailers are losing money because the funds they receive on Friday evening, Saturday, and Sunday cannot be credited to their accounts and earn interest before Monday, at the earliest. These calculations estimate the amount of interest forgone to the grocery industry for retail transactions made by cash, checks, and credit and debit cards. This calculation measures the upper bound of forgone earnings. It assumes that every store would deposit every dollar and every check at the bank on the day that it is received. It also does not take into account that payments made by retailers, under weekend settlement, would be debited from their accounts earlier, thereby potentially decreasing their interest earnings. To measure forgone interest earnings, we used the federal funds rate, the rate at which a bank with excess reserves at a Federal Reserve district bank charges other banks that need overnight funds. This is an appropriate measure because the excess grocery funds would be invested in a similar, short-term fashion. The average federal funds rate from January 1, 1998, to January 1, 2002, was approximately 5 percent. The current federal funds rate is approximately 2 percent. We estimated forgone earnings at both of these rates. To gain credit for deposits for a given day, retailers must have deposits collected by approximately 2:00 p.m. on that day. Grocery industry representatives stated that most Friday sales tend to occur after that hour; therefore, we assumed that all proceeds from Friday, Saturday, and Sunday do not get deposited until Monday. However, Sunday proceeds deposited on Monday generally would be processed as quickly as money deposited Monday through Thursday; therefore, we did not include Sunday proceeds as idle balances. In addition to those named above, Tonita W. Gillich, Marc Molino, Robert Pollard, Carl Ramirez, Barbara Roesmann, Nicholas Satriano, Paul Thompson, and John Treanor made key contributions to this report. U.S. General Accounting Office, Payment Systems: Central Bank Roles Vary, but Goals Are the Same, GAO-02-303 (Washington, D.C.: (February 25, 2002). U.S. General Accounting Office, Check Relay: Controls in Place Comply With Federal Reserve Guidelines, GAO-02-19 (Washington, D.C.: December 12, 2001). U.S. General Accounting Office, Federal Reserve System: Mandated Report on Potential Conflicts of Interest, GAO-01-160 (Washington, D.C.: November 13, 2000). U.S. General Accounting Office, Retail Payments Issues: Experience With Electronic Check Presentment, GAO/GGD-98-145 (Washington, D.C.: July 14, 1998). U.S. General Accounting Office, Payments, Clearance, and Settlement: A Guide to the Systems, Risks, and Issues, GAO/GGD-97-73 (Washington, D.C.: June 20, 1997). | The U.S. payment system is a large and complex system of people, institutions, rules, and technologies that transfer monetary value and related information. The nation's payment system transfers an estimated $3 trillion dollars each day--nearly one third of the U.S. gross domestic product. Currently, settlement--the final step in the transfer of ownership involving the physical exchange of payment or securities--occurs only during the business week. Some retailers, however, generate approximately half their weekly sales on weekends--when depository and other financial institutions generally are closed--receiving cash, checks, and electronic payments that are not credited to their accounts until at least the next business day. Weekend settlement of financial transactions would provide small benefits to retailers and consumers, and little, if any, benefit to the economy as a whole. Because payment system actors and processes are interdependent, implementing weekend settlement would require payment service providers that clear and settle retail and wholesale payments to open on weekends, resulting in significantly increased operational costs. Although there are no direct federal prohibitions against weekend settlement, state laws that are not preempted by federal laws or regulations providing for weekend settlement could interfere with development of a uniform, national 7 day settlement system. |
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Social Security provides retirement, disability, and survivor benefits to insured workers and their dependents. Insured workers are eligible for reduced benefits at age 62 and full retirement benefits between age 65 and 67, depending on their year of birth. Social Security retirement benefits are based on the worker’s age and career earnings, are fully indexed for inflation after retirement, and replace a relatively higher proportion of wages for career low-wage earners. Social Security’s primary source of revenue is the Old Age, Survivors, and Disability Insurance (OASDI) portion of the payroll tax paid by employers and employees. The OASDI payroll tax is 6.2 percent of earnings each for employers and employees, up to an established maximum. One of Social Security’s most fundamental principles is that benefits reflect the earnings on which workers have paid taxes. Social Security provides benefits that workers have earned to some degree because of their contributions and those of their employers. At the same time, Social Security helps ensure that its beneficiaries have adequate incomes and do not have to depend on welfare. Toward this end, Social Security’s benefit provisions redistribute income in a variety of ways—from those with higher lifetime earnings to those with lower ones, from those without dependents to those with dependents, from single earners and two-earner couples to one-earner couples, and from those who don’t live very long to those who do. These effects result from the program’s focus on helping ensure adequate incomes. Such effects depend to a great degree on the universal and compulsory nature of the program. According to the Social Security Trustees’ 2005 intermediate, or best- estimate, assumptions, Social Security’s cash flow is expected to turn negative in 2017. In addition, all of the accumulated Treasury obligations held by the trust funds are expected to be exhausted by 2041. Social Security’s long-term financing shortfall stems primarily from the fact that people are living longer and having fewer children. As a result, the number of workers paying into the system for each beneficiary has been falling and is projected to decline from 3.3 today to about 2 by 2030. Reductions in promised benefits and/or increases in program revenues will be needed to restore the long-term solvency and sustainability of the program. About one-fourth of public employees do not pay Social Security taxes on the earnings from their government jobs. Historically, Social Security did not require coverage of government employment because there was concern over the question of the federal government’s right to impose a tax on state governments, and some had their own retirement systems. However, virtually all other workers are now covered, including the remaining three-fourths of public employees. The 1935 Social Security Act mandated coverage for most workers in commerce and industry, which at that time comprised about 60 percent of the workforce. Subsequently, the Congress extended mandatory Social Security coverage to most of the excluded groups, including state and local employees not covered by a public pension plan. The Congress also extended voluntary coverage to state and local employees covered by public pension plans. Since 1983, however, public employers have not been permitted to withdraw from the program once they are covered. Also in 1983, amendments to the Social Security Act extended mandatory coverage to newly hired federal workers and to all members of the Congress. SSA estimates that in 2004 nearly 5 million state and local government employees, excluding students and election workers, are not covered by Social Security. In addition, about three-quarters of a million federal employees hired before 1984 are also not covered. Seven states—California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas—account for 71 percent of the noncovered payroll. Most full-time public employees participate in defined benefit pension plans. Minimum retirement ages for full benefits vary. However, many state and local employees can retire with full benefits at age 55 with 30 years of service. Retirement benefits also vary, but they are usually based on a specified benefit rate for each year of service and the member’s final average salary over a specified time period, usually 3 years. For example, plans with a 2 percent rate replace 60 percent of a member’s final average salary after 30 years of service. In addition to retirement benefits, members generally have a survivor annuity option and disability benefits, and many receive some cost-of-living increases after retirement. In addition, in recent years, the number of defined contribution plans, such as 401(k) plans and the Thrift Savings Plan for federal employees, has been growing, and such plans are becoming a relatively more common way for employers to offer pension plans; public employers are no exception to this trend. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses’ or their own earnings in covered employment. SSA estimates that nearly all noncovered state and local employees become entitled to Social Security as workers, spouses, or dependents. However, their noncovered status complicates the program’s ability to target benefits in the ways it is intended to do. To address the fairness issues that arise with noncovered public employees, Social Security has two provisions—the Government Pension Offset, to address spouse and survivor benefits, and the Windfall Elimination Provision, to address retired worker benefits. Both provisions depend on having complete and accurate information that has proven difficult to get. Also, both provisions are a source of confusion and frustration for public employees and retirees. Under the GPO provision, enacted in 1977, SSA must reduce Social Security benefits for those receiving noncovered government pensions when their entitlement to Social Security is based on another person’s (usually a spouse’s) Social Security coverage. Their Social Security benefits are to be reduced by two-thirds of the amount of their government pension. Under the WEP, enacted in 1983, SSA must use a modified formula to calculate the Social Security benefits people earn when they have had a limited career in covered employment. This formula reduces the amount of payable benefits. Regarding the GPO, spouse and survivor benefits were intended to provide some Social Security protection to spouses with limited working careers. The GPO provision reduces spouse and survivor benefits to persons who do not meet this limited working career criterion because they worked long enough in noncovered employment to earn their own pension. Regarding the WEP, the Congress was concerned that the design of the Social Security benefit formula provided unintended windfall benefits to workers who had spent most of their careers in noncovered employment. The formula replaces a higher portion of preretirement Social Security covered earnings when people have low average lifetime earnings than it does when people have higher average lifetime earnings. People who work exclusively, or have lengthy careers, in noncovered employment appear on SSA’s earnings records as having no covered earnings or a low average of covered lifetime earnings. As a result, people with this type of earnings history benefit from the advantage given to people with low average lifetime earnings when in fact their total (covered plus noncovered) lifetime earnings were higher than they appear to be for purposes of calculating Social Security benefits. Both the GPO and the WEP apply only to those beneficiaries who receive pensions from noncovered employment. To administer these provisions, SSA needs to know whether beneficiaries receive such noncovered pensions. However, SSA cannot apply these provisions effectively and fairly because it lacks this information, according to our past work. In response to our recommendation, SSA performed additional computer matches with the Office of Personnel Management to get noncovered pension data for federal retirees. These computer matches detected payment errors; we estimate that correcting these errors will generate hundreds of millions of dollars in savings. However, SSA still lacks the information it needs for state and local governments and therefore it cannot apply the GPO and the WEP for state and local government employees to the same degree that it does for federal employees. The resulting disparity in the application of these two provisions is yet another source of unfairness in the final outcome. In our testimony before this committee in May 2003, we recommended that the Congress consider giving the Internal Revenue Service (IRS) the authority to collect the information that SSA needs on government pension income, which could perhaps be accomplished through a simple modification to a single form. Earlier versions of the Social Security Protection Act of 2004 contained such a provision, but this provision was not included when the final version of the bill, was approved and signed into law. In recent years, various Social Security reform proposals that would affect public employees have been offered. Some proposals specifically address the GPO and the WEP and would either revise or eliminate them. Still other proposals would make coverage mandatory for all state and local government employees. The GPO and the WEP have been a source of confusion and frustration for the more than 6 million workers and 1.1 million beneficiaries they affect. Critics of the measures contend that they are basically inaccurate and often unfair. For example, some opponents of the WEP argue that the formula adjustment is an arbitrary and inaccurate way to estimate the value of the windfall and causes a relatively larger benefit reduction for lower-paid workers. In the case of the GPO, critics contend that the two- thirds reduction is imprecise and could be based on a more rigorous formula. A variety of proposals have been offered to either revise or eliminate the GPO or the WEP. While we have not studied these proposals in detail, I would like to offer a few observations to keep in mind as you consider them. First, repealing these provisions would be costly in an environment where the Social Security trust funds already face long-term solvency issues. According to the most recent estimates from SSA eliminating the GPO entirely would cost $32 billion over 10 years and cost 0.06 percent of taxable payroll, which would increase the long-range deficit by about 3 percent. Similarly, eliminating the WEP would cost nearly $30 billion and increase Social Security’s long-range deficit by 3 percent. Second, in thinking about the fairness of the provisions and whether or not to repeal them, it is important to consider both the affected public employees and all other workers and beneficiaries who pay Social Security taxes. For example, SSA has described the GPO as a way to treat spouses with noncovered pensions in a fashion similar to how it treats dually entitled spouses, who qualify for Social Security benefits on both their own work records and their spouses’. In such cases, spouses may not receive both the benefits earned as a worker and the full spousal benefit; rather they receive the higher amount of the two. If the GPO were eliminated or reduced for spouses who had paid little or no Social Security taxes on their lifetime earnings, it might be reasonable to ask whether the same should be done for dually entitled spouses who have paid Social Security on all their earnings. Otherwise, such couples would be worse off than couples that were no longer subject to the GPO. And far more spouses are subject to the dual entitlement offset than to the GPO; as a result, the costs of eliminating the dual entitlement offset would be commensurately greater. Making coverage mandatory for all state and local government employees has been proposed to help address the program’s financing problems. According to Social Security actuaries, doing so for all newly hired state and local government employees would reduce the 75-year actuarial deficit by about 11 percent. Covering all the remaining workers increases revenues relatively quickly and improves solvency for some time, since most of the newly covered workers would not receive benefits for many years. In the long run, however, benefit payments would increase as the newly covered workers started to collect benefits. Overall, this change would still represent a net gain for solvency, although it would be small. In addition to considering solvency effects, the inclusion of mandatory coverage in a comprehensive reform package would need to be grounded in other considerations. In recommending that mandatory coverage be included in the reform proposals, the 1994-1996 Social Security Advisory Council stated that mandatory coverage is basically “an issue of fairness.” Its report noted that “an effective Social Security program helps to reduce public costs for relief and assistance, which, in turn, means lower general taxes. There is an element of unfairness in a situation where practically all contribute to Social Security, while a few benefit both directly and indirectly but are excused from contributing to the program.” Moreover, mandatory coverage could improve benefits for the affected beneficiaries, but it could also increase pension costs for the state and local governments that would sponsor the plans. The effects on public employees and employers would depend on how states and localities changed their noncovered pension plans to conform with mandatory coverage. For example, Social Security offers automatic inflation protection, full benefit portability, and dependent benefits, which are not available in many public pension plans. Creating new pension plans that kept all the existing benefit provisions but added these new ones would increase the cost of the total package. Under this scenario, costs could increase by as much as 11 percent of payroll, depending on the benefit packages of the new plans. Alternatively, states and localities that wanted to maintain level spending for retirement would likely need to reduce some pension benefits. Additionally, states and localities could require several years to design, legislate, and implement changes to current pension plans. Mandating Social Security coverage for state and local employees could also elicit a constitutional challenge. Finally, mandatory coverage would not immediately address the issues and concerns regarding the GPO and the WEP. If left unchanged, these provisions would continue to apply for many years to come for existing employees and beneficiaries. Still, in the long run, mandatory coverage would make these provisions obsolete. In conclusion, there are no easy answers to the difficulties of equalizing Social Security’s treatment of covered and noncovered workers. Any reductions in the GPO or the WEP would ultimately come at the expense of other Social Security beneficiaries and taxpayers. Mandating universal coverage would promise eventual elimination of the GPO and the WEP but at potentially significant cost to affected state and local governments, and even so the GPO and the WEP would continue to apply for some years to come, unless they were repealed. Whatever the decision, it will be important to administer the program effectively and equitably. The GPO and the WEP have proven difficult to administer because they depend on complete and accurate reporting of government pension income, which is not currently achieved. The resulting disparity in the application of these two provisions is yet another source of unfairness in the final outcome. We therefore take this opportunity to bring the matter back to your attention for further consideration. To facilitate complete and accurate reporting of government pension income, the Congress should consider giving IRS the authority to collect this information, which could perhaps be accomplished through a simple modification to a single form. Mr. Chairman, this concludes my statement, I would be happy to respond to any questions you or other members of the subcommittee may have. For information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues, on (202) 512-7215. Individuals who made key contributions to this testimony include Daniel Bertoni, Ken Stockbridge, and Michael Collins. Social Security Reform: Answers to Key Questions. GAO-05-193SP. Washington, D.C.: May 2005. Social Security: Issues Relating to Noncoverage of Public Employees. GAO-03-710T. Washington, D.C.: May 1, 2003. Social Security: Congress Should Consider Revising the Government Pension Offset “Loophole.” GAO-03-498T. Washington, D.C.: Feb. 27, 2003. Social Security Administration: Revision to the Government Pension Offset Exemption Should Be Considered. GAO-02-950. Washington, D.C.: Aug. 15, 2002. Social Security Reform: Experience of the Alternate Plans in Texas. GAO/HEHS-99-31, Washington, D.C.: Feb. 26, 1999. Social Security: Implications of Extending Mandatory Coverage to State and Local Employees. GAO/HEHS-98-196. Washington, D.C.: Aug. 18, 1998. Social Security: Better Payment Controls for Benefit Reduction Provisions Could Save Millions. GAO/HEHS-98-76. Washington, D.C.: April 30, 1998. Federal Workforce: Effects of Public Pension Offset on Social Security Benefits of Federal Retirees. GAO/GGD-88-73. Washington, D.C.: April 27, 1988. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Social Security covers about 96 percent of all U.S. workers; the vast majority of the rest are state, local, and federal government employees. While these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits. This poses difficult issues of fairness, and Social Security has provisions that attempt to address those issues, but critics contend these provisions are themselves often unfair. The Subcommittee asked GAO to discuss Social Security's effects on public employees as well as the implications of reform proposals. Social Security's provisions regarding public employees are rooted in the fact that about one-fourth of them do not pay Social Security taxes on the earnings from their government jobs, for various historical reasons. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses' or their own earnings in covered employment. To address the issues that arise with noncovered public employees, Social Security has two provisions--the Government Pension Offset (GPO), which affects spouse and survivor benefits, and the Windfall Elimination Provision (WEP), which affects retired worker benefits. Both provisions reduce Social Security benefits for those who receive noncovered pension benefits. Both provisions also depend on having complete and accurate information on receipt of such noncovered pension benefits. However, such information is not available for many state and local pension plans, even though it is for federal pension benefits. As a result, the GPO and the WEP are not applied consistently for all noncovered pension recipients. In addition to the administrative challenges, these provisions are viewed by some as confusing and unfair. In recent years, various Social Security reform proposals that would affect public employees have been offered. Some proposals specifically address the GPO and the WEP and would either revise or eliminate them. Such actions, while they may reduce confusion among affected workers, would increase the long-range Social Security trust fund deficit and could create fairness issues for workers who have contributed to Social Security throughout their working lifetimes. Other proposals would make coverage mandatory for all state and local government employees. According to Social Security actuaries, mandatory coverage would reduce the 75-year actuarial deficit by 11 percent. It could also enhance inflation protection, pension portability, and dependent benefits for the affected beneficiaries, in many cases. However, to maintain the same level of spending for retirement, mandating coverage would increase costs for the state and local governments that sponsor the plans, and would likely reduce some pension benefits. Moreover, the GPO and the WEP would still be needed for many years to come even though they would become obsolete in the long run. |
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Since 1998, the results from state surveys of nursing homes have been the principal source of public information on nursing home quality, which is posted and routinely updated on CMS’s Nursing Home Compare Web site. Under contract with CMS, states are required to conduct periodic surveys that focus on determining whether care and services meet the assessed needs of the residents and whether homes are in compliance with federal quality requirements, such as preventing avoidable pressure sores, weight loss, or accidents. During a survey, a team that includes registered nurses spends several days at a home reviewing the quality of care provided to a sample of residents. States are also required to investigate complaints lodged against nursing homes by residents, families, and others. In contrast to surveys, complaint investigations generally target a single area in response to a complaint filed against a home. Any deficiencies identified during routine surveys or complaint investigations are classified according to the number of residents potentially or actually affected (isolated, pattern, or widespread) and their severity (potential for minimal harm, potential for more than minimal harm, actual harm, and immediate jeopardy). To improve the rigor of the survey process, HCFA contracted for the development of quality indicators and required their use by state surveyors beginning in 1999. Quality indicators are derived from data collected during nursing homes’ assessments of residents, known as the minimum data set (MDS). The MDS contains individual assessment items covering 17 areas, such as mood and behavior, physical functioning, and skin conditions. MDS assessments of each resident are conducted in the first 14 days after admission and periodically thereafter and are used to develop a resident’s plan of care. Facility-reported MDS data are used by state surveyors to help identify quality problems at nursing homes and by CMS to determine the level of nursing home payments for Medicare; some states also use MDS data to calculate Medicaid nursing home payments. Because it also envisioned using indicators to communicate nursing home quality to consumers, HCFA recognized that any publicly reported indicators must pass a very rigorous standard for validity and reliability. Valid quality indicators that distinguish between good and poor care provided by nursing homes would be a useful adjunct to existing quality data. Such indicators must also be reliable—that is, they must consistently distinguish between good and bad care. HCFA contracted with Abt to review existing quality indicators and determine if they were suitable for public reporting. Abt catalogued and evaluated 143 existing quality indicators, including those used by state surveyors. It also identified the need for additional indicators both for individuals with chronic conditions who are long-term residents of a facility and for individuals who enter a nursing home for a short period, such as after a hospitalization (a postacute stay). According to Abt, a main concern about publicly reporting quality indicators was that the quality indicator scores might be influenced by other factors, such as residents’ health status. Abt concluded that the specification of appropriate risk adjustment models was a key requirement for the validity of any quality indicators. Risk adjustment is important because it provides consumers with an “apples-to-apples” comparison of nursing homes by taking into consideration the characteristics of individual residents and adjusting quality indicator scores accordingly. For example, a home with a disproportionate number of residents who are bedfast or who present a challenge for maintaining an adequate level of nutrition—factors that contribute to the development of pressures sores—may have a higher pressure sore score. Adjusting a home’s quality indicator score to fairly represent to what extent a home does—or does not—admit such residents is important for consumers who may wish to compare one home to another. After several years of work, Abt recommended 39 risk-adjusted quality indicators to CMS in October 2001. Twenty-two were based on existing indicators and the remaining 17 were newly developed by Abt, including 9 indicators for nursing home residents with chronic conditions and 8 indicators for individuals who enter a nursing home for a short period. In September 2001, CMS contracted with the NQF to review Abt’s work with the objective of (1) recommending a set of quality indicators for use in its planned six-state pilot and (2) developing a core set of indicators for national implementation of the initiative scheduled for late 2002. NQF established a steering committee to accomplish these two tasks. The steering committee met in November 2001 and identified 11 indicators for use in the pilot, 9 of which were selected by CMS. The committee made its selection from among Abt’s list of 39 indicators but it did not recommend use of Abt’s risk-adjustment approach. Moreover, the steering committee indicated that it would not be limited to the same Abt list in developing its recommended core set of indicators for national implementation. In April 2002, NQF released a draft consensus report identifying the indicators it had distributed to its members and the public for comment on their potential inclusion in the national implementation. Under its contract, NQF was scheduled to make a final recommendation to CMS prior to the national reporting of quality indicators. CMS’s initiative to augment existing public data on nursing home quality has considerable merit but more time is needed to assure that the indicators proposed by CMS for public reporting are appropriate in terms of their validity and reliability. Based on work by Abt to validate the indicators it developed for CMS, the agency selected quality indicators for national reporting. The full Abt validation report—which is important for a thorough analysis of the appropriateness of the quality indicators--was still not available to us as of October 28, 2002. Our review of available portions of the Abt report, however, raised serious questions about whether testing and validation of the selected indicators has been sufficient to move forward with national reporting at this time. Moreover, CMS plans to initiate national reporting before it receives recommendations from NQF, its contractor, on appropriate quality indicators. On August 9, 2002, CMS announced the 10 indicators selected for its nationwide reporting of quality indicators, which it plans to launch in mid- November 2002. CMS selected these indicators from those that Abt had validated in its August 2, 2002, validation report. Abt classified the indicators it studied as to the degree of validity—top, middle, or not valid. The indicators that CMS selected were in the top category with one exception—residents in physical restraints—which was in the middle category. The objective of Abt’s validation study was to confirm that the indicators reflect the actual quality of care that individual nursing facilities provide, after taking into account resident and facility-level characteristics. For example, a validation analysis could confirm that a low percentage of pressure sores among residents was linked to a facility’s use of procedures to prevent their development. Successful validation reduces the chance that publicly reported data could misrepresent a high-quality facility as a low-quality facility—or vice versa. CMS’s decision to implement national reporting in November 2002 is troubling, given the issues raised by our review of the available portions of Abt’s validation report. Although we asked CMS for a copy of Abt’s 11 technical appendixes, as of October 28, 2002, they were still undergoing review and were not available to us. The technical appendixes are essential to adequately understand and evaluate Abt’s validation approach. Our review of the available portions of the Abt report raised serious questions about whether the effort to date has been sufficient to validate the indicators. The validation study is based on a sample that is drawn from six states; it is not representative of nursing homes nationwide and may not be representative of facilities in these six states. Selected facilities were allowed to decline participation and about 50 percent did so. For those facilities in the validation study, Abt deemed most of the indicators as valid—that is, better care processes were associated with higher quality indicator scores, taking into account resident and facility-level characteristics. However, we could not evaluate these findings because Abt provided little information on the specific care processes against which the indicators were validated. Unresolved questions also exist about the risk adjustment of the quality indicators. Risk adjustment is a particularly important element in determining certain quality indicators because it may change the ranking of individual facilities—a facility that is among the highest on a particular quality indicator without risk adjustment may fall to the middle or below after risk adjustment—and vice versa. Data released by CMS in March 2002 demonstrated that Abt’s risk adjustment approaches could either lower or raise facility scores by 40 percent or more. Although such changes in ranking may be appropriate, Abt did not provide detailed information on how its risk adjustment approaches changed facility rankings or a basis for assessing the appropriateness of the changes. In addition to the questions raised by our review of the Abt validation report, CMS is not planning to wait for the expert advice it sought on quality indicators through its contract with the NQF. Under this contract, the NQF steering committee issued a consensus draft in April 2002 with a set of potential indicators for public reporting. The steering committee had planned to complete its review of these indicators using its consensus process by August 2002. In late June, however, CMS asked NQF to delay finalizing its recommendations until early 2003 to allow (1) consideration of Abt’s August 2002 report on the validity of its indicators and risk- adjustment methods—including the technical appendices, when they become available and (2) a review of the pilot evaluation results expected in October 2002. An NQF official told us that the organization agreed to the delay because the proposed rapid implementation timeline had been a concern since the initiative’s inception. CMS’s list of quality indicators for the November 2002 national rollout did not include six indicators under consideration by NQF—depression, incontinence, catheterization, bedfast residents, weight loss, and rehospitalization (see app. I). Instead, CMS intends to consider NQF’s recommendations and revise the indicators used in the mid-November national rollout sometime next year. CMS is also moving forward without a consensus on risk adjustment of quality indicators. CMS is planning to report one indicator with facility- level adjustment based on a profile of residents’ status at admission, and two indicators both with and without this Abt-developed risk adjuster. However, both Abt and NQF have concluded that adjusting for the type of residents admitted to the nursing home required further research to determine its validity. We believe that reporting the same indicator with and without facility-level risk adjustment could serve to confuse rather than help consumers. Two of the three consultants hired by NQF specifically recommended against the use of facility-level adjustments in public reporting at this time. We also found that, as of October 1, 2002, CMS had not reached internal consensus on how to describe the risk- adjustment methods used in each of the 10 indicators it plans to begin reporting nationally in November 2002. Several agency officials agreed with our assessment that the descriptions on its Web site were inconsistent with Abt’s own descriptions of the risk adjustment associated with each indicator. Two different Abt studies have presented CMS with conflicting messages about the accuracy of MDS data. Abt’s August 2002 quality indicator validation report suggested that the underlying data used to calculate most indicators were, in the aggregate, very reliable. However, our analysis of more detailed facility-level data in a February 2001 Abt report raised questions about the reliability of some of the same MDS data. Because MDS data are used by CMS and some states to determine the level of nursing home payments for Medicare and Medicaid and to calculate quality indicators, ensuring its accuracy at the facility level is critical both for determining appropriate payments and for public reporting of the quality indicators. Recognizing the importance of accurate MDS data, CMS is in the process of implementing a national MDS accuracy review program expected to become fully operational in 2003, after the nationwide reporting of quality indicators begins in November 2002. We recently reported that CMS’s review program is too limited in scope to provide adequate confidence in the accuracy of MDS assessments in the vast bulk of nursing homes nationwide. Abt’s August 2, 2002, validation report concluded that the reliability of the underlying MDS data used to calculate 39 quality indicators ranged from acceptable to superior, with the data for only 1 indicator proving unacceptable. Abt’s findings were based on a comparison of assessments conducted by its own nurses to assessments performed by the nursing home staff in 209 sample facilities. For each quality indicator, Abt reported the overall reliability for all of the facilities in its sample. However, because quality indicators will be reported for each nursing home, overall reliability is not a sufficient assurance that the underlying MDS data are reliable for each nursing home. Although Abt did not provide information on MDS reliability for individual facilities, it noted that reliability varied considerably within and across states. Earlier work by Abt and others calls into question the reliability of MDS data. Abt’s February 2001 report on MDS data accuracy identified significant variation in the rate of MDS errors across the 30 facilities sampled. Differences between assessments conducted by Abt’s nurses and the nursing home staff were classified as errors by Abt. Error rates for all MDS items averaged 11.7 percent but varied across facilities by a factor of almost two—from 7.8 percent to 14.5 percent. As shown in figure 1, the majority of error rates were higher than 10.5 percent. Furthermore, error rates for some of the individual MDS items used to calculate the quality indicators were much higher than the average error rate. According to Abt, the least accurate sections of the MDS included physical functioning and skin conditions. Abt also noted that there was a tendency for facilities to underreport residents with pain. MDS items from these portions of the assessment are used to calculate several quality indicators that CMS plans to report nationally in November 2002—activities of daily living, pressure sores, and pain management. Table 1 shows that the error rate across the residents sampled ranged from 18 percent for pressure sores to 42 percent for pain intensity. Abt’s February 2001 findings were consistent with areas that states have identified as having a high potential for error, including activities of daily living and skin conditions. Moreover, a study by the HHS Office of Inspector General (OIG), which identified differences between the MDS assessment and the medical record, found that activities of daily living was among the areas that provided the greatest source of differences. In addition, the OIG report noted that 40 percent of the nursing home MDS coordinators it surveyed identified the physical functioning section, used to calculate the quality indicator on activities of daily living, as the most difficult to complete. Some coordinators explained that facility staff view a resident’s capabilities differently and thus the assessments tend to be subjective. As part of CMS’s efforts to improve MDS accuracy, its contractor is still field-testing the on-site aspect of its approach, which is not expected to be implemented until 2003. Although Abt’s February 2001 report found widespread MDS errors, CMS intends to review roughly 1 percent of the MDS assessments prepared over the course of a year, which numbered 14.7 million in 2001. Moreover, only 10 percent of the reviews will be conducted on-site at nursing homes. In contrast, our prior work on MDS found that 9 of the 10 states with MDS-based Medicaid payment systems that examine MDS data’s accuracy conduct periodic on-site reviews in all or a significant portion of their nursing homes, generally examining from 10 to 40 percent of assessments. On-site reviews heighten facility staff awareness of the importance of MDS data and can lead to the correction of practices that contribute to MDS errors. We reported earlier that CMS’s approach may yield some broad sense of the accuracy of MDS assessments on an aggregate level but is insufficient to provide confidence about the accuracy of MDS assessments in the vast bulk of nursing homes nationwide. While CMS is strongly committed to making more information available to the public on nursing home quality and such an initiative has considerable merit, the agency had not demonstrated a readiness to assist the public in understanding and using those data. We found that CMS’s reporting of quality indicators in the six pilot states was neither consumer friendly nor reported in a format consistent with the data’s limitations, implying a greater degree of precision than is currently warranted. Our analysis of the data currently available in the six pilot states demonstrated the potential for public confusion over both the quality indicators themselves and inconsistencies with other available data on deficiencies identified during nursing home surveys—which, to date, are the primary source of public data on nursing home quality. Moreover, our phone calls to the Medicare and QIO toll-free numbers revealed that CMS was not adequately prepared to address consumers’ questions raised by discrepancies between conflicting sources of quality data. Our review of the quality indicators on the CMS Web site found that the presentation of the data was not consumer friendly and that the reporting format implies a greater confidence in the data’s precision than may be warranted at this time. Quality indicators are reported as the percentage of residents in a facility having the particular characteristics measured by each indicator. The Web site explains that having a low percentage of residents with pressure sores or pain is better than having a high percentage. In the six-state pilot, the public can compare a nursing home’s score to the statewide and overall average for each quality indicator. We believe that equating a high score with poor performance is counterintuitive and could prove confusing to consumers. Despite the Web site’s explanation of how to interpret the scores, the public might well assume that a high score is a positive sign. In addition, reporting actual quality indicator scores rather than the range of scores a home falls into for an indicator—a low, medium, or high score— can be confusing and implies a confidence in the precision of the results that is currently a goal rather than a reality. Consumers will find it difficult to assess a home with a score that is 5 to 10 percentage points from the state average. Such a home could be an outlier—one of the best or the worst on that indicator; alternatively, it could be that the home was close to the state average because the outliers involved much larger differences. Concerns about the validity of the indicators and the potential reliability of the data make comparisons of homes with similar scores questionable. Consumers may be misled if a difference of several percentage points between two homes is perceived as demonstrating that one is better or worse than the other. To partially address these types of concerns, Maryland has reported quality indicator data on its own Web site since August 2001 in ranges rather than individual values. Thus, it indicates if a facility falls into the bottom 10 percent, the middle 70 percent, or the top 20 percent of facilities in the state. Consumers may also be confused about how to interpret missing information. Although the CMS Web site explains that quality indicator scores are not reported for nursing homes with too few residents, it does not acknowledge the extent of such missing data. We found that 6 percent of all nursing homes in the six pilot states have no score for any of the nine quality indicators and that, for individual indicators, from 9 percent to 40 percent of facilities have missing scores (see table 2). When data for homes of potential interest to consumers are not reported, consumers may need some assistance in how to incorporate such instances into their decisionmaking. Consumer confusion may also occur when quality indicator scores send conflicting messages about the overall quality of care at a home. We found that the Web site data for a significant number of facilities contained such inconsistencies. Seventeen percent of nursing homes in the six pilot states had an equal number of highly positive and highly negative quality indicator scores. We defined highly positive scores as those indicating that a facility was among the 25 percent of homes with the lowest percentage of residents exhibiting poor outcomes, such as a decline in their ability to walk or use the toilet. In contrast, facilities with a highly negative score were among the top 25 percent of homes with poor outcomes. We also found that 37 percent of nursing homes with four or more highly positive quality indicator scores had two or more highly negative scores. In addition, our comparison of survey deficiency data available on the Web site with quality indicator scores also revealed inconsistencies. For example, 17 percent of nursing homes with four or more highly positive quality indicator scores and no highly negative scores—seemingly “good” nursing homes—had at least one serious quality-of-care deficiency on a recent state survey. We have found that serious deficiencies cited by state nursing home surveyors were generally warranted and indeed reflected instances of documented actual harm to nursing home residents. Moreover, 73 percent of nursing homes with four or more highly negative quality indicator scores—seemingly “bad” facilities—had no serious quality-of-care deficiencies on a recent survey (see table 3). The latter situation is consistent with our past work that surveyors often miss serious quality-of-care problems. Nevertheless, consumers will generally lack such insights on the reliability of state surveys that would permit them to better assess the available data on quality of care. With the apparent need for assistance to consumers in interpreting and using this information, the important role of the Medicare and QIO toll-free numbers is evident. We requested and reviewed copies of the Medicare hotline and QIO scripts and found that they did not address the issue of responding to questions about conflicting or confusing quality data. Furthermore, our calls to the Medicare hotline and to QIO toll-free numbers in the six pilot states demonstrated that the staff were not adequately prepared to handle basic questions about the quality data available under the pilot. CMS officials had told us that Medicare hotline callers with complicated questions would be seamlessly transferred to a QIO without having to hang up and call another number. Although we asked the Medicare hotline staff if another organization might be better able to respond to our questions, no one offered to refer us to QIOs, even when we specifically asked about them. In fact, one hotline staff member told us that a QIO would not be an appropriate referral. Consequently, we independently attempted to call the QIOs in the six pilot states. We found that it was difficult to reach a QIO staff member qualified to answer questions. Each QIO had a toll-free number but neither the automated recordings at four QIOs nor operators at the remaining two indicated that the caller had reached a QIO. In addition, the automated recordings did not contain a menu choice for questions about nursing home quality indicators. We were unable to contact one QIO because the hotline had neither an operator nor a voice mail capability. On other calls, after reaching a QIO staff person, it frequently took several referrals to identify an appropriate contact point. One QIO took 5 working days for a staff member to call us back. Four of the five QIOs we contacted explained that their primary role was to work with nursing homes to improve quality of care. In general, QIO staff were not prepared to respond to consumer questions. Staff at the Medicare hotline and the QIOs varied greatly in their basic understanding of quality indicators and survey deficiencies. While two of the nine staff we contacted were generally knowledgeable about different types of quality data, others were unable to answer simple questions and the majority provided erroneous or misleading data. One QIO staff member told us that MDS data were not representative of all residents of a nursing home but only presented a “little picture” based on a few residents. However, assessments of all residents are taken into consideration in calculating quality indicators. When we expressed concern about a home identified on the Web site with a “level-3” deficiency, a Medicare hotline staff member incorrectly told us that it was not a serious deficiency because level 3 indicated potential harm. CMS designates actual harm deficiencies as “level-3” deficiencies. A QIO staff member incorrectly told us that actual harm pressure sore deficiencies had nothing to do with patient care and might be related to paperwork. Our review of survey reports has shown that actual harm deficiencies generally involved serious quality-of-care problems resulting in resident harm. Generally, hotline staff did not express a preference for using either nursing home surveys or quality indicators in choosing a nursing home. Two QIO staff, however, stated that the nursing home survey information gave a better picture of nursing home care than the quality indicators, which they judged to be imprecise and subject to variability. CMS’s evaluation of the pilot is limited and will not be completed prior to national reporting of quality indicators because of the short period of time between the launch of the pilot and the planned November 2002 national implementation. According to CMS officials, the pilot evaluation was never intended to help decide whether the initiative should be implemented nationally or to measure the impact on nursing home quality. While CMS is interested in whether nursing home quality actually improves as a result of the initiative, it will be some time before such a determination can be made. Thus, CMS focused the pilot evaluation on identifying improvements that could be incorporated into the initiative’s design prior to the scheduled national implementation in November 2002. A CMS official told us that initial pilot evaluation results were expected by early October 2002, allowing just over a month to incorporate any lessons learned. In commenting on a draft of this report, CMS stated that it was using preliminary findings to steer national implementation. The final results of the pilot evaluation will not be completed until sometime in 2003. CMS’s evaluation of the pilot is focused on identifying how to communicate more effectively with consumers about the initiative and how to improve QIO interaction with nursing homes. Specifically, CMS will assess whether (1) the target audiences were reached; (2) the initiative increased consumer use of nursing home quality information; (3) consumers used the new information to choose a nursing home; (4) QIO activities influenced nursing home quality improvement activities; (5) nursing homes found the assistance provided by QIOs useful; and (6) the initiative influenced those who might assist consumers in selecting a nursing home, such as hospital discharge planners and physicians. Information is being collected by conducting consumer focus groups, tracking Web site “hits” and toll-free telephone inquiries, administering a Web site satisfaction survey, and surveying nursing homes, hospital discharge planners, and physicians. As of late August 2002, CMS teams were also in the process of completing site visits to stakeholders in the six pilot states, including QIOs, nursing homes, ombudsmen, survey agencies, nursing home industry representatives, and consumer advocacy groups. The teams’ objective is to obtain a first-hand perspective of how the initiative is working with the goal of implementing necessary changes and better supporting the program in the future. Although CMS’s initiative to publicly report nursing home quality indicators is a commendable and worthwhile goal, we believe that it is important for CMS to wait for and consider input from NQF and make necessary adjustments to the initiative based on its input. We believe several factors demonstrate that CMS’s planned national reporting of quality indicators in November 2002 is premature. Our review of the available portions of Abt’s validation report raised serious questions about whether the effort to date has been sufficient to validate the quality indicators. NQF was asked to delay recommending a set of indicators for national reporting until 2003, in part, to provide sufficient time for it to review Abt’s report. Although limited in scope, CMS’s planned MDS accuracy review program will not begin on-site accuracy reviews of the data underlying quality indicators until 2003. CMS’s own evaluation of the pilot, designed to help refine the initiative, was limited to fit CMS’s timetable for the initiative and the preliminary finding were not available until October 2002, leaving little time to incorporate the results into the planned national rollout. Other aspects of the evaluation will not be available until early 2003. We also have serious concerns about the potential for public confusion over quality data, highlighting the need for clear descriptions of the data’s limitations and easy access to informed experts at both the Medicare and QIO hotlines. CMS has not yet demonstrated its readiness to meet these consumer needs either directly or through the QIOs. To ensure that publicly reported quality indicator data accurately reflect the status of quality in nursing homes and fairly compare homes to one another, we recommend that the Administrator of CMS delay the implementation of nationwide reporting of quality indicators until there is greater assurance that the quality indicators are appropriate for public reporting—including the validity of the indicators selected and the use of an appropriate risk-adjustment methodology—based on input from the NQF and other experts and, if necessary, additional analysis and testing; and a more thorough evaluation of the pilot is completed to help improve the initiative’s effectiveness, including an assessment of the presentation of information on the Web site and the resources needed to assist consumers’ use of the information. CMS and the NQF reviewed and provided comments on a draft of this report. (See app. II and app. III, respectively). CMS reiterated its commitment to continually improve the quality indicators and to work to resolve the issues discussed in our report. Although CMS stated it would use our report to help improve the initiative over time, it intends to move forward with national implementation in November 2002 as planned. It stated that “waiting for more reliability, more validity, more accuracy, and more usefulness will delay needed public accountability, and deprive consumers, clinicians, and providers of important information they can use now.” The NQF commented that it unequivocally supports CMS’s plans to publicly report quality indicators but indicated that the initiative would benefit from a short-term postponement of 3 to 4 months to achieve a consensus on a set of indicators and to provide additional time to prepare the public on how to use and interpret the data. We continue to support the concept of reporting quality indicators, but remain concerned that a flawed implementation could seriously undercut support for and the potential effectiveness of this very worthwhile initiative. CMS’s comments and our evaluation focused largely on two issues: (1) the selection and validity of quality indicators, and (2) lessons learned from CMS’s evaluation of the pilot initiative. CMS asserts that the quality indicators it plans to report nationally are reliable, valid, accurate, and useful and that it has received input from a number of sources in selecting the indicators for this initiative. However, CMS provided no new evidence addressing our findings regarding the appropriateness of the quality indicators selected for public reporting and the accuracy of the underlying data. We continue to believe that, prior to nationwide implementation, CMS should resolve these open issues. CMS intends to move forward with nationwide implementation without a requested NQF assessment of the full Abt validation report and without NQF’s final recommendations on quality indicators. CMS would not share the technical appendices to Abt’s validation report with us because they were undergoing review and revision. The technical appendices are critical to assessing Abt’s validation approach. CMS’s comments did not address our specific findings on the available portions of Abt’s validation report, including: (1) the validation results are not representative of nursing homes nationwide because of limitations in the selection of a sample of nursing homes to participate in the validation study, and (2) Abt provided little information on the specific care processes against which the indicators were validated or how its risk adjustment approaches changed facility rankings and the appropriateness of the changes. Although both Abt and the NQF concluded that Abt’s facility-level risk adjustment approach required further research to determine its validity, CMS plans to report two indicators with and without facility-level adjustments. CMS’s comments indicated that it has chosen to report these measures both ways in order to evaluate their usefulness and to allow facilities and consumers the additional information. We continue to believe that reporting data of uncertain validity is inappropriate and, as such, will likely not be useful to either facilities or consumers. For quality indicators to be reliable, the underlying MDS data used to calculate the indicators must be accurate. CMS’s comments did not specifically address the conflicting findings on MDS accuracy from Abt’s August 2002 validation report and its February 2001 report to CMS. Abt’s August 2002 validation report concluded that, in aggregate, the underlying MDS data were very reliable but that the reliability varied considerably within and across states. Aggregate reliability, however, is insufficient because quality indicators are reported separately for each facility. In its February 2001 report to CMS, Abt identified widespread errors in the accuracy of facility-specific assessments used to calculate some of the quality indicators that CMS has selected for reporting in November. CMS indicated that its efforts since 1999 have improved MDS accuracy. But because CMS does not plan to begin limited on-site MDS accuracy reviews until 2003, there is little evidence to support this assertion. CMS commented that findings from a number of activities evaluating the six-state pilot were not available prior to the time we asked for comments on our draft report. While final reports are not yet available for some of these studies, CMS stated that the pilot allowed it to work through important issues and incorporate lessons learned before a national launch. We pointed out that the pilot evaluation was limited and incomplete—an additional reason to delay the initiative. CMS also did not evaluate a key implementation issue—the adequacy of assistance available to consumers through its toll-free telephone hotlines. Moreover, the lack of formal evaluation reports to help guide the development of a consensus about key issues, such as how quality indicators should be reported, is troubling. In its comments, CMS stated that it was committed to working aggressively to help the public understand nursing home quality information using lessons learned from the pilot. However, CMS learned about the flaws in its hotline operations not from its pilot evaluation but from our attempts to use the Medicare and QIO toll-free phone numbers to obtain information on quality data. Acknowledging the weaknesses we identified, the agency laid out a series of actions intended to strengthen the hotlines’ ability to respond to public inquiries, such as providing additional training to customer service representatives prior to the national launch of the initiative. CMS outlined other steps it plans to take such as providing its customer service representatives with new scripts and questions and answers to the most frequently asked questions. At the outset of the pilot in April 2002, CMS described seamless transfers from the Medicare to the QIO hotlines for complicated consumer questions but now acknowledges that limitations in QIO telephone technology prevent such transfers. Instead of automatic transfers, CMS stated that, when referrals to QIOs are necessary, callers will be provided with a direct toll-free phone number. CMS also commented that consumers should be encouraged to consider multiple types of information on nursing home quality. While we agree, we believe it is critical that customer service representatives have a clear understanding of the strengths and limitations of different types of data to properly inform consumers when they inquire. CMS commented that we offered no explanation of the analysis that led us to conclude that (1) consumers could be confused because scores on quality indicators can conflict with each other and the results of routine nursing home surveys, and (2) the public may confuse a high quality indicator score with a positive result. Our draft clearly states that our findings were based on our analysis of the quality indicator data and survey results available in the six pilot states—a database that CMS provided at our request. In its comments, CMS provided limited data to support its assertion that consumers are not confused by the quality indicators and are very satisfied with the current presentation on its Web site. According to CMS, over two-thirds of respondents to its August 2002 online satisfaction survey of randomly chosen users of Nursing Home Compare information said they were highly satisfied with the information, for example, it was clearly displayed, easy to understand, and valuable. It is not clear, however, that these responses were representative of all nursing home consumers accessing the Web site, as CMS implied. For example, CMS informed us that this survey was part of a larger survey of all Medicare Web site users, which had a low overall response rate of 29 percent. Moreover, of the 654 respondents to the Nursing Home Compare component of the survey, fewer than half (40 percent) were identified as Medicare beneficiaries, family members, or friends. NQF feedback to CMS on its Web site presentation was consistent with our findings. In commenting on our draft report, NQF noted that it had offered informal guidance to CMS, such as using positive or neutral wording to describe indicators, exploring alternative ways of presenting information about differences among facilities, and ensuring that the presentation of the data reflects meaningful differences in topics important to consumers. While justifying its current presentation of quality indicator data, CMS commented that it is seriously considering not reporting individual nursing home scores but rather grouping homes into ranges such as the bottom 10 percent, middle 70 percent, and top 20 percent of facilities in a state. Such a change, however, would not come before the national rollout. We agree with CMS that, when grouping homes into ranges, homes on the margin—close to the bottom 10 percent or top 20 percent—may not be significantly different from one another. However, the same is true of reporting individual facility scores. Moreover, reporting ranges more clearly identifies homes that are outliers for consumers. CMS also commented on our characterization of the scope of the nursing home quality initiative. CMS stated that we had narrowly framed the initiative as one designed solely for consumers, ignoring the QIO’s quality improvement activities with individual nursing homes requesting assistance. Our report acknowledged and briefly outlined the quality improvement role of the QIOs. However, based on our requestors’ concerns about the relatively short pilot timeframe prior to national implementation of public reporting of quality indicators, we focused our work on that key aspect of the initiative. CMS cited its Interim Report on Evaluation Activities for the Nursing Home Quality Initiative to support its conclusion that the initiative was successful in promoting quality improvement activities among nursing homes. The improvements cited in the Interim Report were self-reported by facilities and CMS offered no insights on the nature of the quality improvement changes. The Interim Report was not available when we sent our draft report to CMS for comment. CMS provided several 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 its issue date. At that time, we will send copies to the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please call me at (202) 512-7118 or Walter Ochinko at (202) 512-7157. GAO staff acknowledgments are listed in appendix IV. The following staff made important contributions to this report: Laura Sutton Elsberg, Patricia A. Jones, Dean Mohs, Dae Park, Jonathan Ratner, Peter Schmidt, Paul M. Thomas, and Phyllis Thorburn. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to GAO Mailing Lists” under “Order GAO Products” heading. | GAO was asked to review the Centers for Medicare & Medicaid Services (CMS) initiative to publicly report additional information on its "Nursing Home Compare" Web site intended to help consumers choose a nursing home. GAO examined CMS's development of the new nursing home quality indicators and efforts to verify the underlying data used to calculate them. GAO also reviewed the assistance CMS offered the public in interpreting and comparing indicators available in its six-state pilot program, launched in April 2002, and its own evaluation of the pilot. The new indicators are scheduled to be used nationally beginning in November 2002. CMS's initiative to augment existing public data on nursing home quality has considerable merit, but its planned November 2002 implementation does not allow sufficient time to ensure the indicators are appropriate and useful to consumers. CMS's plan urges consumers to consider nursing homes with positive quality indicator scores, in effect, attempting to use market forces to encourage nursing homes to improve the quality of care. However, CMS is moving forward without adequately resolving important open issues on the appropriateness of the indicators chosen for national reporting or the accuracy of the underlying data. To develop and help select the quality indicators, CMS hired two organizations with expertise in health care data--Abt Associates, Inc. and the National Quality Forum (NQF). Abt identified a list of potential quality indicators and tested them to verify that they represented the actual quality of care individual nursing homes provide. GAO's review of the available portions of the report raised serious questions about the basis for moving forward with national reporting at this time. NQF, which was created to develop and implement a national strategy for measuring health care quality, was hired to review Abt's work and identify core indicators for national reporting. To allow sufficient time to review Abt's validation report, NQF agreed to delay its recommendations for national reporting until 2003. CMS limited its own evaluation of its six-state pilot program for the initiative so that the November 2002 implementation date could be met. Early results were expected in October 2002, leaving little time to incorporate them into the national rollout. Despite the lack of a final report from NQF and an incomplete pilot evaluation. CMS has announced a set of indicators it will begin reporting nationally in November 2002. GAO has serious concerns about the potential for public confusion by the quality information published, especially if there are significant changes to the quality indicators due to the NQF's review. CMS's proposed reporting format implies a precision in the data that is lacking at this time. While acknowledging this problem, CMS said it prefers to wait until after the national rollout to modify the presentation of the data. GAO's analysis of data currently available from the pilot states demonstrated there was ample opportunity for the public to be confused, highlighting the need for clear descriptions of the data's limitations and easy access to impartial experts hired by CMS to operate consumer hotlines. CMS has not yet demonstrated its readiness to meet these consumer needs either directly or through the hotlines fielding public questions about confusing or conflicting quality data. CMS acknowledged that further work is needed to refine its initiative, but believes that its indicators are sufficiently valid, reliable, and accurate to move forward with national implementation in November 2002 as planned. |
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In general, the S&T community includes government research laboratories and testing facilities as well as contractors and academic institutions that support these facilities. This community conducts research and development to support military or intelligence applications, such as space or weapon systems. While intelligence community funding levels for S&T are classified, DOD uses Research, Development, Test and Evaluation (RDT&E) funds for S&T work, including space S&T work, some of which is classified. Space S&T efforts are undertaken by many government organizations. While DOD and the intelligence community comprise the vast majority of organizations involved in space S&T, several civilian government organizations are also involved, including the National Aeronautics and Space Administration (NASA), the National Oceanic and Atmospheric Administration (NOAA), and the Department of Energy (DOE). NASA’s space S&T efforts are significant and drive advances in space science, technology, and exploration and often can involve technology transfers to DOD and other agencies. NOAA, which provides space weather information to other government organizations and the public, conducts research in the development of new satellite sensors, creates new applications for using satellite data, and develops innovative approaches for handling increased data rates as well as increases in computing power and data storage. DOE develops sensors that collect space weather data, and its laboratories often collaborate on space S&T efforts that are sponsored by the Defense Advanced Research Projects Agency, the Air Force Research Laboratory, or the Naval Research Laboratories. Strategy developers told us that NASA and NOAA were not consulted in the development of the strategy because there was no statutory requirement to do so. According to strategy developers, DOE was involved in the development of the strategy even though their involvement was not required. DOD RDT&E investment is separated into seven discrete investment categories known as budget activities. Within the DOD S&T community, the first three categories—which represent basic research, applied research, and advanced technology development activities, and are collectively known as S&T activities—use RDT&E funds. Figure 1 describes the three categories of DOD S&T investment. Congress required DOD to develop and implement a space S&T strategy in 2004. DOD was not required to collaborate with DNI in developing the 2004 strategy. DOD’s 2004 strategy described six specific investment areas: assured access to space; responsive space capability; assured space operations; spacecraft technology; information superiority; and the S&T workforce. The most significant space S&T goals were identified within each area, with the exception of S&T workforce. The strategy stated it would be necessary to successfully develop and demonstrate the requisite technologies in a relevant environment within the short-term, defined to be within the next 5 years, and the long-term, defined to be in the year 2020 or beyond. The 2004 strategy also discussed implementation mechanisms for the strategy, the importance of transitioning new technology to fielded capability, and an approach to assess progress toward achieving the goals. Though there are many diverse organizations carrying out S&T efforts related to space and a considerable amount being invested, DOD did not update its space S&T strategy between 2004 and 2011. Our review of DOD’s 2004 space S&T strategy found that it provided a foundation for coordination among space S&T efforts but lacked detail in key areas needed to achieve the strategy’s goals. We found that DOD had taken an initial positive step in optimizing investments in space S&T projects by establishing short- and long-term goals. However, we also identified significant challenges or barriers for DOD in implementing the strategy such as inadequate funding visibility, decreased testing resources, workforce deficiencies, and long-standing incentives that encourage technology development to take place within acquisition programs rather than the S&T community. We recommended that the strategy contain stronger linkages to DOD’s requirements-setting process, identify additional measures for assessing progress in achieving strategic goals, address barriers to achievement, and include all efforts related to space S&T. In addition, we recommended establishing protocols and mechanisms for enhancing coordination and knowledge sharing among the DOD S&T community, acquisition programs involved in space, and DOD intelligence agencies. DOD agreed with our recommendations. Our comparison of the strategy against the statutory reporting requirements found that the strategy addresses eight statutory requirements and DOD has plans to address two other statutory requirements. For two of the requirements involving strategy implementation, DOD has asserted that its normal budgetary process will suffice. While the requirements were met, additional information that could enable DOD to successfully implement the strategy was not included. See table 1 for our assessment of the strategy. The contents of the strategy address four primary areas: (1) short- and long-term goals; (2) goal implementation; (3) goal assessment; and (4) the transition of space S&T technology to space acquisition programs. The strategy outlines a total of 54 space S&T goals—30 short-term and 24 long-term, and describes existing, routine DOD processes such as program planning and budgeting procedures to help implement the strategy. It also mentions that periodic structured and informal programmatic and technical reviews are used to assess progress toward achievement of DOD goals and objectives and describes how there is no distinct process for transitioning space S&T products toward ultimate application in acquisition programs, while also describing several examples considered “success stories” in the transition of space S&T. While DOD addresses, or plans to address, the statutory requirements, in some instances, the inclusion of more detailed information could have allowed an opportunity for more successful implementation of the strategy. Specifically, in relation to the strategy’s goals, it does not establish a newly developed implementation plan for the achievement of the goals. Instead, the strategy describes a plan for implementation where DOD components essentially implement the strategy as a routine element of their existing program planning and budgeting procedures while employing processes that are specifically tailored to each component’s mission function. Assistant Secretary of Defense, Research and Engineering (ASD (R&E)) officials, who served as leads in developing the strategy (strategy developers) also cited a program called Reliance 21 as helping to manage and implement its entire S&T portfolio, including space S&T. While creation of a newly developed implementation plan was not a specific statutory requirement, it potentially could have provided a more delineated, exacting process for successfully achieving the strategy’s goals. Also, DOD strategy developers told us that, as part of implementing the entire strategy, they did not specifically direct DOD components and research laboratories to meet the statutory requirements to (1) identify their research projects in support of the strategy that contribute directly and uniquely to the development of space technology, or (2) inform top DOD officials of their planned budget and planned schedule for executing those projects. However, officials explained that research components and research laboratories would do these activities as part of the normal DOD budgetary process. DOD strategy developers also told us that their entire S&T portfolio, including space S&T, is managed using the existing Reliance 21 process, including implementation planning, execution, coordination, and review. They further explained that the Reliance 21 S&T Strategic Overview process fosters awareness and joint planning among senior S&T leadership and enhances coordination among DOD’s S&T investment managers. In addition, the ASD(R&E), in conjunction with the S&T Executive Committee, conducts an annual review of all DOD S&T investments, and Space-related Advanced Technology Demonstrations are reviewed yearly at the Air Force Applied Technology Council held as part of the Air Force Space Command Space S&T Council. Strategy developers further added that cooperation, collaboration, and partnerships among the S&T organizations are also achieved through a variety of mechanisms such as technology forums, workshops, conferences, project and program reviews, international agreements, partnerships, and on-site liaisons. Another example where key details were not present in the strategy is the establishment of 54 total goals without any prioritization. Though prioritization is not a statutory requirement, given the breadth and scope of space S&T development activities and issues we have identified in the past with respect to a lack of coordination and prioritization, it is important, and indeed a best practice, that goals be prioritized. We have also identified several, additional strategic planning best practices in the next section of this report that were not followed in the development of the strategy. If the strategy had more closely followed these best practices, it potentially could have allowed for the development of a more robust and useful space S&T strategy that addresses some of the major challenges in space S&T. While the content of the space S&T strategy meets statutory requirements, it does not address fundamental challenges facing the space S&T community. These challenges include human capital shortages, growing fiscal pressures, and the difficulty in transitioning space S&T to acquisition programs. While adopting best practices in strategic planning for future versions of the strategy is not required under the current statutory requirements, we identified some best practice elements that could be used to develop well-structured goals in any strategic plan. Recent DOD-sponsored and congressional studies have addressed concerns over the DOD S&T laboratory personnel and the loss of talent in the space workforce. In addition, our prior reports have identified challenges facing the space S&T community. We have also consistently reported on today’s challenging budgetary environment and that many of DOD’s problems with poor cost and schedule outcomes on acquisition programs can be attributed to deficiencies (1) in strategic planning for critical technologies such as S&T investments, and (2) in processes for technology development and transition to acquisition programs. In fact, in S&T areas across DOD, we have found challenges in transitioning new technology from the laboratory to acquisition programs. The new space S&T strategy acknowledges there is no single process for transitioning space S&T products, and that transition is tailored to the nature of the technology being developed and the ultimate application. Strategy developers told us they recognize that having many different processes for technology transition to acquisition programs is a fact of life and they do not endorse a one-size-fits-all approach. However, as we have previously reported, DOD does not use a process with criteria that would allow lab and program managers to know when a technology is ready to transition. In our assessment, we identified some strategic planning best practice elements that, while not required for the strategy, should be part of well- structured goals in strategic plans. Most of these strategic planning best practices are contained in the Government Performance and Results Act of 1993, designed to provide a basis for the establishment of government strategic planning and performance management, as well as the Office of Management and Budget (OMB) guidance designed to provide specific information to government agencies on the preparation and submission of strategic plans. We have also discussed DOD strategic planning best practices in our prior reports. If incorporated, these best practice elements could improve the usefulness of future strategy versions and position DOD to better address fundamental challenges in space S&T. In the absence of these more detailed best practice elements, the usefulness of the strategy for decision making may be limited. Adopting these best practice elements in future versions of the strategy is not required under the current statutory requirements, but we believe that incorporating them will ultimately improve the foundation the strategy provides for space S&T. Identify Required Human Capital: Both the U.S. government and industry face substantial shortages of scientists and engineers and difficulty in recruiting new personnel because the space industry is one of many sectors competing for the limited number of these professionals. A recent U.S. House of Representatives study concluded that the space workforce is facing significant loss of talent and expertise and the challenge exists to smoothly transition to a new space workforce. Also, a recent study done for DOD on S&T observed that while the DOD S&T laboratory infrastructure was once world leading, the flow of research science, technology development, and engineering expertise is not as robust as it once was and, for the most part, it has declined to the point where most DOD S&T people are project managers who monitor research being done by others outside of DOD. While the discussion of human capital needs is considered a strategic planning best practice, the strategy does not include a discussion of the human capital currently engaged in space S&T or the human capital required to achieve the strategy’s goals. Identify Required Funding: Our prior work has shown that, in general, a lack of investment information can adversely affect the ability to avoid unnecessary duplication, control costs, ensure basic accountability, anticipate future costs, and measure performance. Funding required to implement and achieve the goals was not compiled or included in the strategy. Strategy developers told us that since they were not required to report funding information, they did not collect funding information from the various DOD research laboratories and components involved in space S&T and they did not impose funding constraints in developing the strategy. In addition, DNI officials told us there was no attempt to incorporate information on space S&T funding amounts associated with the intelligence community in the strategy. Furthermore, strategy developers told us that achieving top-level visibility for DOD space S&T funding is not a simple task and would require substantial effort. However, when asked about the biggest challenge to achieving the goals, strategy developers told us it was maintaining consistent funding in a funding- constrained environment. In addition to funding information, neither an analysis of past trends nor future funding needs were included in the strategy, both of which could have established a recommended level of consistent funding. These efforts could potentially help mitigate risk to space S&T against the backdrop of growing national government fiscal imbalance and budget deficits that are straining all federal agencies’ resources. Prioritize Initiatives: The federal government faces real fiscal limitations and will have to make difficult choices about upcoming priorities, but the strategy does not go beyond what was required and prioritize the goals in a more definitive way than classifying them as either short- or long-term. We have reported that prioritizing initiatives enables evaluation in terms of overall importance to the portfolio and can help decision makers when allocating resources. Strategy developers told us criteria were not developed to either accept or reject goals for inclusion in the strategy or to prioritize a goal as either short- or long-term. Instead, they told us that meetings were convened to discuss and review draft goals and that the categorization of goals as either short- or long-term was based upon the professional judgment of the meeting participants with respect to the current state of technology and potential to achieve capabilities within nominal time frames. The strategy currently lists 30 short-term and 24 long-term goals—22 more goals than were identified in the 2004 strategy—and gives no indication which ones are more important than the others. Strategy developers also added that more specific time frames or goal prioritization were not included in the strategy because that would require the assignment of resource (i.e., funding) commitments, which was not required. Since strategy goals were not prioritized, it will be difficult to determine which space S&T goals are the most important to the space S&T community if trade-off decisions are necessary. Establish Ways to Measure Progress: Performance measures can be used to assess the value of projects relative to goals, demonstrate results and provide useful information for decision makers. The strategy did not develop new metrics or performance measures that could be used to assess whether the strategy’s goals are being achieved. Rather, the strategy indicates that various periodic structured, and informal, programmatic and technical reviews are used to evaluate the effectiveness and quality of space S&T investments and assess progress toward achievement of objectives and goals. It is unclear how these reviews can help assess the larger strategic goals developed in the strategy that are meant to apply to DOD and the intelligence community. It is also unclear how the Reliance 21 program helps to specifically assess the progress of, and provide linkage to, the goals established in the strategy. Further, Reliance 21 reviews do not involve an examination of space S&T within the intelligence community. Without established ways to measure progress toward strategy goals, it will be more difficult to measure the progress and achievement of space S&T goals and implement corrective actions if needed. Establish Process for Revising Goals in the Future: Criteria to establish and revise goals could help to improve performance and results. The strategy, however, does not articulate the process to be used to revise the goals in the future for the next version of the strategy. Strategy developers told us there were no criteria established to initially help formulate goals and that the general consensus of the officials involved determined which goals were included in the strategy. While this same process could be used to make revisions to the goals, the absence of criteria will likely make future revisions more difficult to track and understand, and certainly more ad hoc. Although most organizations involved with the space S&T strategy participated significantly in developing its short- and long-term goals, participation among some organizations in developing other aspects of the strategy was more limited. DOD and DNI officials told GAO that their interpretation of the 2009 statute directing development of the strategy was that it did not require that the intelligence community be involved to the full extent in some aspects of the strategy. Moreover, although their involvement was not required by the statute, other agencies with investments in space S&T, such as NASA and NOAA, were not involved in the strategy’s development. Together, the intelligence community and these other agencies conduct a significant amount of space S&T development. By limiting their involvement, DOD may have missed an opportunity to leverage these activities and optimize its own S&T spending. Also, since the strategy has only recently been issued, it is too early to evaluate the effectiveness of the coordination mechanisms planned to implement the strategy. According to an ASD (R&E) official, his office served as the lead in development of the strategy and explained that the methodology began with identifying DOD, DNI, and other space S&T stakeholders. As required, strategy developers consulted with the directors of DOD research laboratories and other DOD research components, as well as the heads of other DOD organizations that have interests in space S&T. Officials from most of the DOD laboratories and components said that they had participated in establishing the strategy goals. Seven of eight organizations we interviewed reported they were tasked to compile and submit their goals related to space S&T. Goals included in the final strategy were based on consensus agreement. Strategy developers organized the strategy goals under the space functional areas used in the National Security Space Plan. Goals were categorized as either short- or long-term, based on the professional judgment of the strategy developers with respect to the current state of technology and the potential to achieve the desired capabilities within nominal time frames. While it is clear that DOD research laboratories and components were consulted, and most assisted in the development of the strategy, it is also clear from our discussions with these organizations that their involvement was typically limited to contributing to the establishment of short- and long-term space S&T goals. Although workgroups were established to develop each of the strategy’s sections, responses varied concerning the level of involvement. Some organizations’ participation in the development of the strategy’s sections that discuss the implementation, assessment, and transition of space S&T was limited. Some research laboratories and components reported playing larger roles in the workgroups than others. DOD strategy developers told us that, in developing the strategy, they did not direct DOD research laboratories or components to identify and provide a compilation of their space S&T projects being worked on or planned. On the basis of the statute, they were not specifically required to do so. They also were not required to, nor did they ask these research laboratories and components to, provide planned budget information associated with their space S&T projects. Officials explained that they did not believe this was necessary or would provide value to the development of the strategy and said they have processes in place, such as the Reliance 21 program, to help facilitate the coordination of space S&T projects within DOD. Reliance 21, however, is a DOD program and does not involve reviews of space S&T projects within the intelligence community. DNI, while not required to in the development of the strategy, did not provide a compilation of space S&T projects, nor the associated planned budget information for assessment as the strategy was being developed. While the statutory provision for the strategy was amended in 2009 to require DNI to jointly develop the strategy with DOD, other parts of the statute do not specifically call for DNI’s involvement. DOD and DNI officials told us they interpreted this to mean the intelligence community was not required to be involved to the full extent in some aspects of the strategy. Specifically, DNI officials told us that they interpret the statute to apply to the establishment of goals for DOD in the strategy, and that there is no requirement that these goals take into consideration the goals of the intelligence community. According to DNI officials, only where the DOD goals coincide with the already established goals of the intelligence community do they plan to work jointly toward goal accomplishment. Further, DNI officials told us that while the strategy addresses plans for implementing the goals established, these plans only apply to DOD and the strategy does not include implementation plans for the intelligence community. While coordination between DOD and DNI was limited in development of the strategy, strategy developers told us that apart from the development, they do coordinate regularly with each other on space S&T projects and also use on-site liaison personnel at the Air Force Research Laboratory and the National Reconnaissance Office. Strategy developers also provided some limited information on meetings and councils in which agencies within the two organizations participate. Although DOD did coordinate with DNI and the intelligence community, we believe greater coordination among the stakeholders would allow for the formation of a single strategic plan to guide this important area. In the past, we have raised concerns about DOD strategic planning and the degree to which DOD and DNI collaborate on space strategic planning. In 2008, we reported to Congress that we were concerned there was no overarching strategic guidance in place to link the defense and intelligence communities’ future space programs, plans, and new space concepts. The National Reconnaissance Office (NRO), which served as the lead agent for DNI and the primary participant from the intelligence community in the development of the strategy, typically develops sophisticated space capabilities and is critically important to space intelligence. While the amount of money NRO spends on space S&T is classified, it is the premier space reconnaissance organization in the world and has established a priority to improve this area of investment. Further, strategy developers stated that they did not coordinate with NASA or NOAA in developing the strategy because the statute did not direct that these agencies be involved. NASA and NOAA are both involved in significant space S&T efforts with NASA’s fiscal year 2012 budget request including over $1 billion for space research and technology. NASA has a strategic plan of its own with a primary mission to drive advances in space science, technology, and exploration and can be involved in technology transfers to DOD and other agencies. While DOD and DNI did not coordinate with NASA in the development of the strategy, NASA and DOD periodically coordinate on S&T projects as part of the National Science and Technology Council. NASA’s procedural requirements also recommend they search research and technology literature prior to investing in new research areas to minimize duplication of effort and look for opportunities to augment research and technology efforts from other agencies. NOAA conducts research in the development of new satellite sensors, new applications of satellite data, new approaches for handling increased data rates, as well as increased computing power and data storage. If done well, strategic planning provides the foundation for the most important things organizations do each day and fosters informed communication between organizations and their stakeholders. Strategic planning provides decision makers with a framework to guide program efforts and the means to determine if these efforts are achieving the desired results. While the strategy was a first step, it unfortunately was not a rigorous, comprehensive strategic plan. Instead, it embraces the status quo without laying out a path for assuring effective and efficient progress. The space S&T strategy could have gone beyond statutory requirements and provided the basis for a rigorous, comprehensive space S&T program, consistent with economic trends and budgetary constraints to ensure the United States continues to possess the advantages that space provides DOD and the intelligence community. Improving coordination and incorporating changes in future versions would help ensure the strategy addresses space S&T challenges, and help supports agency investments. Addressing these kinds of factors would enable DOD and the intelligence community to have a more effective strategy to guide this critical area of investment. To optimize government investment in space S&T and address key challenges, we recommend that the Secretary of Defense (who would direct the Assistant Secretary of Defense, Research and Engineering and the DOD Executive Agent for Space) and the Director of National Intelligence make the following three improvements to enhance the next version of the space S&T strategy: Develop a specific implementation plan that provides a detailed process for achieving the strategy’s goals. Include information on required human capital; required funding; prioritization; ways to measure progress against the goals; and process(es) for revising goals to address the challenges in space S&T. Enhance coordination between the DOD space S&T community, the intelligence space S&T community, and NASA and NOAA in the development of the strategy so that the space S&T area can be examined strategically. In written comments on a draft of this report, DOD concurred with all three of our recommendations to enhance the next version of the space S&T strategy. DNI did not offer any comments on the draft report provided for their review. DOD's written comments are reprinted in appendix II. We are sending copies of this report to the Secretary of Defense, the Assistant Secretary of Defense, Research and Engineering, the DOD Executive Agent for Space, the Director of National Intelligence, and the Director of the Office of Management and Budget. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Staff members making key contributions to this report are listed in appendix III. To determine the extent the 2011 space science and technology (S&T) strategy addressed statutory requirements, we compared the strategy contents to the congressional requirements in 10 U.S.C. Section 2272 and asked the Department of Defense (DOD) and Director of National Intelligence (DNI) officials for additional details when necessary. We also met with DOD and DNI officials to discuss and collect information on the methods, approaches, and analyses used to support the content of the strategy. We also identified existing challenges in space S&T documented in prior government and GAO reports and compared these challenges to the areas covered by the strategy’s contents. Further, we identified best practices in strategic planning and compared the strategy’s contents to these best practices to determine if there were ways to improve it. We obtained the strategic planning best practices from the Government Performance and Results Act of 1993, Office of Management and Budget Circular No. A-11, Part 6, Preparation and Submission of Strategic Plans, Annual Performance Plans, and Annual Program Performance Reports, July 2010, and prior GAO reports. To determine the extent of coordination efforts used to develop and implement the strategy, we discussed the coordination methods used in the strategy’s development with officials from the Office of Assistant Secretary of Defense, Research and Engineering (formerly the Director, Defense Research and Engineering); Office of the Director of National Intelligence (including National Reconnaissance Office officials); Defense Advanced Research Projects Agency; Missile Defense Agency; Army Materiel Command; Office of the Assistant Secretary of the Army for Acquisition, Logistics, and Technology; Army Space and Missile and Defense Command; Naval Research Laboratory; Office of Naval Research; Office of the Assistant Secretary of the Air Force for Acquisition; Air Force Research Laboratory; and the Department of Energy. Since the strategy has only recently been issued, and given the time constraints of our review, it was too early to assess the mechanisms and processes outlined in the strategy for its implementation. We also reviewed other relevant high-level space strategic plans including the National Security Strategy, the National Security Space Strategy, the Quadrennial Defense Review, the National Space Policy, the Defense Science and Technology Strategy, the DOD Research and Engineering Strategic Plan, and the DOD Space Science and Technology Strategy (2004). We conducted this performance audit from April 2011 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. In addition to the contact named above, Art Gallegos, Assistant Director; Tim Persons; Marie Ahearn; Don Springman; LeAnna Parkey; and Laura Greifner made key contributions to this report. | Each year, the United States spends billions of dollars on space-based systems to support national security activities. The National Defense Authorization Act for Fiscal Year 2010 requires the Department of Defense (DOD) and the Director of National Intelligence (DNI) to develop and issue a space science and technology (S&T) strategy every 2 years addressing S&T goals and a process for achieving these goals, among other requirements. As GAO is required to assess the strategy, this report addresses (1) the extent to which the strategy meets the statutory requirements, (2) if other approaches could be used to enhance the usefulness of the strategy, and (3) the extent of coordination efforts used in developing the strategy. GAO reviewed the strategy for sufficiency with statutory requirements and met with DOD and DNI officials to discuss the analyses and coordination used to support the content of the strategy. GAO also compared the strategy to strategic planning best practices to see if there are ways it could be improved. The space science and technology strategy addresses eight statutory requirements, and DOD plans to address the two remaining requirements. While the statutory requirements were addressed, additional information that could have enhanced the strategy was not always included. For example, in relation to the strategy's goals, a newly developed implementation plan for the achievement of the goals was not established. Instead, the strategy describes a plan for implementation where DOD components implement the strategy as a routine element of their existing budgetary process. Also, the strategy's new goals were established without any prioritization, and while this was not required, given the breadth and scope of space S&T development activities, it is important that goals be prioritized. For the statutory requirements involving strategy implementation, officials explained that while the requirements to identify S&T projects with associated funding and schedule information were not addressed in the strategy, components and research laboratories conduct these activities as part of the normal DOD budgetary process. While the content of the strategy addresses statutory requirements, it does not address fundamental challenges facing the space S&T community. These challenges have been identified in high-level studies and prior GAO reports and include human capital shortages, growing fiscal pressures, and the difficulty in transitioning space S&T to acquisition programs. In this assessment, GAO identified some strategic planning best practices that, if used, could improve future strategy versions by addressing these fundamental challenges and thereby potentially enhancing the usefulness of the strategy. These practices include identifying required human capital; identifying required funding; prioritizing initiatives; establishing ways to measure progress; and establishing processes for revising goals in the future. Organizations involved in development of the strategy participated in creating its short- and long-term goals; however, their participation in developing other aspects of the strategy was more limited. DOD and DNI officials told GAO that their interpretation of the 2009 statute directing development of the strategy was that it did not require that the intelligence community be involved to the full extent in some aspects of the strategy. Moreover, the National Aeronautics and Space Administration (NASA) and the National Oceanic and Atmospheric Administration (NOAA) together with the intelligence community, conduct a significant amount of space S&T. Although NASA and NOAA participation is not required, DOD may have missed an opportunity to leverage these agencies' activities and optimize its own S&T spending by involving them in strategy development. GAO was also required to evaluate the effectiveness of the coordination mechanisms planned to implement the strategy. However, because the strategy has only recently been issued, it is too early to make such an evaluation. GAO recommends that DOD and DNI develop a more specific implementation plan; include additional information and prioritization, ways to measure progress, and processes for revision when establishing strategic planning goals; and enhance coordination among the DOD S&T community, the intelligence community, NASA, and NOAA. DOD concurred with the recommendations and DNI had no comment. |
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The Asset Forfeiture Program has three primary goals: (1) to punish and deter criminal activity by depriving criminals of property used or acquired through illegal activities; (2) to enhance cooperation among foreign, federal, state, and local law enforcement agencies through the equitable sharing of assets recovered through this program; and, as a by-product, (3) to produce revenues in support of future law enforcement investigations and related forfeiture activities. A number of federal law enforcement organizations participate in the AFF, including USMS, which serves as the primary custodian of seized and forfeited property for the program. See figure 1 for the Asset Forfeiture Program participants. DOJ’s Asset Forfeiture Management Staff (AFMS) is part of DOJ’s Justice Management Division and is responsible for managing and overseeing all financial aspects of the AFF, review and evaluation of asset forfeiture program activities, internal controls and audit functions, information systems, and other administrative functions related to the fund. The Asset Forfeiture Money and Laundering Section (AFMLS) is part of DOJ’s Criminal Division and is responsible for legal aspects of the program, including civil and criminal litigation and providing legal advice to the U.S. Attorneys’ Offices. AFMLS is responsible for establishing the Asset Forfeiture Program’s policies and procedures, coordinating multidistrict asset seizures, acting on petitions for remission in judicial forfeiture cases, and coordinating international forfeiture and sharing. AFMLS also oversees the AFF’s equitable sharing program. United States Attorneys’ Offices (USAO) are responsible for the prosecution of both criminal and civil actions against property used or acquired during illegal activity. USMS serves as the primary custodian of seized property for the Asset Forfeiture Program. USMS manages and disposes of the majority of the valued property seized for forfeiture. In serving as the primary custodian of the majority of assets managed by the fund, USMS manages all valued assets that are not considered evidence, contraband, or targeted for use by individual law enforcement agencies. ATF enforces the federal laws and regulations relating to alcohol, tobacco, firearms, explosives, and arson by working directly and in cooperation with other federal, state, and local law enforcement agencies. While USMS is the primary custodian over valued assets, ATF maintains custody over assets seized under its authority, including firearms, ammunition, explosives, alcohol, and tobacco. DEA implements major investigative strategies against drug networks and cartels. DEA maintains custody over narcotics and other seized contraband. The FBI investigates a broad range of criminal violations, integrating the use of asset forfeiture into its overall strategy to eliminate targeted criminal enterprises. There are several agencies outside the Department of Justice that also participate in the DOJ Asset Forfeiture Program. Non-DOJ participants include the United States Postal Inspection Service, the Food and Drug Administration’s Office of Criminal Investigations, the United States Department of Agriculture’s Office of the Inspector General, the Department of State’s Bureau of Diplomatic Security, and the Department of Defense Criminal Investigative Service. There are two types of forfeiture: administrative and judicial, and they differ in a number of ways, including (1) the point in the proceeding, generally at which the property may be seized; (2) the burden of proof necessary to forfeit the property; and (3) in some cases, the type of property interests that can be forfeited. Administrative forfeiture allows for property to be forfeited without judicial involvement. Although property may be seized without any judicial involvement, seizures performed by federal agencies must be based on probable cause. In administrative forfeitures, the government initiates a forfeiture action and will take ownership of the property provided that no one steps forward to contest the forfeiture. Specifically, the administrative forfeiture procedure requires that those with an interest in the property be notified and given an opportunity to request judicial forfeiture proceedings. See below for an example of an administrative forfeiture. Example of Administrative Forfeiture DEA initiated a task force investigation into a drug-trafficking organization. Task force officers received information from a confidential source that the drug-trafficking organization was using a van with hidden compartments to transport methamphetamine and drug proceeds, and a drug detection dog gave a positive alert to the presence of drugs in the van. Officers obtained and executed a search warrant on the vehicle, which resulted in the discovery and seizure of 149 kilograms of cocaine and $1,229,785 in U.S. currency. Because no party filed a claim contesting the forfeiture, the currency was administratively forfeited by DEA pursuant to 19 U.S.C. § 1609. Judicial forfeiture, both civil and criminal, is the process by which property may be forfeited to the United States by filing a forfeiture action in federal court. In civil forfeiture, the action is against the property and thus does not require that the owner of the property be charged with a federal offense. The government must only prove a connection between the property and the crime. By contrast, criminal forfeiture requires a conviction of the defendant before property is subject to forfeiture. Example of Civil Forfeiture After obtaining a search warrant, agents searched a residence and the adjoining land on a 50-acre farm. Agents found firearms and ammunition, along with 60 pounds of processed marijuana. Agents also found approximately 4,000 marijuana plants growing outside in the adjacent field, along with approximately 2,500 plants being processed. While the owner of the farm will be subject to prosecution, because the land was used for illegal activities, a separate civil forfeiture action was filed against the property. The farm where the marijuana plants were located was seized and will be forfeited under civil forfeiture proceedings. Example of Criminal Forfeiture According to the United States Attorney, two Philadelphia-based corporations operated an Internet enterprise that facilitated interstate prostitution activities. The defendants allegedly developed and operated an Internet website and created an online network for prostitutes, escort services, and others to advertise their illegal activities to consumers and users of those services. The case was investigated by state police, FBI, and the Internal Revenue Service Criminal Investigations Division. The investigation found that defendants received fees in the form of money orders, checks, credit card payments, and wire transfers from users of the website. The funds the defendants allegedly received were the proceeds of violations of federal laws prohibiting interstate travel in aid of racketeering enterprises, specifically prostitution, and aiding and abetting such travel. The money-laundering conspiracy charge alleges that the defendants engaged in monetary transactions in property of a value greater than $10,000 derived from those unlawful activities. The defendants entered guilty pleas to the money-laundering conspiracy charge and agreed to serve a probation term of 18 months and to pay a $1,500,000 fine. In addition, under the terms of the plea agreement, the defendants agreed to the criminal forfeiture of $4.9 million in cash derived from the unlawful activity, as well as forfeiture of the domain name, all of which represent property used to facilitate the commission of the offenses. The asset forfeiture process involves a number of key steps, including necessary planning in advance of the seizure, seizing and taking custody of the asset, notifying interested parties, addressing any claims and petitions, and equitable sharing with state and local law enforcement agencies. According to DOJ, enhancing cooperation among federal, state, and local law enforcement agencies is one goal of the equitable sharing program. For more information on how agencies qualify for equitable sharing, see appendix I. From fiscal years 2003 through 2011, AFF revenues and expenditures increased, with annual revenues doubling in fiscal year 2006, due in part to an increase in forfeitures resulting from fraud and financial crimes investigations. DOJ estimates anticipated revenues and expenditures based on prior years’ trends and then carries over funds to help cover operational expenses and other liabilities in the next fiscal year, including reserves needed for pending equitable sharing and third-party payments. However, the transparency of DOJ’s process for carrying over these funds could be enhanced. Once all expenses have been accounted for and unobligated funds deemed necessary for next year’s expenses have been carried over to the next fiscal year, DOJ then reserves funds to cover annual rescissions. In the 9-year period from fiscal years 2003 through 2011, AFF revenues totaled $11 billion, growing from $500 million in fiscal year 2003 to $1.8 billion in fiscal year 2011. Since 2006, an increase in the prosecution of fraud and financial crime cases has led to substantial increases in AFF revenue.involved the misappropriation of funds by the founder of a television cable company, Adelphia Communications, and resulted in over $700 million in forfeited assets. As a result of the increase in forfeitures resulting from money laundering and financial crimes investigations, in 2006, revenues doubled those of previous years, and for the first time in the AFF’s history, total annual revenues grew above $1 billion to approximately $1.2 billion. Since 2006, the AFF’s annual revenues have remained above $1 billion, For example, a money laundering case in fiscal year 2007 with the highest revenues of $1.8 billion reported in 2011.shows the fund’s revenue growth over time from fiscal years 2003 through 2011. Moreover, according to DOJ officials, in addition to an increase in the prosecution of fraud and financial crime cases, the increase in revenues can also be attributed to an overall increase in the number of forfeiture cases together with higher-value forfeitures. Across all fiscal years, forfeited cash income constituted 76 percent or more of the AFF’s revenue sources. Forfeited cash income includes cash/currency, as well as financial instruments such as money orders, bank accounts, brokerage accounts, and shares of stock. The second, and much smaller, source of revenue is the sale of forfeited property including automobiles, boats, airplanes, jewelry, and real estate, among others. In fiscal year 2011, revenues from forfeited cash income and the sale of forfeited property together accounted for over 84 percent of the total revenues. Other sources of income may include transfers from the Treasury Forfeiture Fund (TFF), and transfers from other federal agencies. Additionally, since fiscal year 2006—when the AFF’s revenues from fraud and financial crime cases increased—large-case deposits (forfeitures greater than $25 million) of forfeited cash income have contributed an average of 37 percent to total revenues. For example, in 2007, DOJ reported a total of six large deposits that totaled $842 million, or slightly over 50 percent of the AFF’s total revenues in that fiscal year. These forfeitures of assets greater than $25 million involved investigations of misappropriation of funds, including corporate fraud and the illegal sales of pharmaceutical drugs. The types of assets that were seized in these investigations were primarily forfeited cash income. From fiscal years 2003 through 2011, AFF expenditures totaled $8.3 billion. As revenues have increased, there has been a corresponding increase in expenditures in support of asset forfeiture activities. Specifically, expenditures increased from $458 million in fiscal year 2003 to $1.3 billion in fiscal year 2011. Figure 3 shows the expenditures from fiscal year 2003 through 2011, including the large growth in expenditures beginning in 2007. Revenues resulting from forfeitures are used to pay the forfeiture program’s expenditures in three major categories: 1. payments to third parties, including payments to satisfy interested parties such as lienholders, as well as the return of funds to victims of large-scale fraud; 2. equitable sharing payments to state and local law enforcement agencies that participated in law enforcement efforts resulting in the forfeitures; and 3. all other program operations expenses that include a total of 13 expenditure categories such as asset management and disposal, the storage and destruction of drugs, and investigative expenses leading to a seizure. Table 1 shows the AFF’s expenditures across all fiscal years, including payments to third parties, equitable sharing, and all other program operations expenses. Equitable sharing payments to state and local law enforcement agencies have generally increased since fiscal year 2003; in fiscal year 2003, equitable sharing payments totaled $218 million, and in fiscal year 2011, equitable sharing totaled $445 million. Moreover, when compared with DOJ grant programs, equitable sharing is one of the largest DOJ programs providing funds to recipients in order to support state and local law enforcement activities. For example, in fiscal year 2010, the Victims of Crime Assistance (VOCA) Program was DOJ’s largest grant program; DOJ distributed approximately $412 million in funds through the VOCA program. By way of comparison, equitable sharing in fiscal year 2010 provided a total of $388 million in equitable sharing payments to state and local law enforcement agencies. According to state and local law enforcement officials we met with, because most of their departmental budgets go toward personnel costs, the equitable sharing program is extremely important because it helps fund equipment, training, and other programs that they may otherwise not be able to afford. For example, one local law enforcement agency stated that salaries make up 96 percent of its annual budget. As a result, equitable sharing dollars allow them to purchase equipment they could not otherwise buy with the limited available annual budget. See appendix I for the total equitable sharing payments made to each state in fiscal year 2011. Equitable sharing has generally increased from 2003 through 2011; however, as a percentage of total expenditures, equitable sharing has decreased from 48 percent of total expenditures in 2003 to 34 percent in 2011. This percentage decrease began in fiscal year 2006, when another expenditure category—payments to third parties including lienholders and victims—increased from 10 to 44 percent of total expenditures. DOJ officials attribute the shift among these major expense categories in part to the increase in the prosecution of fraud cases with significant numbers of victims. Moreover, because large-case deposits are generally the result of fraud and financial crime cases, they typically have a greater proportion of payments to victims than equitable sharing, a fact that may also contribute to the overall percentage decrease in equitable sharing. For example, in fiscal year 2007, as a result of a non-prosecution agreement with Adelphia Communications, over $700 million in cash and stocks was forfeited and liquidated. In fiscal year 2012, the net proceeds from these forfeitures, which totaled approximately $728 million, were returned to victims. In addition to equitable sharing and third-party payments to victims and lienholders, the AFF is used to pay for a variety of program operations expenses. According to DOJ, the primary purpose of the AFF is to provide a stable source of resources to cover the costs of the Asset Forfeiture Program, including the costs of seizing, evaluating, inventorying, maintaining, protecting, advertising, forfeiting, and disposing of property seized for forfeiture. Among the program operations expenses covered by the AFF are costs associated with storing, maintaining, and disposing of forfeited assets. The AFF also funds case- related expenses including costs of managing paperwork, costs associated with the prosecution of forfeiture cases, costs associated with the execution of forfeiture judgments, and the costs of advertising.AFF also funds a variety of investigative expenses associated with forfeiture, including payments to reimburse any federal agency participating in the AFF for investigative costs leading to seizures. Other investigative expenses may include awards for information, purchase of evidence, and costs to fund joint task force operations. For additional details regarding expenditure categories, see appendix II. At the end of each fiscal year, DOJ carries over funds in order to help ensure it has sufficient resources to cover all AFF expenses that may not be covered by the next year’s revenues; however, the process DOJ uses to determine how much to carry over each year is not documented or outlined in its Congressional Budget Justifications. While DOJ officials stated that they cannot predict how much revenue will result from forfeitures in any given year, they attempt to estimate their anticipated revenues based on prior years’ trends. They then carry over funds needed to cover anticipated expenses for the coming year including funds needed to cover the costs of pending equitable sharing and third-party payments as well as funds needed to ensure the Asset Forfeiture Program’s solvency—including the anticipated costs associated with continuing forfeiture activities—at the start of the next fiscal year. Similar to the growth in revenues and expenditures, the funds DOJ carries over to cover these authorized expenses at the end of each fiscal year have grown since 2003. For example, at the end of fiscal year 2003, DOJ carried over approximately $365 million both to maintain solvency and to cover anticipated equitable sharing and third-party payments in fiscal year 2004. In comparison, in fiscal year 2011, DOJ carried over a total of $844 million to cover these expenditures. Additionally, DOJ officials emphasized that because revenues from fraud and financial crime cases have increased, the funds needed to make third-party payments, including payments to victims, have also increased. The flow of funds into and out of the AFF is complex and involves an interaction among revenues, expenditures, and funds carried over to manage the AFF. The following illustrates how DOJ used revenues, expenditures, and carryover funds to manage the AFF in fiscal year 2010: At the start of fiscal year 2010, DOJ carried over a total of $634 million in funds from fiscal year 2009 to maintain the program’s solvency and for pending equitable sharing and third-party payments. These funds were used at the start of fiscal year 2010 to continue operations, such as paying expenses for asset storage, and to cover pending equitable sharing and third-party payments. In addition to the $634 million, $207 million was reserved to cover DOJ’s fiscal year 2010 rescission. This rescission was proposed in the President’s budget, and later passed by Congress and enacted into law. As a result, at the start of fiscal year 2010, DOJ carried over a total of $841 million in funds from fiscal year 2009, as shown in table 2 below. In the course of fiscal year 2010, a total of approximately $1.58 billion was deposited into the AFF, including revenues received from forfeitures. Based on the total of $841 million that was carried over from fiscal year 2009 plus the $1.58 billion deposited into the AFF in fiscal year 2010, DOJ then had approximately $2.42 billion in total available resources in fiscal year 2010. Of these resources, DOJ obligated $1.45 billion in fiscal year 2010 and carried over $975 million into fiscal year 2011 to maintain solvency and reserves and to cover the proposed fiscal year 2011 rescission. While DOJ had obligated $1.45 billion for the three main expenditure categories; equitable sharing, third-party interests, and all other program operations expenses, DOJ’s actual expenditures in fiscal year 2010 totaled $1.29 billion. The difference of $0.16 billion in fiscal year 2010 represents funds that had been obligated, but had not yet been spent. According to DOJ officials, there may be a lag between the funds obligated in a fiscal year and the actual expenditures, and therefore, it is not uncommon for the total obligations to be higher than the expenditures in a given fiscal year. Table 2 shows the total funds available for use in fiscal year 2010. In order to identify the funds that will need to be carried over to cover anticipated expenses for the coming year, DOJ officials stated that they use reports generated from its asset-tracking system to identify pending equitable sharing and third-party payments. These reports provide DOJ with information to determine carry over funds needed for the disbursements that must be paid in the next fiscal year. In addition, DOJ carries over funds needed to ensure the Asset Forfeiture Program’s solvency at the start of the next fiscal year. According to DOJ officials, they consider a number of factors when calculating the funds needed to maintain solvency, such as historical data including information on the costs of past contracts, salary costs, and other expenses; known future expenses including salaries and contracts; and the costs of any potential new expenditures. DOJ officials explained the general factors they consider when carrying over funds needed to cover anticipated expenditures in the next fiscal year, but they do not specify in the AFF’s Congressional Budget Justifications how they determine the total amounts carried over each year. Specifically, the Congressional Budget Justifications do not include information on how DOJ calculated the amounts carried over nor do they explain the significant variations from one year to the next in the amount of funds carried over for solvency. For example, in fiscal year 2007, DOJ carried over $188 million based on its estimates of what it needed to cover solvency. The amount carried over to cover solvency then increased to $402 million in fiscal year 2009 and decreased to $169 million by fiscal year 2011. Figure 4 shows the variation in carryover funds retained in the AFF at the end of each fiscal year to cover solvency, equitable sharing, and third-party payments from fiscal years 2003 through 2011. DOJ officials stated that a number of cost drivers may change the funds needed for solvency from year to year. These cost drivers include salaries for government employees, information systems costs, asset management and disposal contracts, and contracts for administrative support staff, among other things. According to DOJ, these categories comprise recurring operational costs of the Asset Forfeiture Program. While these expenses are generally funded by AFF revenues, DOJ carries over funds to ensure it has sufficient resources that may not be covered by the next year’s revenues. Moreover, additional funds may need to be carried over to account for any number of program uncertainties. For example, the AFF could be responsible for making payments related to pending judicial actions, in the event that DOJ were to lose a forfeiture case in court. Therefore, DOJ may carry over more funds from one fiscal year to the next in order to cover these types of liabilities. DOJ officials stated that they estimate needed carryover funds by reviewing the cost drivers, as well as by assessing the risk that revenues may be less than projected. DOJ officials further noted that planning for AFF carryover and the actual carryover can differ due to the unpredictable dynamics of the fund. According to DOJ officials, there is no documented process used to determine the amount of funds that are carried over at the end of each fiscal year. Our prior work has emphasized the importance of transparency in federal agencies’ budget presentations to help provide Congress the necessary The information to make appropriation decisions and conduct oversight. department provides a yearly budget justification to Congress that details the estimated revenues, expenses, and carryover requirements for the upcoming fiscal year as well as AFF-related performance information. Officials further noted that the Congressional Justification includes discussions of the various categories of fund expenses, but does not include a detailed discussion of the process used to estimate the amounts carried over. Without a clearly documented and transparent process that demonstrates how DOJ determines the amounts that will be carried over each year, it is difficult to determine whether DOJ’s conclusions regarding the amounts that need to be carried over each year are well founded. Providing more transparent information as part of the AFF’s annual budget process would better inform Congress’ oversight of the AFF, by making it easier to evaluate whether the funds carried over to maintain Asset Forfeiture Program solvency and cover pending equitable sharing and third-party payments adequately reflect the AFF’s needed resources. After revenues needed to cover expenses in the current and upcoming fiscal years have been carried over, DOJ reserves funds to cover rescissions. After these funds have been reserved, any funds determined to be in excess of these requirements (excess unobligated balances) may be declared as Super Surplus. While these Super Surplus balances may be used at DOJ’s discretion for a variety of purposes, in recent years, these balances have been used as a means to supplement the funds reserved to cover yearly rescissions proposed in the President’s budget, and later passed by Congress and enacted into law. Figure 5 provides a description of the process for identifying Super Surplus balances in any given fiscal year. Rescissions are legislative actions to reduce an agency’s budgetary resources. For example, in fiscal year 2010, $387 million was rescinded from the AFF, and in fiscal year 2011, the enacted rescission totaled $495 million. Rescinded funds are generally taken from an agency and returned to the Treasury before they are obligated. However, per Office of Management and Budget (OMB) guidance, rescinded funds from the AFF have not been returned to the Treasury. Instead, DOJ has treated the funds as unavailable for obligation for the remainder of the fiscal year for which the rescission was enacted. At the beginning of each new fiscal year, DOJ would have made the rescinded funds available for obligation again, also in response to OMB guidance, had a new rescission not been enacted. With the enactment of a new rescission for the subsequent fiscal year, however, DOJ has continued to treat the rescinded funds as unavailable for obligation. For example, the $387 million that was rescinded from the AFF in fiscal year 2010 was treated as unavailable for obligation in fiscal year 2010, and was then used again to cover part of the enacted $495 million rescission in fiscal year 2011. To make up the difference needed to meet the $495 million rescission in fiscal year 2011, DOJ used unobligated balances in the amount of $233 million. Table 3 shows the enacted rescissions for each fiscal year, as well as the unobligated balances used by DOJ in order to meet the rescissions. One effect of these rescissions is to reduce the department’s discretionary spending in the year in which the rescission was enacted. This could ultimately decrease the size of the federal deficit, provided the decreased spending from the rescission is not offset by increased spending elsewhere. For example, in fiscal year 2012, DOJ’s discretionary budget authority was reduced to $27.4 billion, due in part to the $675 million enacted AFF rescission. DOJ has established guidelines and oversight mechanisms for the equitable sharing program, but additional controls could enhance the consistency and transparency of the program. Moreover, DOJ has recently started conducting reviews of state and local law enforcement agencies that participate in the equitable sharing program to determine the extent to which they are complying with program policies as well as bookkeeping, accounting, and reporting requirements. DOJ has established written guidelines governing how state and local law enforcement agencies should apply for equitable sharing. Specifically, according to the guidelines, state and local law enforcement agencies must submit an application for equitable sharing in which they outline identifying information for their agency, information on the asset that was forfeited, how they intend to use the asset (or the proceeds of the asset), and the number of work hours their agency contributed to the investigation. In addition, DOJ has established mechanisms governing how DOJ agencies should make equitable sharing determinations. Specifically, the field office for the DOJ agency that served as the lead federal agency in the investigation is responsible for making an initial recommendation regarding the percentage of the proceeds of the forfeited asset that each participating agency should receive. According to forfeiture statutes governing the transfer of forfeited property to state and local law enforcement agencies, equitable sharing determinations must bear a reasonable relationship to the degree of direct participation of the requesting agency in the total law enforcement effort leading to the forfeiture. are to be based on a comparison of the work hours that each federal, state, and local law enforcement agency contributed to the investigation. However, according to DOJ guidelines, further adjustments to sharing percentages may be made when work hours alone do not reflect the relative value of an agency’s participation in an investigation. For example, if a state or local law enforcement agency contributed additional resources or equipment to an investigation, its sharing percentage might be adjusted upward from what it would be based on work hours alone. See 21 U.S.C. §881(e)(3); 18 U.S.C. §981(e). of the agencies that participated in the investigation.then required to forward both the application forms completed by state and local law enforcement agencies and sharing recommendations to investigative agency headquarters officials for review. The review process differs depending on the amount and type of the forfeiture, as follows: For administrative forfeitures less than $1 million, agency headquarters officials are responsible for reviewing and approving the final sharing determination. For judicial forfeitures less than $1 million, agency headquarters officials are to forward the recommendation to the USAO for final approval. In any administrative or judicial forfeiture where the total appraised value of all forfeited assets is $1 million or more, in multidistrict cases, and in cases involving the equitable transfer of real property, the agency headquarters officials forward the recommendation to the USAO for review, which is then submitted to AFMLS officials for review. o Where the investigative agency, the USAO, and AFMLS concur in a sharing recommendation, the Assistant Attorney General makes the final equitable sharing determination. o Where the investigative agency, the USAO, and AFMLS do not all concur in a sharing recommendation, the Deputy Attorney General (DAG) determines the appropriate share. Figure 6 shows the steps involved in making equitable sharing determinations. While DOJ has established guidance indicating that adjustments to sharing percentages may be made when a state or local law enforcement agency’s work hours alone do not reflect the value of its participation in an investigation, DOJ has not developed guidance regarding how to apply the qualitative factors that may warrant departures from sharing percentages. DOJ agencies currently make adjustments to sharing percentages based on a number of qualitative factors regarding the additional assistance or contributions state or local law enforcement agencies may have made during an investigation. According to DOJ’s written guidelines, DOJ agencies must take these factors into account when determining whether to adjust an equitable sharing percentage beyond a strict work hour allocation. For example, according to DOJ guidelines, the deciding authority should consider such factors as the inherent importance of the activity, the length of the investigation, whether an agency originated the information leading to the seizure, or whether an agency provided unique and indispensable assistance, among others. In addition, DOJ’s Equitable Sharing Guidelines state that each agency may use judgment when determining how these qualitative factors should be used to adjust sharing percentages. In the course of our review, DOJ officials provided examples of these qualitative factors. For example, if a state or local law enforcement agency provided a helicopter, drug-sniffing dog, or a criminal informant to an investigation, DOJ would consider these contributions to be unique or indispensible assistance. In one case we reviewed, a local law enforcement agency that participated in a joint investigation with federal agents would have received 7.4 percent in equitable sharing based on the work hours it contributed to the investigation. However, the agency also provided information obtained from a confidential source that led to the seizure and provided a helicopter for aerial surveillance. As a result, its final sharing determination was adjusted upward from 7.4 percent to 12 percent. If the net proceeds of the forfeiture are $1.6 million once all investigative and forfeiture-related expenses have been paid, the resulting equitable sharing payment made to the law enforcement agency will increase from $118,400 to $192,000. Standards for Internal Control in the Federal Government calls for significant events to be clearly documented in directives, policies, or manuals to help ensure operations are carried out as intended. AFMLS officials report that they have established “rules of thumb” based on historical knowledge or precedent when applying these qualitative factors to equitable sharing adjustments that are subject to their review, but have not issued guidance to the DOJ agencies. Further, headquarters officials for each of the DOJ agencies emphasized that they follow the guidelines issued by DOJ when making adjustments to sharing percentages. However, as previously discussed, these guidelines outline the qualitative factors that may be considered when making adjustments to sharing percentages, but they do not include any additional information regarding how qualitative factors should be used to adjust sharing percentages. As a result, agency headquarters officials stated that field office staff use their own judgment when determining how qualitative factors should be used to adjust sharing percentages. AFMLS officials state that adjustments to equitable sharing percentages based on qualitative factors should be made on a case-by-case basis because each investigation is unique and the facts and circumstances of each case must be considered in totality before making adjustments to sharing determinations. While we recognize the inherently subjective nature of evaluating each agency’s unique contributions to a case based on facts and circumstances, additional guidance regarding how to apply the qualitative factors could help to improve transparency and better ensure consistency with which these qualitative factors are applied over time or across cases. This is particularly important given that these determinations represent DOJ’s overall assessment of each agency’s unique contributions to an investigation and are a key component of how DOJ makes decisions about how much to award each agency. DOJ’s written guidance also requires the DOJ agencies that are responsible for making equitable sharing determinations to use work hours as the primary basis for calculating sharing percentages; however, agencies do not consistently document the work hours each agency contributed to the investigation. According to DOJ officials, the work hours contributed by each of the local, state, and federal law enforcement agencies involved in the investigation should be added together by the DOJ agency leading the investigation to arrive at a total. Each law enforcement agency’s individual work hours are then divided by the total in order to determine each agency’s equitable sharing percentage. DOJ’s guidance states that every agency participating in the investigation should report work hours on either the application for equitable sharing or on the equitable sharing decision form. While state and local law enforcement agencies record their work hours on their applications for equitable sharing, we found that the DOJ agencies did not consistently record their own hours or the total hours contributed by all participating agencies. Of the 25 equitable sharing determinations we reviewed, 5 included supplemental memos provided by the DOJ agencies detailing the work hours provided by all of the agencies involved in the investigation. However, these memos are not required under existing DOJ guidance and were provided in only those investigations subject to AFMLS review. For the remaining 20 determinations, DOJ agencies did not document this information. Specifically, although work hours serve as the primary basis of calculating equitable sharing determinations, in 20 of the 25 determinations we reviewed, neither the work hours contributed by DOJ agencies nor the total number of work hours contributed by all of the agencies involved in the investigation were recorded in the documents provided to agency headquarters officials for review. According to DOJ agency headquarters officials responsible for reviewing and approving equitable sharing determinations, they rely on agents in the field to calculate sharing percentages and as a result, they do not verify the work hours contributed by each agency involved in the investigation. In the absence of documented work hours, it is unclear how deciding authorities could verify whether equitable sharing determinations involving millions of dollars in assets were calculated in accordance with established guidance. DOJ’s guidance does not explicitly require DOJ agencies to record the rationale for making adjustments to sharing percentages when work hours alone do not reflect the value of an agency’s participation in the investigation. In the 25 equitable sharing determinations we reviewed, state and local law enforcement agencies often reported basic information regarding their agency’s role in a particular investigation in their applications for equitable sharing, but DOJ’s rationale for making adjustments to sharing percentages was not consistently documented in each investigation. Specifically, agencies did not consistently document whether they believed the state or local law enforcement agency made additional contributions that warranted departures from standard sharing percentages. Of the 25 determinations we reviewed, 5 included supplemental memos provided by the DOJ agencies indicating whether adjustments from standard sharing percentages were warranted. In 3 of these 5 AFMLS determinations, adjustments to sharing percentages were made based on the additional contributions of the state and local law enforcement agencies involved in the investigation and the memos detailed the rationale for making the adjustment in each case. However, these memos are not required under existing DOJ guidance and were provided in only those investigations subject to AFMLS review. For the remaining 20 investigations, DOJ did not document this information. Moreover, because work hours were not documented in these cases, it was not possible to determine whether further adjustments were made based on additional contributions made by each of the agencies involved in the investigation. According to DOJ agency headquarters officials responsible for reviewing and approving equitable sharing determinations, they rely on agents in the field to calculate sharing percentages and, as a result, they do not attempt to verify the adjustments that are made based on each agency’s additional contributions to the investigation. Specifically, agency headquarters officials reported that the field is responsible for confirming state and local law enforcement’s contributions to a case through a variety of means including face-to-face meetings, telephone conversations, and e-mails. For example, one agency official noted that although the rationale for making adjustments to sharing percentages is not included in the documents provided to headquarters for review and approval, the field office is most familiar with the investigation and the contributions that each state and local law enforcement agency may have made in a given case. Therefore, headquarters considers the field office to be the best source of information for how qualitative factors should be taken into account when adjusting sharing percentages. Agency headquarters officials further noted that it is rare for them to question equitable sharing recommendations made by the field or to ask for more information regarding the rationale for adjustments to sharing percentages. While the field office may have firsthand knowledge of the contributions of state and local law enforcement agencies in a given investigation, in the absence of the rationale for adjustments to sharing percentages being documented, there is limited transparency over how and why agencies make adjustments to sharing determinations when work hours alone do not accurately represent an agency’s contribution to an investigation. Standards for Internal Control in the Federal Government states that transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction or event from the initiation and authorization through its final classification in summary records. In addition, control activities help to ensure that all transactions are completely and accurately recorded. In the absence of consistently documenting work hours and the rationale for making adjustments to sharing percentages, it is unclear how the equitable sharing deciding authorities could evaluate the nature and value of the contributions of each of the agencies involved in the investigation. Establishing a mechanism to ensure that this information is documented by all DOJ agencies responsible for making equitable sharing determinations could enhance the transparency of equitable sharing decisions. In the absence of documenting work hours or the rationale for making adjustments to sharing percentages, deciding authorities have limited means to verify the basis for equitable sharing decisions. Agency headquarters officials responsible for reviewing and approving equitable sharing determinations report that they review equitable sharing applications and decision forms to ensure that they are complete and that sharing determinations appear reasonable. However, headquarters officials for each of the DOJ agencies reported that they rely on field office staff to ensure that equitable sharing percentages were calculated correctly based on the work hours and the qualitative factors that each federal, state, and local law enforcement agency contributed to the investigation. However, because the information that serves as the basis for equitable sharing recommendations—including work hours and the qualitative factors used to make adjustments to sharing percentages—are not subject to review by agency headquarters officials, DOJ does not have reasonable assurance that the equitable sharing determinations are made in accordance with the established guidance. According to Standards for Internal Control in the Federal Government, controls should generally be designed to ensure that ongoing monitoring occurs in the course of normal operations. Such monitoring should be performed continually and ingrained in the agency’s operations. This could include regular management and supervisory activities, comparisons, reconciliations, or other actions. Developing a mechanism to verify the work hours and qualitative factors that serve as the basis for equitable sharing determinations could improve DOJ’s visibility over equitable sharing determinations and help promote confidence in the integrity of the equitable sharing program. Agency headquarters officials have reported that altogether, DEA, ATF, and FBI reviewed a total of 52,034 equitable sharing requests in fiscal year 2011, and 113 of these requests went to AFMLS for review and approval. As a result, agency headquarters officials note that they have limited resources to verify the basis for each and every equitable sharing determination. We recognize that in the face of these limited resources, it may not be practical for agency headquarters officials to review all of the information used in support of all equitable sharing determinations. However, a spot check approach would allow headquarters officials to assess the extent to which equitable sharing decisions are made in accordance with established guidelines to help address resource constraints. DOJ has established requirements governing the permissible uses of equitable sharing funds. Specifically, DOJ’s guidelines state that equitably shared funds or assets put into official use shall be used by law enforcement agencies for law enforcement purposes only. Some of the permissible uses of equitable sharing funds include training, facilities, equipment, travel and transportation in support of law enforcement activities, as well as paying for the costs of asset accounting and auditing functions. Examples of impermissible uses of equitable sharing funds include payments to cover the costs of salaries or benefits and non-law enforcement education and training. DOJ’s guidelines also state that agencies should use federal sharing monies prudently and in such a manner as to avoid any appearance of extravagance, waste, or impropriety. For example, tickets to social events, hospitality suites at conferences, or meals outside of the per diem are all considered impermissible uses of shared funds. DOJ’s guidelines further state that equitable sharing funds must be used to increase or supplement the resources of the receiving state or local law enforcement agency and should not be used to replace or supplant the appropriated resources of the recipient. This means that equitable sharing funds must serve only to supplement funds they would normally receive and must not be used as a substitute for funds or equipment that would otherwise be provided by the law enforcement agency. For example, if city officials were to cut the police department’s budget by $100,000 as a result of the police department’s receiving $100,000 in equitable sharing funds, DOJ would consider this to be an example of improper supplantation, which is not an allowable use of equitable sharing funds. In addition to establishing requirements governing the permissible uses of equitably shared funds and property, DOJ has also established bookkeeping, internal controls, reporting, and audit requirements that state and local law enforcement agencies must follow in order to participate in the equitable sharing program. For example, state and local law enforcement agencies must establish mechanisms to track equitably shared funds and property, implement proper bookkeeping and accounting procedures, maintain compliance with internal controls standards, and meet defined reporting standards. Among other things, DOJ’s equitable sharing guidance calls for participating agencies to avoid commingling DOJ equitable sharing funds with funds from any other source, maintain a record of all equitable sharing expenditures, and complete annual reports known as Equitable Sharing Agreement and Certification Forms. These Equitable Sharing Agreement and Certification Forms require agencies participating in the equitable sharing program to report annually on the actual amounts and uses of equitably shared funds and property. Among other things, agencies must detail the beginning and ending equitable sharing fund balance, and the totals spent on specific law enforcement activities (e.g., training, computers, weapons, and surveillance equipment). In submitting the form each year, agencies must certify that they will be complying with the guidelines and statutes governing the equitable sharing program. Office of Management and Budget, “Audits of States, Local Governments and Non-Profit Organizations,” A-133, June 27, 2003. requirements, the substantial majority of equitable sharing participants are required to comply with the Single Audit Act. Under a Single Audit, an auditor must provide his or her opinion on the presentation of the entity’s financial statements and schedule of federal expenditures, and on compliance with applicable laws, regulations, and provisions of contracts or grant agreements that could have a direct and material effect on the financial statements. AFMLS officials reported that pilot testing of the compliance review process was started in December 2010, but the compliance review team did not start on a full-scale basis until April 2011. beforehand either through news reports or referrals from the U.S. Attorneys’ Offices. AFMLS has established guidelines for conducting compliance reviews of equitable sharing participants in order to determine the extent to which agencies are following established equitable sharing guidelines. Among other things, they select a sample of the agency’s expenditures in order to substantiate the agency’s records and to confirm that the expenditure was consistent with established DOJ guidelines. AFMLS also determines whether the agency has established an appropriate system of internal controls for tracking and recording equitable sharing receipts and expenditures. Further, AFMLS determines whether the agency was subject to Single Audit requirements and if so, whether the Single Audit including reporting on equitable sharing funds was completed as required. As of December 2011, AFMLS had completed a total of 11 onsite audits of approximately 9,200 state and local law enforcement agencies that participate in the equitable sharing program.has limited staff (eight total) and resources to conduct compliance reviews of equitable sharing participants. As a result, AFMLS reported conducting risk assessments in order to select agencies for compliance reviews. In addition to monitoring news briefs regarding the potential misuse of funds among equitable sharing participants, some of the issues that AFMLS considers as part of these risk assessments include the amount of each agency’s equitable sharing expenditures, whether a state or local law enforcement agency has reported spending a significant amount of money in a sensitive area, and whether a small law enforcement agency that may be unfamiliar with the equitable sharing program suddenly received a large equitable sharing payment. The 11 compliance reviews completed in 2011 revealed that participants do not consistently follow requirements to properly account for equitable sharing receipts and expenditures, do not consistently comply with the allowable AFMLS reports it currently uses of equitable sharing funds, and do not consistently complete Single Audits as required. AFMLS identified one or more areas for corrective action in 9 of the 11 compliance reviews. Two of the state and local law enforcement agencies were determined to be in full compliance with all of the equitable sharing requirements. In May 2012, AFMLS officials reported that all of the agencies had fully addressed the corrective actions identified by AFMLS. See appendix III for the results of the 11 compliance reviews AFMLS has completed as of December 2011. AFMLS has established a mechanism to systematically track and analyze the results of these reviews. Specifically, the findings from each compliance review are entered into a tracking report, and follow-up with each agency is completed to ensure that corrective actions are taken. AFMLS officials noted that they may follow up with an agency multiple times to ensure that items identified for corrective action are addressed. According to AFMLS, tracking frequencies and trends identified in the course of compliance reviews is an important tool in risk evaluations for both future audit selections and return audits to specific participants with particularly troublesome problems. Further, AFMLS officials have stated that they plan to use the results of compliance reviews in order to identify larger trends that may need to be addressed across all equitable sharing participants. For example, AFMLS has found through these reviews that equitable sharing recipients are not consistently reporting equitable sharing expenditures on Single Audits. AFMLS has reported that it is currently working with both equitable sharing recipients and the auditor community to address this issue. AFMLS’s approach to conducting compliance reviews of equitable sharing participants is consistent with standards for internal control, which state that monitoring should assess the quality of performance over time and ensure that the findings of audits and other reviews are promptly resolved. With more than $1 billion in forfeited assets deposited into the AFF every year since 2006, the Asset Forfeiture Program generates substantial revenue for the Department of Justice. These funds are used to cover annual operating expenses, to compensate crime victims, or are shared with state and local law enforcement agencies that participate in investigations resulting in forfeiture. The significant amounts of money involved as well as the sensitive nature of asset forfeiture mean it is imperative to be vigilant in maintaining the transparency of the program. Since the Asset Forfeiture Program’s operations are supported by annual revenues, DOJ faces a challenging task estimating future revenues and expenditures each year. The AFF’s annual revenues have consistently exceeded annual expenditures, allowing DOJ to cover annual rescissions and to reserve funds for the next fiscal year. This allows DOJ to ensure that the AFF has sufficient resources at the start of each fiscal year to cover solvency and pending equitable sharing and third-party payments. However, the AFF’s Congressional Budget Justification does not clearly outline the factors that DOJ considers when determining the total amounts that need to be carried over each fiscal year. As part of the AFF’s annual budget process, documenting how DOJ determines the funds that need to be carried over at the end of each year and providing additional details on that determination to Congress would provide more transparency over the process and would help Congress make more informed appropriations decisions. In addition, the authorization to share federal forfeiture proceeds with cooperating state and local law enforcement agencies is one of the most important provisions of asset forfeiture. DOJ has established guidelines stating that adjustments to equitable sharing percentages should be based on qualitative factors; however, additional guidance regarding how to apply these factors could help to improve the transparency and better ensure consistency with which adjustments to sharing percentages are made over time or across cases. Additionally, there are gaps in the extent to which key information that serves as the basis for equitable sharing decisions is documented. In the absence of documenting the work hours used to calculate initial equitable sharing percentages—the primary means to determine each agency’s share of forfeiture proceeds—it is unclear how equitable sharing deciding authorities could verify the relative degree of participation of each of the agencies involved in the case. Similarly, documenting information on DOJ’s rationale for making adjustments to sharing percentages could help to improve transparency over whether equitable sharing decisions are being made in accordance with DOJ’s guidance. Additionally, establishing a mechanism to verify that equitable sharing determinations are made in accordance with established guidance would provide DOJ with greater assurance that there are effective management practices in place to help promote confidence in the integrity of the equitable sharing program. We are making four recommendations to the Attorney General. To help improve transparency over the AFF’s use of funds, we recommend that the Attorney General provide more detailed information to Congress as part of the AFF’s annual budget process, clearly documenting how DOJ determines the amount of funds to be carried over into the next fiscal year. To help improve management controls over the equitable sharing program, we recommend that the Attorney General direct AFMLS to take the following three actions: Develop and implement additional guidance on how DOJ agencies should apply qualitative factors when making adjustments to equitable sharing percentages. Establish a mechanism to ensure that the basis for equitable sharing determinations—including the work hours contributed by all participating agencies and the rationale for any adjustments to sharing percentages—are recorded in the documents provided to agency headquarters officials for review and approval. Develop a risk-based mechanism to monitor whether key information in support of equitable sharing determinations is recorded and the extent to which sharing determinations are made in accordance with established guidance. We provided a draft of this report to DOJ for its review and comment. DOJ did not provide official written comments to include in our report. However, in an e-mail received on June 21, 2012, the DOJ liaison stated that the department appreciated the opportunity to review the draft report and that DOJ concurred with our recommendations. DOJ further noted that the department will develop a plan of corrective action in order to address the recommendations. DOJ also provided us written technical comments, which we incorporated as appropriate. We are sending copies of this report to the Attorney General, selected congressional committees, and other interested parties. In addition, this report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any further questions about this report, please contact me at (202) 512- 9627 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. State and local law enforcement agencies typically qualify for equitable sharing by participating directly with Department of Justice (DOJ) agencies in joint investigations leading to the seizure and forfeiture of property. Agencies may either receive a portion of the proceeds resulting from the sale of the forfeited asset or may request that a forfeited asset such as a vehicle be put into official use. Any property other than contraband or firearms may be transferred to a state or local agency for official use provided that it is used for law enforcement purposes. State and local law enforcement can receive equitable sharing payments after working on a joint case with one or more federal law enforcement partners or after participating in a case carried out by a federal law enforcement task force. Approximately 83 percent of all equitable sharing determinations are the result of joint investigations. State and local law enforcement agencies can also qualify for equitable sharing by requesting that federal partners adopt a case initiated at the state or local level. An adoptive forfeiture occurs when local police officials effectively hand a case over to federal law enforcement officials provided that the property in question is forfeitable under federal law. According to DOJ officials, many state and local law enforcement agencies will make seizures pursuant to their state laws. However, they may reach out to federal law enforcement agencies to adopt a forfeiture if they don’t have a state or local statute that allows them to carry out a forfeiture. For example, in a particular case, there may be large amounts of cash involved but no drugs found or seized. Federal statute allows for the forfeiture of assets based on illegal activity even if there are no drugs seized, whereas the state or local statute might not allow for this type of forfeiture. Alternatively, state and local law enforcement agencies may request that DOJ adopt a forfeiture in those cases where federal coordination or expertise is needed in the case. Our analysis shows a slight decrease in adoptive versus non-adoptive equitable sharing payments since 2003. In 2003, adoptions made up about 23 percent of all equitable sharing payments, while in 2010, adoptions made up about 17 percent of all equitable sharing payments. According to DOJ, as more states have established their own forfeiture laws, they may rely less on DOJ to adopt forfeiture cases and may instead pursue forfeitures under state law when appropriate. Figure 7 shows the equitable sharing payments made to each state in fiscal year 2011. Directions: Place mouse over each state name for the total equitable sharing payments made to that state in fiscal year 2011. Ill. Our analysis shows a strong positive association between the equitable sharing payments made to each state and the state’s total population. However, our analysis found no correlation between per capita equitable sharing payments and arrest rates, once we corrected for population size. It is important to note that a number of other factors may influence the amount of equitable sharing payments a state receives in a given year. For example, if a state or local law enforcement agency participated in a joint investigation that resulted in a very large forfeiture, the agency might receive a significant amount of equitable sharing dollars, even if no arrests were made in conjunction with the case. Alternately, an agency may work several cases that generate multiple arrests, but no forfeitures, so no equitable sharing payments would be made. Finally, differences in equitable sharing between states may be influenced by whether state and local law enforcement agencies decide to pursue forfeitures under their state laws versus those cases where federal involvement may be warranted. 1. Third-Party Payments: Third-party payments are payments to satisfy third-party interests, including lienholders and other innocent parties, pursuant to 28 U.S.C. § 524(c)(1)(D); payments in connection with the remission and mitigation of forfeitures, pursuant to 28 U.S.C. § 524(c)(1)(E). 2. Equitable Sharing Payments: These funds are reserved until the receipt of the final forfeiture orders that result in distributions to the participants. Equitable sharing payments represent the transfer of portions of federally forfeited cash and proceeds from the sale of forfeited property to state and local law enforcement agencies and foreign governments that directly assisted in targeting or seizing the property. Most task force cases, for example, result in property forfeitures whose proceeds are shared among the participating agencies. All other program operations expenses 3. Asset Management and Disposal: According to DOJ, the primary purpose of the Assets Forfeiture Fund (AFF) is to ensure an adequate and appropriate source of funding for the management and disposal of forfeited assets. Also, funding is required for the assessment, containment, removal, and destruction of hazardous materials seized for forfeiture, and hazardous waste contaminated property seized for forfeiture. The United States Marshals Service (USMS) has primary responsibility for the storage and maintenance of assets, while the Drug Enforcement Administration (DEA) and the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) are responsible for the disposal of toxic and hazardous substances. 4. Case-Related Expenses: Case-related expenses are expenses associated with the prosecution of a forfeiture case or execution of a forfeiture judgment, such as advertising, travel and subsistence, court and deposition reporting, courtroom exhibit services, and expert witness costs. In appropriate cases, the services of foreign counsel may be necessary. 5. Special Contract Services: The AFF uses contract personnel to manage the paperwork associated with forfeiture, including data entry, data analysis, word processing, file control, file review, quality control, case file preparation, and other process support functions. 6. Investigative Expenses Leading to Seizure: Investigative expenses are those normally incurred in the identification, location, and seizure of property subject to forfeiture. These include payments to reimburse any federal agency participating in the AFF for investigative costs leading to seizures. 7. Contracts to Identify Assets: Investigative agencies use these funds for subscription services to nationwide public record data systems, and for acquisition of specialized assistance, such as reconstruction of seized financial records. According to DOJ, these resources are used to identify assets during the investigative stage of the case, where such research will enhance effective use of the asset forfeiture sanction. DOJ officials note that if the government can improve upon the identification of ill-gotten assets, the nature of the criminal wrongdoing can be better demonstrated and reinforced before the jury. Such evidence results in greater penalties for criminals who may have avoided such penalties in the past by successfully concealing such assets. 8. Awards for Information Leading to a Forfeiture: The Omnibus Consolidated Appropriations Act, 1997, amended the Justice Fund statute to treat payments of awards based on the amount of the forfeiture the same as other costs of forfeiture. Therefore, the amount available each year for expenses for awards no longer had to be specified in annual appropriations acts. 9. Automated Data Processing: Recurring costs include telecommunications support, system and equipment maintenance, user support and help desk, software maintenance, user training, equipment, and data center charges in support of the Consolidated Asset Tracking System (CATS). All asset forfeiture activity for each asset is recorded in CATS. According to DOJ, CATS enables access for more than 1,000 locations to a central database to perform full asset forfeiture life-cycle tasks more efficiently. The system provides current information to field personnel on the status of cases, integrates financial analysis capabilities into the inventory management process, provides the estimation of program income and expenses, and provides the capability for agency and department managers to review and assess program activity. 10. Training and Printing: This category funds expenses for training personnel on aspects of the federal forfeiture program as well as other training necessary to maintain the competency of federal and contractor personnel dedicated to performing federal forfeiture functions. Printing costs reflect the continuing need to provide current legal advice and support. Expenses include updating and distributing manuals and pamphlets directly related to forfeiture issues, policies, and procedures. 11. Other Program Management: This category includes several types of expenses in support of the overall management of the Asset Forfeiture Program, including management analysis, performance assessment, problem analysis, requirements analyses, policy development, and other special projects designed to improve program performance. This funding is to provide travel and per diem funds for temporary duty assignments needed to correct program deficiencies. Other activities funded under this heading include the annual audit of the financial statements of the Assets Forfeiture Fund and the Seized Asset Deposit Fund by an independent accounting firm and special assessments and reviews. This category also finances the Asset Forfeiture Money Laundering Section (AFMLS), Asset Forfeiture Management Staff (AFMS), and, since 2001, USMS headquarters administrative personnel and non- personnel costs associated with the forfeiture program. In addition, the AFF funds Deputy U.S. Marshal salaries to enhance the legal and fiduciary responsibilities that are inherent in the seizure of personal and real property during the pendency of a forfeiture action. 12. Storage, Protection, and Destruction of Controlled Substances: These expenses are incurred to store, protect, or destroy controlled substances. 13. Joint Federal, State, and Local Law Enforcement Operations: Under 28 U.S.C. § 524(c)(1)(l), the AFF has authority to pay for “overtime, travel, fuel, training, equipment, and other similar costs of state or local law enforcement officers that are incurred in a joint law enforcement operation with a federal law enforcement agency participating in the Fund.” 14. Awards for Information and Purchase of Evidence Awards payable from the AFF directly support law enforcement efforts by encouraging the cooperation and assistance of informants. The AFF may also be used to purchase evidence of violations of drug laws, Racketeering Influenced and Corrupt Organizations (RICO), and criminal money laundering laws. According to DOJ, payment of awards to sources of information creates motivation for individuals to assist the government in the investigation of criminal activity and the seizure of assets. 15. Equipping of Conveyances: This category provides funding to equip vehicles, vessels, or aircraft for law enforcement functions, but not to acquire them. Purchased equipment must be affixed to and used integrally with the conveyance. This funding is used for emergency and communications equipment, voice privacy and surveillance equipment, armoring, and engine upgrades and avionic equipment for aircraft. According to DOJ, it is only through AFF resources that many of these surveillance vehicles are available to the field districts that need them. DEA uses various surveillance techniques, including stationary and mobile platforms to conduct surveillance and gather intelligence, the cornerstone of cases against most major drug violators. In addition, evidence obtained through the use of such surveillance often provides the audio and video documentation necessary for conviction. DOJ’s Asset Forfeiture and Money Laundering Section completed a total of 11 compliance reviews of equitable sharing participants in 2011. Table 4 shows the results of the 11 compliance reviews. In addition to the contact named above, Sandra Burrell and Dawn Locke (Assistant Directors), Sylvia Bascope, Samantha Carter, Raymond Griffith, Mike Harmond, Shirley Hwang, Valerie Kasindi, and Jeremy Manion made key contributions to the report. Also contributing to this report were Lydia Araya, Benjamin Bolitzer, Frances Cook, Katherine Davis, Richard Eiserman, Janet Temko, Mitchell Karpman, Linda Miller, Jan Montgomery, Bintou Njie, Robert Lowthian, Cynthia Saunders, and Jerry Seigler. | Every year, federal law enforcement agencies seize millions of dollars in assets in the course of investigations. The AFF was established to receive the proceeds of forfeiture and holds more than $1 billion in assets. DOJ uses the proceeds from forfeitures primarily to cover the costs of forfeiture activities. DOJ also shares forfeiture proceeds with state and local agencies that participate in joint investigations through its equitable sharing program. GAO was asked to review (1) AFFs revenues and expenditures from fiscal years 2003 through 2011 and DOJs processes for carrying over funds for the next fiscal year, and (2) the extent to which DOJ has established controls to help ensure that the equitable sharing program is implemented in accordance with established guidance. GAO analyzed data on AFF revenues, expenditures, and balances; interviewed DOJ officials; and analyzed a sample of 25 equitable sharing determinations, which included 5 determinations from each relevant DOJ agency. GAOs analysis of the samples was not generalizable, but provided insight into DOJs decisions. Annual revenues into the Assets Forfeiture Fund (AFF) from forfeited assets increased from $500 million in 2003 to $1.8 billion in 2011, in part due to an increase in prosecutions of fraud and financial crimes cases. Expenditures in support of forfeiture activities such as equitable sharing payments to state and local law enforcement agencies and payments to victims also increased over the same 9-year period, growing from $458 million in 2003 to $1.3 billion in 2011. The Department of Justice (DOJ) uses the difference between revenues and expenditures in any year to help cover anticipated expenses in the next fiscal year. Because the AFF uses fund revenues to pay for the expenses associated with forfeiture activities, DOJ carries over funds at the end of each fiscal year to ensure it has sufficient resources to cover expenses that may not be covered by the next years revenues. When determining the amounts to carry over, DOJ reviews historical data on past program expenditures, analyzes known future expenses such as salaries and contracts, and estimates the costs of any potential new expenditures. However, DOJ has not documented the process for determining the amount of funds needed to cover anticipated expenditures in the next fiscal year in its annual budget justifications. Providing more transparent information as part of the AFFs annual budget process would better inform Congress oversight of the AFF. Further, after DOJ obligates funds needed to cover program expenses, any remaining AFF funds identified at the end of a fiscal year may be declared an excess unobligated balance. DOJ has the authority to use these balances for any of the departments authorized purposes. Per Office of Management and Budget guidance, in recent years, DOJ used these excess unobligated balances to help cover rescissions. Rescissions cancel the availability of DOJs previously enacted budget authority, making the funds involved no longer available for obligation. For example, in fiscal year 2011, DOJ used excess unobligated balances to help cover a $495 million AFF program rescission. DOJ has established guidelines for making equitable sharing determinations, but controls to ensure consistency and transparency could be improved. For example, DOJ agencies responsible for making equitable sharing determinations may make adjustments to sharing percentages when work hours alone do not reflect the relative value of an agencys contribution to an investigation. If a state or local law enforcement agency contributed a helicopter or a drug-sniffing dog to an investigation, its sharing percentage might be adjusted upward from what it would be based on work hours alone. However, DOJs guidance does not include information regarding how decisions about these adjustments to sharing determinations should be made. This is particularly important given that these determinations represent DOJs overall assessment of each agencys unique contributions and are a key component of how DOJ determines how much to award to each agency. Furthermore, key information that serves as the basis for equitable sharing determinationssuch as the work hours contributed by each of the participating agencies in an investigationis not subject to review by approving authorities. Developing guidance regarding how these decisions are to be made, documenting the basis for these decisions, and subjecting them to review and approval would help ensure the consistency and transparency of equitable sharing determinations. GAO recommends that, among other things, DOJ clearly document how it determines the amount of funds that will need to be carried over for the next fiscal year, develop guidance on how components should make adjustments to equitable sharing determinations, and ensure that the basis for equitable sharing determinations is documented and subjected to review and approval. DOJ concurred with GAOs recommendations. |
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The Flood Control Act of 1944 established a comprehensive plan for flood control and other purposes, such as hydroelectric power production, in the Missouri River Basin. The Pick-Sloan Plan—a joint water development program designed by the U.S. Army Corps of Engineers (the Corps) and the Department of the Interior’s (Interior) Bureau of Reclamation—included the construction of five dams on the Missouri River, including the Garrison Dam in North Dakota and the Oahe, Fort Randall, Big Bend, and Gavins Point Dams in South Dakota. The construction of the Fort Randall Dam, located 7 miles above the Nebraska line in south-central South Dakota, began in May 1946 and was officially dedicated in August 1956. The dam is 160 feet high, and the reservoir behind it, known as Lake Case, stretches 107 miles to the northwest. (See fig. 1.) In September 1959, the Corps began work on the Big Bend Dam, which is about 100 miles northwest of the Fort Randall Dam on land belonging to both the Crow Creek Sioux and Lower Brule Sioux tribes. The Big Bend Dam is 95 feet high and was completed in September 1966. The reservoir behind the dam, known as Lake Sharpe, is 20 miles long. (See fig. 2.) The Crow Creek Sioux and Lower Brule Sioux tribes reside on reservations located across the Missouri River from one another in central South Dakota. The Crow Creek reservation includes about 225,000 acres, 56 percent of which is owned by the tribe or individual Indians. According to the 2000 Census, the Crow Creek reservation has 2,199 residents, with the majority residing in the community of Fort Thompson. The Lower Brule reservation includes about 226,000 acres, 60 percent of which is owned by the tribe or individual Indians. According to the 2000 Census, the Lower Brule reservation has 1,355 residents, including several hundred who reside in the community of Lower Brule. Both reservations include some non- Indians, and both tribes have several hundred members who do not live on the reservations. The major economic activities for both the Crow Creek Sioux and Lower Brule Sioux tribes are cattle ranching and farming, and both tribes provide guided hunting for fowl and other game. Each tribe also operates a casino and a hotel. Both tribes are governed by a tribal council under their respective tribal constitutions, and each tribal council is led by a tribal chairman. The major employers on the reservations are the tribes, the casinos, the Bureau of Indian Affairs, and the Indian Health Service. In addition, the Lower Brule Sioux tribe provides employment through the Lower Brule Farm Corporation, which is the nation’s number one popcorn producer. See appendix II for a map of the Crow Creek and Lower Brule reservations and the locations of the previously mentioned dams and reservoirs. The construction of the Fort Randall Dam caused the flooding of more than 17,000 acres of Crow Creek and Lower Brule reservation land and the displacement of more than 100 tribal families. After these two tribes sustained major damage from this project, the construction of the Big Bend Dam inundated over 20,000 additional acres of their reservations. This flooding displaced more families, some of whom had moved earlier as a result of flooding from the Fort Randall Dam. (See table 1.) Flooding from the installation of both dams resulted in the loss of valuable timber and pasture and forced families to move to less desirable land, which affected their way of life. During the early 1950s, the Corps; Interior, through its Missouri River Basin Investigations Unit (MRBI); and the tribes—represented through tribal negotiating committees—developed their own estimates of the damages caused by the Fort Randall Dam. Discussions and informal negotiating conferences were held among the three parties in 1953 to try to arrive at acceptable compensation for damages. At that point, the Fort Randall Dam had been closed since July 1952 and portions of the reservations were underwater. The MRBI’s appraisal of damages was about $398,000 for Crow Creek and about $271,000 for Lower Brule, which was higher than the Corps’ proposal. Both the MRBI appraisal and the Corps’ proposal were substantially lower than the tribes’ settlement proposals, and the parties were unable to reach settlement. The Corps planned to take the land by condemnation, but in July 1954 decided against that action when the Congress authorized and directed the Corps and Interior to jointly negotiate separate settlements with the tribes. Meanwhile, the tribes arranged to have settlement bills introduced in July 1954. These bills requested $1.7 million for damages for the Crow Creek Sioux tribe and $2.5 million for damages for the Lower Brule Sioux tribe. Both of these bills also contained requests for about $2.5 million each for rehabilitation funds. The first formal negotiating conference was held among the parties in November 1954, and further discussions continued over several more years after the bills were introduced, but, again, the parties could not reach settlement. In 1955, with negotiations stalled, the Corps requested and obtained an official declaration of taking. The tribes—with their lands now flooded—received funds based on the earlier MRBI appraisal figures, with the understanding that negotiations for additional funds would continue. The tribes continued to insist on receiving substantially higher compensation amounts for damages, and additional funds for rehabilitation, as part of the settlement. The amounts the tribes requested for rehabilitation fluctuated in tribal settlement proposals between 1954 and 1957, but both the Corps and the MRBI maintained that rehabilitation funding was not within the scope of the negotiations. In March 1958, each tribe’s negotiating committee submitted new proposals at compensation hearings for the Fort Randall Dam. The Crow Creek Sioux tribe proposed compensation of about $2.2 million for damages and administrative expenses related to the settlement, and the Lower Brule Sioux tribe proposed compensation of about $1.8 million for damages and administrative expenses. Neither proposal included funds for rehabilitation because both tribes agreed with the government’s request to wait to procure these funds in the Big Bend Dam compensation request. In May 1958, bills were introduced in the Congress with amounts that were less than the tribes had proposed through their negotiating committees, with the amount for direct damages from Fort Randall Dam construction being substantially reduced. According to House reports, both the tribes and the Corps agreed to the amounts proposed for damages. Later that summer, amendments to the bills reduced the amount for indirect damages for both tribes. In September 1958, the Congress authorized a payment of about $1.5 million to the Crow Creek Sioux tribe, and almost $1.1 million to the Lower Brule Sioux tribe. See table 2 for a summary of selected settlement proposals related to the Fort Randall Dam. In contrast to the Fort Randall negotiations, the compensation for the construction of the Big Bend Dam was granted quickly. In bills introduced in March 1961, the Crow Creek Sioux tribe requested over $1 million for damages and administrative expenses as a result of the Big Bend Dam construction. The Lower Brule Sioux tribe requested close to $2.4 million for damages, administrative expenses, and a new school. In addition, both tribes requested the rehabilitation funds that had not been included in the Fort Randall Dam settlement—that is, the Crow Creek Sioux tribe requested more than $4 million and the Lower Brule Sioux tribe requested about $2.7 million. In June 1961, the government and the tribes agreed to a reduction in direct damages, while the tribes requested an increase to the amount for indirect damages, bringing the total amount of compensation, including rehabilitation, requested by the Crow Creek Sioux and Lower Brule Sioux tribes to about $4.9 million for each tribe. In subsequent bills over the next year, however, the Congress lowered indirect damages considerably and dropped the amount requested for a new school for Lower Brule. The amounts requested for administrative expenses and rehabilitation were also reduced. In October 1962, the Congress authorized a payment of $4.4 million to the Crow Creek Sioux tribe and about $3.3 million to the Lower Brule Sioux tribe. See table 3 for a summary of selected settlement proposals related to the Big Bend Dam. See appendixes III and IV for a timeline summary of the settlement negotiations and compensation for the two dams for the Crow Creek Sioux and Lower Brule Sioux tribes, respectively. Tribes at five other reservations affected by flood control projects along the Missouri River incurred losses ranging from about 600 acres to over 150,000 acres. These tribes received some compensation, primarily during the 1950s, for the damages they sustained. However, beginning in the 1980s, some of these tribes began requesting additional compensation. The Congress responded to their requests by authorizing the establishment of development trust funds. (See table 4.) The tribes at the Fort Berthold, Standing Rock, and Cheyenne River reservations received compensation within the ranges we had suggested the Congress consider in our reviews of the tribes’ additional compensation claims. The ranges were based on the current value of the difference between each tribes’ final asking price and the amount that the Congress authorized. We were not asked to review the additional compensation claims for the Crow Creek Sioux and Lower Brule Sioux tribes in the 1990s or for the Santee Sioux and Yankton Sioux tribes in 2002. The Crow Creek Sioux and Lower Brule Sioux tribes’ consultant differed from the approach we used in our prior reports. The consultant used a variety of settlement proposals, instead of consistently using the tribes’ final asking prices, in calculating the difference between what the tribes asked for and what the Congress authorized. As a result, the consultant’s proposed compensation estimates are higher than if he had consistently used the tribes’ final asking prices. In addition, the consultant provided only the highest additional compensation value, rather than a range of possible additional compensation from which the Congress could choose. To arrive at an additional compensation estimate, the consultant did not consistently use the tribes’ final asking prices when calculating the difference between what the tribes asked for and what they finally received. In determining possible additional compensation for the tribes at the Fort Berthold and Standing Rock reservations in 1991, and the Cheyenne River reservation in 1998, we used the tribes’ final asking prices to calculate the difference between what the tribes asked for and what they received. In our prior reports, we used the tribes’ final position because we believed that it represented the most up-to-date and complete information, and that their final position was more realistic than their initial asking prices. In contrast, the consultant used figures from a variety of settlement proposals—several of which were not the tribes’ final asking prices—to estimate additional compensation for damages (including direct and indirect damages), administrative expenses, and rehabilitation. As a result, the consultant’s estimate of the tribes’ asking prices in the late 1950s and early 1960s was about $7.7 million higher than it would have been if he had consistently used the tribes’ final asking prices. Choosing which settlement proposal to use to calculate the difference between what the tribe asked for and what it finally received is critically important, because a small numerical difference 50 years ago can result in a large difference today, once it is adjusted to reflect more current values. With respect to the Fort Randall Dam, the consultant used amounts from a variety of settlement proposals for damages and administrative expenses. To determine additional compensation, the consultant used a $2.2 million settlement proposal by the Crow Creek Sioux tribe and a $2.6 million settlement proposal by the Lower Brule Sioux tribe. (See table 5.) The Crow Creek proposal was from May 1957, and was the same as the tribe’s final asking price requested about 1 year later, in February 1958. However, the Lower Brule proposal was from the first compensation bill introduced in the Congress in July 1954, almost 4 years before the tribe’s final asking price of about $1.8 million in March 1958-—a difference of more than $850,000. For the Big Bend Dam, the consultant also used amounts from different settlement proposals for damages and administrative expenses. To determine additional compensation, the consultant used amounts from congressional bills introduced in March 1961 for direct damages, but used amounts from proposed amendments to the bills in June 1961 for indirect damages. The tribes’ asking prices from June 1961 can be considered their final asking prices because the proposed amendments are the last evidence of where the tribes requested specific compensation (indirect damages) or agreed to a compensation amount (direct damages). The consultant would have been more consistent had he used both the indirect and direct damage settlement figures in the proposed amendments from June 1961, rather than a mixture of these figures. As a result, the total amount for damages the consultant used to calculate the difference between what the tribes requested and what it finally received is about $427,000 (in 1961 dollars) higher than if the tribes’ final asking prices from June 1961 had been used consistently. (See table 6.) Lastly, the consultant did not use the tribes’ final asking prices for the rehabilitation component of the settlement payment. The consultant used a $6.7 million rehabilitation figure that the Crow Creek Sioux tribe’s negotiating committee proposed in May 1957 and a $6.3 million rehabilitation figure that was proposed in congressional bills in 1955 and 1957 for the Lower Brule Sioux tribe. (See table 7.) Both of these figures were developed during the negotiations for the Fort Randall Dam. However, the tribes agreed in their February and March 1958 proposals— their final asking prices for the Fort Randall Dam—to defer consideration of their rehabilitation proposals until after land acquisitions were made for the construction of the Big Bend Dam. The Big Bend Dam’s installation would once again result in the flooding of their lands. In our view, the consultant should have used the final rehabilitation figures proposed by the tribes in 1961—that is, $4 million for the Crow Creek Sioux tribe and $2.7 million for the Lower Brule Sioux tribe. While rehabilitation was the largest component of the tribes’ settlement proposals, we believe it should be considered separately from the comparison for damages because rehabilitation was not directly related to the damage caused by the dams. Funding for rehabilitation, which gained support in the late-1940s, was meant to improve the tribes’ social and economic development and prepare some of the tribes for the termination of federal supervision. Funding for these rehabilitation programs came from both the government and from the tribes themselves. From the late- 1940s through the early-1960s, the Congress considered several bills that would have provided individual tribes with rehabilitation funding. For example, between 1949 and 1950, the House passed seven bills for tribes totaling more than $47 million in authorizations for rehabilitation funding, and considered other bills, one of which would have provided $50 million to several Sioux tribes, including Crow Creek and Lower Brule. Owing to opposition from tribal groups, the termination policy began to lose support with the Congress in the late 1950s, and rehabilitation funding for individual tribes during this time was most often authorized by the Congress in association with compensation bills for dam projects on the Missouri River. However, the granting of rehabilitation funding for these tribes was inconsistent. Some tribes did not receive rehabilitation funding along with compensation for damages, while others did. (See table 8.) In our two prior reports, we suggested that, for the tribes of Fort Berthold, Standing Rock, and Cheyenne River, the Congress consider a range of possible compensation based on the current value of the difference between the final asking price of each tribe and the amount that it received. In calculating the current value, we used two different rates to establish a range of additional compensation. For the lower end of the range, we used the inflation rate to estimate the amount the tribes would need to equal the purchasing power of the difference. For the higher range, we used an interest rate to estimate the amount the tribes might have earned if they had invested the difference in Aaa corporate bonds as of the date of the settlement. The consultant did not follow this approach when he calculated the compensation estimates for the Crow Creek Sioux and Lower Brule Sioux tribes. Instead, he used the corporate bond rate to develop a single figure for each tribe, rather than a range. The consultant justified using only the corporate bond rate to calculate the compensation figures for the Crow Creek Sioux and Lower Brule Sioux tribes by pointing out that the Congress authorized additional compensation of $149.2 million for the tribes of Fort Berthold and $290.7 million for the Cheyenne River Sioux tribe in 1992 and 2000, respectively, by using our estimates of the high end of the range for these tribes. The consultant contended that if the Congress also uses the corporate bond rate for the Crow Creek Sioux and Lower Brule Sioux tribes to determine compensation, it would ensure parity with the amounts the tribes of Fort Berthold and the Cheyenne River Sioux received. However, the Congress has not always chosen to use the highest value in the ranges we estimated. For example, in the case of the Standing Rock Sioux tribe, the Congress chose to provide additional compensation of $90.6 million in 1992—an amount closer to the lower end of the range we estimated. Using the approach we followed in our prior reports, which was based on the tribes’ final asking prices, we found that the additional compensation the Crow Creek Sioux and Lower Brule Sioux tribes received in the 1990s was either at the high end or above the range of possible additional compensation. For both tribes, we calculated the difference between the final asking prices and the compensation authorized in 1958 and 1962. We then took the difference and adjusted it to account for the inflation rate and the Aaa corporate bond rate through either 1996 or 1997 to produce a possible range of additional compensation to compare it with the additional compensation the Congress authorized for the tribes in 1996 and 1997. For the Crow Creek Sioux tribe, we estimated that the difference adjusted to 1996 values for both dams would range from $6.5 million to $21.4 million (see table 9), compared with the $27.5 million the Congress authorized for the tribe in 1996. The $27.5 million in additional compensation already authorized for the Crow Creek Sioux tribe is therefore higher than the amount that we would have proposed in 1996 using our approach. For the Lower Brule Sioux tribe, we estimated that the difference adjusted to 1997 values for both dams would range from $12.2 million to $40.9 million (see table 10), compared with the $39.3 million the Congress authorized for the tribe in 1997. The $39.3 million falls toward the high end of the range that we would have proposed in 1997 using our approach. Our estimates of additional compensation for the two tribes vary significantly from the amounts calculated by the tribes’ consultant. Our estimated range for the two tribes combined is from about $18.7 million to $62.3 million. The consultant calculated an additional compensation figure for the two tribes of $292.3 million (in 2003 dollars)—that is, $105.9 for the Crow Creek Sioux tribe and $186.4 for the Lower Brule Sioux tribe—before subtracting the amounts received by the tribes in 1996 and 1997, respectively. There are two primary reasons for the difference between our additional compensation amounts and the consultant’s amounts. First, most of the difference is due to the different rehabilitation cost figures that were used. For the difference between the tribes’ asking prices for rehabilitation and the amounts they actually received, we used $901,450 and the consultant used about $7.3 million (in 1961 and 1957 dollars, respectively). Once the $901,450 is adjusted to account for inflation and interest earned through 1996 and 1997, it results in a range of additional compensation for rehabilitation for the two tribes combined of about $4.8 million to $15.1 million. If the consultant’s rehabilitation figure of about $7.3 million is adjusted through 1996 and 1997, his total for the two tribes is $120.9 million, or more than $105 million above our high estimate. Second, our dollar values were adjusted to account for inflation and interest earned only through 1996 and 1997 to compare them with what the two tribes received in additional compensation at that time. The consultant, however, adjusted for interest earned up through 2003. In addition, he then incorrectly adjusted for the additional compensation the tribes were authorized in the 1990s. Specifically, the consultant subtracted the $27.5 million and $39.3 million authorized for the Crow Creek Sioux and Lower Brule Sioux tribes in 1996 and 1997, respectively, from his additional compensation totals without first making the different estimates comparable. Since these amounts were in 1996 and 1997 dollar values, versus the 2003 dollar values for his current calculations, it was incorrect to subtract one from the other without any adjustment. In our view, the consultant should have adjusted his current calculations through 1996 and 1997, depending on the tribe, and then should have subtracted the additional compensation provided the tribes at that time. If there was any remaining compensation due the tribes, the final step then would have been to adjust it to reflect 2003 dollar values. Using this approach, the additional compensation provided to the tribes in the 1990s would have been subtracted from comparable dollar values. The additional compensation already authorized for the Crow Creek Sioux and Lower Brule Sioux tribes in 1996 and 1997, respectively, is consistent with the additional compensation authorized for the other tribes on the Missouri River. Rather than bringing the Crow Creek Sioux and Lower Brule Sioux tribes into parity with the other tribes, the two bills under consideration in the 109th Congress—H.R. 109 and S. 374—would have the opposite effect. Providing a third round of compensation to the Crow Creek Sioux and Lower Brule Sioux tribes, in the amounts proposed in the bills, would catapult them ahead of the other tribes and set a precedent for the other tribes to seek a third round of compensation. Our analysis does not support the additional compensation amounts contained in H.R. 109 and S. 374. Notwithstanding the results of our analysis, the Congress will ultimately decide whether additional compensation should be provided and, if so, how much it should be. Our analysis will assist the Congress in this regard. Because the consultant’s analysis was the basis for the tribes’ additional compensation claims and the consultant had asserted that the additional compensation amounts were based on a methodology deemed appropriate by GAO, we chose to provide the tribes’ consultant with a draft of this report for review and comment. In commenting on the draft, the tribes’ consultant (1) acknowledged that he had made a calculation error in his analysis, (2) proposed a range of additional compensation based on four different alternatives, and (3) discussed the complex issues of “asking price” in the context of the particular set of facts for the Crow Creek Sioux and Lower Brule Sioux tribes. In addition, the consultant commented “…that there has been no uniform or consistent approach, method, formula, or criteria for providing additional compensation. . .” to the seven tribes affected by Pick-Sloan dam projects on the Missouri River. Specifically, the consultant pointed out that the Congress has provided additional compensation to four tribes based on a per-acre analysis, while only three tribes have received additional compensation within the ranges we calculated in our two prior reports. As a result, the consultant believes that there is a wide disparity in the total compensation that the seven tribes have received from the Congress. As discussed in detail below, we believe that our approach is reasonable, and we did not make any changes to the report based on the consultant’s comments. The tribes’ consultant provided written comments that are included in appendix V, along with our specific responses. To address the perceived disparity in the total compensation amounts provided by the Congress, the consultant proposed four different alternatives for calculating additional compensation for the Crow Creek Sioux and Lower Brule Sioux tribes: (1) on a per-acre basis compared with the Cheyenne River Sioux tribe, (2) the consultant’s original proposal (amended to correct for the calculation error), (3) on a per-acre basis compared with the Santee Sioux tribe, and (4) calculations based on using the tribes’ highest asking prices. We do not believe that the consultant’s amended original proposal nor the three new alternatives represent a sound approach for establishing the range of additional compensation. Our approach is to provide the Congress with a range of possible additional compensation based on the difference between the amount the tribes believed was warranted at the time of the taking and the final settlement amount. We then adjusted the differences using the inflation rate for the lower end of the range and the corporate bond rate for the higher end. The ranges of additional compensation we calculated in this report were calculated in exactly the same way we did in our 1991 and 1998 reports, and we believe our approach is reasonable. In our view, trying to compare the total compensation for the tribes on a per-acre basis—which are two of consultant’s proposed alternatives—does not take into account the differences of what each tribe lost. For example, even if the individual resources such as timber, wildlife, and wild products would have all been valued the same for all of the tribes, if one tribe lost more of one resource than another, then their per-acre compensation values would be different. Also, about half of the payments to four of the tribes were for rehabilitation, which had no direct correlation to the acreage flooded by the dams, and the consultant did not make the different dollar amounts comparable before performing his per-acre calculations. The tribes’ consultant disagreed with our assumption that the tribes’ final asking prices were based on the most up-to-date and complete information and that they were more realistic than their initial asking prices. Specifically, the consultant noted that the tribes’ final asking prices “were made under conditions of extreme duress.” We agree with the consultant that the tribes were not willing sellers of their land at the initial price that the government offered for their land. However, we disagree that this factor invalidates the use of the tribes’ final asking prices. The drawn out negotiations for the Fort Randall Dam and the amounts of the tribes’ final asking prices do not support the conclusion that the tribes simply capitulated and accepted whatever the government offered. For example, for 12 of the 15 compensation components shown in tables 5, 6, and 7 of our report, the tribes’ final asking prices were equal to, or higher than, their initial settlement proposals. We used a clearly defined and consistent approach, whereas, in his analysis, the consultant selected only certain numbers from a variety of tribal settlement proposals without providing any justification. While the tribes’ consultant chose to use the Crow Creek Sioux tribes’ offer from May 1957, he did not use the Lower Brule Sioux tribes’ offer from the same time. Instead, the consultant chose to use the Lower Brule Sioux tribes’ initial offer from 3 years earlier—July 1954— without any explanation. Furthermore, rather than consistently using the Lower Brule Sioux tribes’ July 1954 offer, the consultant used the tribes’ rehabilitation offer from April 1957, again without any explanation. The tribes’ consultant correctly points out that only three of the seven tribes have received additional compensation consistent with the ranges calculated in our two prior reports. Until this report, the Congress had only asked us to review these three tribes’ additional compensation requests, and, each time, the Congress provided additional compensation within the ranges we calculated. Furthermore, our two prior reports dealt with the three highest tribal claims for additional compensation—all over $90 million—whereas, the four tribes that obtained additional compensation based on a per-acre calculation were all less than $40 million, and we were not asked to review those requests. As noted in this report, although the additional compensation already provided to the tribes in 1996 and 1997 was calculated on a per-acre basis, by coincidence, for the Lower Brule Sioux tribe it was within the range we would have proposed and for the Crow Creek Sioux tribe it was above our range. As such, should the Congress rely on our analysis in this report and not provide these two tribes a third round of compensation, then the additional compensation provided to five of the seven tribes would generally be within the ranges we have calculated, leaving only two tribes that would have had their additional compensation calculated based on a per-acre analysis and not analyzed by GAO. Accordingly, we believe our approach would provide more consistency among the tribes. It is important to note that both the consultant’s analysis and the two bills pending in the 109th Congress state that the additional compensation amounts for the Crow Creek Sioux and Lower Brule Sioux tribes are based on a methodology deemed appropriate by GAO. We do not believe our analysis supports the additional compensation claims. We recognize that compensation issues can be a sensitive, complex, and controversial. Ultimately, it is up to the Congress to make a policy determination as to whether additional compensation should be provided and, if so, how much it should be. We amended our observations to reflect this reality. We are sending copies of this report to interested congressional committees, the Secretary of the Interior, the tribes’ consultant, the Crow Creek Sioux and Lower Brule Sioux tribes, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have 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 VI. To assess the consultant’s methods and analysis for determining additional compensation for the Crow Creek Sioux and Lower Brule Sioux tribes as a result of the flooding of 38,000 acres of their land and resources by the installation of the Fort Randall and Big Bend Dams, we used standard economic principles and the analysis we conducted in our two prior reports on additional compensation. We met with the tribes’ consultant to determine how he used the method that we suggested the Congress adopt as the basis for granting additional compensation to other tribes and reviewed additional information he provided on how he arrived at his proposed compensation amounts. In order to ensure that we obtained and reviewed all relevant data, we conducted a literature search for congressional, agency, and tribal documents at the National Archives and the Department of the Interior’s (Interior) library. We used original documents to learn about the negotiation process and to identify the appraised land prices and various proposed settlement amounts. As a result, we determined that these data were sufficiently reliable for purposes of this report. Specifically, from the National Archives, we reviewed legislative files containing proposed House and Senate bills, public laws enacted, House and Senate reports, and hearings held on compensation for the tribes. In addition, from Interior’s library, we obtained Missouri River Basin Investigations Unit documents to review information on early damage estimates as a result of installation of the Fort Randall Dam and on details regarding both informal and formal negotiations between the federal government and the two tribes. We also met with representatives of the two tribes on their reservations in South Dakota to (1) discuss the analysis, the actions taken with the compensation previously obtained, and plans for the additional compensation amounts requested and (2) review any records they might have on earlier compensation negotiations. The tribes, however, did not have any documentation on tribal discussions or decisions regarding either compensation negotiations or offers that took place in the 1950s and 1960s. We performed our work from October 2005 to April 2006 in accordance with generally accepted government auditing standards. January 4, February 14 Tribal Prity Act reintrodced as H.R. 109 nd S. January 4, February 14 Tribal Prity Act reintrodced as H.R. 109 nd S. The following are our comments on the Crow Creek Sioux and Lower Brule Sioux tribes’ consultant’s letter dated April 27, 2006. 1. The tribes’ consultant did not calculate a range of additional compensation as we suggested in our report. Our approach is to provide the Congress with a range of possible additional compensation based on the difference between the amounts the tribes believed was warranted at the time of the taking and the final settlement amount. We then adjusted the differences using the inflation rate for the lower end of the range and the corporate bond rate for the higher end. In deciding not to calculate a low-end value using the inflation rate, the consultant stated that “…there is no precedent for Congress using the inflation rate as a basis for any additional compensation it has awarded to the seven Tribes since 1992.” While the consultant is correct in stating that the Congress has not provided any tribe with additional compensation at the lowest value in the ranges we have calculated, there is a precedent for the Congress providing an amount less than the highest value. In 1992, the Congress authorized $90.6 million in additional compensation for the Standing Rock Sioux tribe, which was toward the low end of the possible compensation range we calculated of $64.5 million to $170 million. Although the Congress did not select the lowest value, having a lower value provided the Congress with a range from which to select. We did not suggest that the consultant should propose a range of additional compensation using four different approaches. 2. Determining whether additional compensation is warranted is a policy decision for the Congress to decide. Nonetheless, if the Congress relies on our analysis in this report and does not provide a third round of compensation to the Crow Creek Sioux and Lower Brule Sioux tribes, the additional compensation provided to five of the seven tribes—the Cheyenne River Sioux tribe, the Crow Creek Sioux tribe, the Lower Brule Sioux tribe, the Standing Rock Sioux tribe, and the Three Affiliated Tribes of the Fort Berthold Reservation—would generally fall within the ranges we calculated using our approach, thereby leaving only two tribes—the Santee Sioux tribe and the Yankton Sioux tribe— that would have had their additional compensation calculated on a per- acre basis and not reviewed by GAO. As a result, we believe using our approach, which is based on the amounts that the tribes believed were warranted at the time of the taking, would provide more consistency among the tribes, rather than less. 3. The tribes’ consultant did not make the amounts from different years comparable before making his per-acre calculations. The consultant did not adjust the original compensation amounts from 1947 through 1962 before adding them with the additional compensation amounts from 1992 through 2002. As a result, any comparisons made between the compensation amounts of the Crow Creek Sioux and Lower Brule Sioux tribes and other tribes, such as the Cheyenne River Sioux tribe or the Santee Sioux tribe, would be inaccurate. For example, for the Lower Brule Sioux tribe, the consultant added three amounts from 1958, 1962, and 1997 for a total of $43.6 million, without first adjusting the individual amounts to constant dollars. More importantly, we do not believe that an aggregate per-acre comparison among the tribes is appropriate. We agree with the tribes’ consultant that the tribes all suffered similar damages, but similar does not mean exactly the same. Damages would have to be exactly the same among all tribes for there to be equal total compensation on a per-acre basis, and this was not the case. Products, such as buildings, timber, and wildlife, were valued differently depending on type and some tribes lost more of one resource than other tribes. As a result, their per-acre compensation values would be different. Also, about half of the payments to four of the tribes were for rehabilitation that was not directly linked to the acreage flooded by the dams. 4. We disagree that the additional compensation authorized for the Cheyenne River Sioux tribe in 2000 had a “skewing” effect on the additional compensation provided to the four other tribes prior to that time. The additional compensation authorized for the Cheyenne River Sioux tribe fell within the range we calculated, as did the additional compensation authorized for the Three Affiliated Tribes of the Fort Berthold Reservation and the Standing Rock Sioux tribe. Our range was based on the amount the Cheyenne Rive Sioux tribe believed was warranted at the time of the taking. Furthermore, as our analysis in this report demonstrates, although the Crow Creek Sioux and Lower Brule Sioux tribes were provided with additional compensation in 1996 and 1997 based on a per-acre analysis, the amounts were consistent with, or higher, than the ranges we calculated in this report. 5. As the tribes’ consultant noted in his comments, he did not use the tribes’ highest offers in every case in his original analysis because he believed that some of those offers, such as the $16 million rehabilitation figure requested by the Lower Brule Sioux tribe, were skewed by special circumstances. However, the consultant uses these same highest asking prices in his fourth alternative, even though he believed them to be too unreasonable to include in his original analysis. 6. The tribes’ consultant is correct in pointing out that we did not use the exact phrase “final asking price” in our two prior reports. However, the ranges we calculated in our 1991 and 1998 reports were based on the final asking price of the tribes and their final settlements. We used the phrase “at the time of the taking” as a general phrase to denote the time period when the tribes’ were negotiating with the government for compensation for the damages caused by the dams. It is not intended to refer to a specific date. 7. We disagree with the tribes’ consultant that tribal members were forced to relocate without funds for moving expenses. The tribes did receive initial funds based on the Missouri River Basin Investigations Unit appraisals to help cover relocation expenses 3 years before they made what we refer to as their final asking prices in March 1958. In March 1955, the Crow Creek Sioux tribe received $399,313 and the Lower Brule Sioux tribe received $270,611 from the court, with the understanding that negotiations between the tribes, the U.S. Army Corps of Engineers, and Interior would continue until settlements were achieved. Tribal committees were formed to plan relocation activities with these funds. 8. We disagree with the tribes’ consultant regarding his characterization of the rehabilitation portion of the payment the tribes received. We state in this report that it should be considered separately from the comparison of the dams because it was not directly related to the damage caused by the dams. The tribes’ consultant states that “…the Congress has consistently demonstrated the understanding that funds for rehabilitation were directly linked to the damages caused by the dams.” We agree that funding for rehabilitation became intertwined with compensation for the dams, and we included rehabilitation in our analysis in this report, as shown in tables 9 and 10, as we did for the Cheyenne River Sioux tribe and the Standing Rock Sioux tribe. However, we disagree that rehabilitation is directly linked to the damages caused by the dams for the following three reasons. First, other tribes not affected by dam projects were also provided with rehabilitation funding. Second, rehabilitation funding was to improve the economic and social conditions of all tribal members, it was not limited to only those members directly affected by the dams. Third, it was clear during the negotiations that the government did not consider rehabilitation funding to be compensation for the damages caused by the dams. In addition, in this report, as in our 1998 report, we show the breakout of each component in our analysis to provide the Congress with the most complete information. In addition to the individual named above, Jeffery D. Malcolm, Assistant Director; Greg Carroll; Timothy J. Guinane; Susanna Kuebler; and Carol Herrnstadt Shulman made key contributions to this report. Also contributing to the report were Omari Norman, Kim Raheb, and Jena Y. Sinkfield. | From 1946 to 1966, the government constructed the Fort Randall and Big Bend Dams as flood control projects on the Missouri River in South Dakota. The reservoirs created behind the dams flooded about 38,000 acres of the Crow Creek and Lower Brule Indian reservations. The tribes received compensation when the dams were built and additional compensation in the 1990s. The tribes are seeking a third round of compensation based on a consultant's analysis. The Congress provided additional compensation to other tribes after two prior GAO reports. For those reports, GAO found that one recommended approach to providing additional compensation would be to calculate the difference between the tribe's final asking price and the amount that was appropriated by the Congress, and then to adjust it using the inflation rate and an interest rate to reflect a range of current values. GAO was asked to assess whether the tribes' consultant followed the approach used in GAO's prior reports. The additional compensation amounts calculated by the tribes' consultant are contained in H.R. 109 and S. 374. The tribes' consultant differed from the approach used in prior GAO reports by (1) not using the tribes' final asking prices as the starting point of the analysis and (2) not providing a range of additional compensation. First, in calculating additional compensation amounts, GAO used the tribes' final asking prices, recognizing that their final settlement position should be the most complete and realistic. In contrast, the consultant used selected figures from a variety of tribal settlement proposals. For example, for the rehabilitation component of the tribes' settlement proposals, the consultant used $13.1 million from proposals in 1957, rather than $6.7 million from the tribes' final rehabilitation proposals in 1961. Second, the tribes' consultant calculated only the highest additional compensation dollar value rather than providing the Congress with a range of possible additional compensation based on different adjustment factors, as in the earlier GAO reports. Based on calculations using the tribes' final asking prices, GAO's estimated range of additional compensation is generally comparable with what the tribes were authorized in the 1990s. By contrast, the consultant estimated about $106 million and $186 million for Crow Creek and Lower Brule, respectively (in 2003 dollars). There are two primary reasons for this difference. First, GAO used the tribes' final rehabilitation proposals from 1961, rather than the 1957 proposals used by the consultant. Second, GAO's dollar amounts were adjusted only through 1996 and 1997 to compare them directly with what the tribes received at that time. The consultant, however, adjusted for interest earned through 2003, before comparing it with the payments authorized in the 1990s. The additional compensation already authorized for the tribes in the 1990s is consistent with the additional compensation authorized for other tribes on the Missouri River. GAO's analysis does not support the additional compensation amounts contained in H.R. 109 and S. 374. |
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Individual taxpayers generally realize gains or losses when they sell capital assets, which are generally defined as properties owned for investment or personal purposes and outside the normal course of a taxpayer’s trade or business. In recent years, IRS studies show that the majority of capital asset transactions and capital gains and losses were for securities transactions, including sales of corporate stock, mutual funds, bonds, options, and capital gain distributions from mutual funds. For example, in 1999, the latest year for which IRS published data on capital assets sales, an estimated 91 percent of capital asset transactions, 62 percent of capital gains, and 79 percent of capital losses were from securities transactions. Also, over the past two decades, individual ownership of securities assets held outside of retirement accounts has increased. According to the Federal Reserve Board, the percentage of families that own stock, mutual funds, and bonds outside of retirement accounts increased from 25 percent in 1983 to a high of 42 percent in 2001, before falling to 38 percent in 2004. When taxpayers sell or otherwise receive income from securities, they must report the transactions on their federal income tax returns. For securities sales, taxpayers are to report the dates they acquired and sold the asset; sales price, or gross proceeds from the sale; cost or other basis of the sold asset; and resulting gains or losses on Schedule D to the individual tax return—Form 1040. Taxpayers are to report this information separately for short-term transactions and long-term transactions. Taxpayers also are to report the total amount of their capital gain distributions from mutual funds, which are always considered to be long-term transactions. Taxpayers are to report their overall gains or losses from securities sales, capital gain distributions, and other capital gains on the Form 1040 tax return itself. Generally, a taxpayer’s gain or loss from a securities sale is simply the difference between the gross proceeds from the sale and the original purchase price, or original cost basis. However, before taxpayers can determine any gains or losses from securities sales, they must determine if and how the original cost basis of the securities must be adjusted to reflect certain events, such as stock splits, nontaxable dividends, or nondividend distributions. For example, figure 1 shows how a taxpayer would need to adjust the basis of a stock following a stock split to accurately determine the resulting capital gain or loss when the stock is sold. In this example, if the taxpayer fails to properly adjust the basis of the stock to account for the split, he or she will incorrectly report a capital loss from the sale. Taxpayers who buy and sell the same stock or mutual fund shares at various times can determine basis in a number of ways. Taxpayers can specifically identify the groups of shares they want to sell. For example, if a taxpayer buys a group of 10 shares of stock in one year for $1 per share and another group of 10 shares of the same stock in the next year for $2 per share, and then sells 10 shares of the stock, the taxpayer can choose to sell the stocks with either the $1 or $2 cost basis. If taxpayers cannot identify which shares they sold among many they bought on varying occasions, they must report the basis of the securities they purchased first as the basis of the sold shares. Except for mutual fund shares, taxpayers cannot use the average cost of securities they purchased at various times to determine basis. When taxpayers sell securities through a broker, that broker is required to file Form 1099-B with IRS and the taxpayers to report a description of the security, sales date, number of shares sold, and gross proceeds from the sale, along with other information. Brokers are not required to report the cost or other basis of the sold security or, with the exception of regulated futures contracts, the resulting gain or loss from a security sale. Capital gain distributions from mutual funds are to be reported on Form 1099- DIV. The rate at which income from securities is taxed depends on how long taxpayers held a security before sale and taxpayers’ regular income tax rates. Securities assets sold after being held for 1 year or less are considered short-term and taxed at the taxpayers’ regular income tax rates. Assets sold after being held for more than 1 year are considered to be long- term and are generally taxed at maximum rates of 5 percent or 15 percent, depending on the taxpayer’s regular income tax rates. Capital gain distributions from mutual funds are always taxed as long-term gains. Taxpayers can deduct capital losses against their capital gains, and any excess losses can be deducted against ordinary income up to a limit of $3,000 ($1,500 for married taxpayers filing separately), beyond which the losses can be carried over to offset capital gains or ordinary income in future tax years. Thirty-eight percent of individual taxpayers who had securities transactions misreported their securities gains or losses for tax year 2001. A greater percentage of taxpayers misreported their securities sales (36 percent) than misreported their capital gain distributions (13 percent), and most of the misreported securities transactions exceeded $1,000 of capital gain or loss. Taxpayers often misreported their capital gains or losses from securities sales because they failed to accurately report the securities’ basis. For tax year 2001, individual taxpayers frequently misreported their capital gains or losses from the securities they sold. Overall, an estimated 8.4 million of the estimated 21.9 million taxpayers with securities transactions misreported their gains or losses. Table 1 shows the estimated percentages of taxpayers who misreported their securities sales and capital gain distributions, overall and by the securities’ holding period. Table 1 shows that a higher estimated percentage of taxpayers misreported a securities sale than a capital gains distribution. Overall, an estimated 7.3 million out of an estimated 20.3 million taxpayers misreported their securities sales compared to the estimated 1.2 million out of an estimated 9.1 million taxpayers who misreported their capital gain distributions. One reason taxpayers may misreport securities sales more frequently is that taxpayers must compute the portion of their sales proceeds that constitutes a gain or loss, whereas taxpayers need only add up their capital gain distributions from information returns they receive and enter the amounts on their tax returns. Table 1 also shows that individual taxpayers are estimated to have misreported their short-term securities sales about as often as their long-term sales. In addition, our analyses showed the following: Of those taxpayers who misreported securities sales, an estimated 97 percent misreported gains or losses from the sales of stocks and mutual funds while an estimated 5 percent misreported bonds, options, or futures. Individual taxpayers misreported securities sales more frequently than other types of income, such as wages and salary, dividend income, and interest income. Respectively, an estimated 10 percent, 17 percent, and 22 percent of taxpayers with these types of income misreported the income. We were not able to estimate the capital gains tax gap for securities because the cases we reviewed included too few misreported securities transactions and taxpayers misreported a wide range of dollar amounts from the transactions, among other reasons (see app. I). However, we were able to determine the direction of the misreporting. For securities sales, an estimated 64 percent of taxpayers underreported their income from securities (i.e., they understated gains or overstated losses) compared to an estimated 33 percent of taxpayers who overreported income (i.e., they overstated gains or understated losses). For both underreported and overreported income, some taxpayers misreported over $400,000 in gains or losses. Also, as shown in table 2, around half of taxpayers who did not accurately report their securities sales were estimated to have misreported at least $1,000 of capital gains or losses (that is, taxpayers not in the less than $1,000 categories). In terms of income levels, the distribution of taxpayers who misreported gains or losses from securities sales and capital gain distributions did not vary greatly from the income level for all individual taxpayers for tax year 2001, as shown in table 3. Based on information in the files we reviewed, a primary type of noncompliance that caused taxpayers to inaccurately report their capital gains or losses from securities sales in tax year 2001 was misreporting the basis of the securities they sold. Table 4 shows the estimated frequency of the types of noncompliance that caused taxpayers to misreport capital gains or losses from their securities sales. For taxpayers who misreported basis, a greater percentage failed to accurately report basis for long-term securities holdings (35 percent of taxpayers who misreported securities sales) than for short-term holdings (21 percent). Taxpayers who failed to report securities sales altogether did not report short-term and long-term securities sales at a similar rate (20 percent and 22 percent, respectively, of taxpayers who misreported securities sales). Although we were able to determine the percentage of taxpayers who failed to accurately report their securities sales because they misreported basis (49 percent), we could not develop reliable estimates on the reasons for this type of misreporting because most of the NRP examination case files did not provide sufficiently descriptive information. However, of the 133 taxpayers who misreported basis from the 849 case files we reviewed, we were able to determine that 32 taxpayers misreported basis for the following reasons: Taxpayers did not have records of their securities purchases (16 taxpayers). Although during examinations, IRS was able to obtain basis records for some of these taxpayers from their brokers, for 9 taxpayers, basis records could not be obtained. For these taxpayers, IRS examiners considered basis to be zero and treated all gross proceeds amounts as capital gains. Taxpayers used original cost basis instead of adjusted cost basis (6 taxpayers). Taxpayers did not understand how to determine basis (5 taxpayers). Taxpayers reported basis information that was incorrectly determined by a tax return preparer (4 taxpayers). One taxpayer reported inaccurate basis information provided by a broker. Of taxpayers who failed to report their securities sales altogether, an estimated 28 percent were estimated to have failed to report capital losses. By not reporting losses, these taxpayers potentially failed to offset other capital gains or deduct their losses against other types of income they reported. Likewise, some of these taxpayers who failed to report capital losses exceeding $3,000 did not carry over these losses to offset capital gains or other income in future tax years. Although in most cases we could not determine why taxpayers did not report these losses, some taxpayers told IRS examiners that they did not know they had to report losses. In addition, IRS officials said some taxpayers might not report their capital losses because they worry that their returns will be examined if they overstate their losses. Also, the officials told us that taxpayers might want to avoid the burden of filing a Schedule D or the cost of paying someone to prepare their returns in cases where filing Schedule D would make the difference between self preparing and using a paid preparer. As also shown in table 4, taxpayers failed to accurately report their securities sales because they misreported the amount of their sale proceeds (12 percent) or misclassified the securities’ holding period (9 percent). However, the case files did not contain enough information to explain why taxpayers made these errors. Also, the responsible officials we interviewed at IRS could not provide explanations for why taxpayers might have made these errors. IRS uses both enforcement and taxpayer service programs in attempting to reduce the individual capital gains tax gap for securities. IRS checks the accuracy of tax returns through its enforcement programs and contacts taxpayers who may have inaccurately reported their securities gains or losses. IRS also offers service programs to provide taxpayers with assistance in fulfilling their capital gains tax obligations. However, these programs face challenges that limit their impact on reducing the capital gains tax gap for securities. Although IRS assesses additional taxes for securities income through its enforcement efforts, neither IRS nor we know the extent to which these assessments reduced the 2001 capital gains tax gap for securities. Consistent with its overarching philosophy that a combination of enforcement and service efforts are essential to tax compliance, IRS attempts to reduce the individual capital gains tax gap for securities through its programs that enforce the tax laws and that seek to help taxpayers voluntarily comply with the laws. IRS uses its enforcement programs to check the accuracy of filed tax returns and contacts taxpayers who have potentially made errors or inaccurately reported capital gains information on their returns. Aspects of IRS’s enforcement programs related to capital gains income for securities appear in table 5. Math Error, AUR, and ASFR are automated enforcement programs. IRS uses the Math Error program to check filed tax returns for internal inconsistencies or mathematical errors, and contacts taxpayers, including when the errors result in a tax change. Through AUR, IRS computers match the amounts of capital gains proceeds that taxpayers report on their tax returns and that brokers report on information returns. If this matching indicates that taxpayers may have underreported their sale proceeds for securities and IRS cannot resolve the discrepancies based on available information, IRS may send notices asking taxpayers to explain the discrepancies or pay any taxes assessed. When IRS determines through ASFR that taxpayers for whom IRS received information returns on the sale proceeds for securities failed to file tax returns, it may create tax returns for the taxpayers and assess tax liabilities. During examinations, IRS uses information from third parties as well as from taxpayers to determine if taxpayers have accurately reported their capital gains or losses. Examiners also may use other resources, such as online services, to help them determine the basis of taxpayers’ securities. IRS assesses additional taxes if it determines that taxpayers have underreported their capital gains income from securities. IRS’s taxpayer service programs provide taxpayers with information, support, and assistance to help them understand and fulfill their capital gains tax obligations for securities. For example, IRS produces publications that explain how to report capital gains or losses and provide examples of how to determine adjusted basis. IRS also provides Web- based information and telephone, written, or face-to-face assistance at Taxpayer Assistance Centers on how to accurately report capital gains and losses. IRS’s enforcement and taxpayer service programs face limitations in reducing the individual capital gains tax gap for securities. In addition to resource constraints that limit how many cases of potential noncompliance are pursued, table 6 summarizes the main limitations each program faces. As table 6 shows, IRS cannot use its automated programs to fully verify the reported capital gains or losses from securities sales because it does not receive basis information from brokers. Also, according to IRS officials, a lack of basis information reduces productivity because IRS spends resources contacting taxpayers for whom it ultimately does not assess additional taxes. For example, for tax year 2002, the latest year for which IRS has complete data, IRS did not assess additional taxes for around 46 percent of the taxpayers it contacted through AUR to address potentially misreported securities sales. By comparison, this “no tax change” percentage was around 20 percent for AUR contacts for all other types of income for 2002. For ASFR, IRS officials said that the lack of basis information hampers IRS’s ability to determine which taxpayers with gross proceeds from securities sales should have filed tax returns and to productively pursue those taxpayers who did not file. Given that IRS does not receive basis information from brokers, it can only verify the accuracy of the basis and gains and losses that taxpayers report for their securities sales by examining these individuals’ tax returns. IRS does not examine these taxpayers’ returns through correspondence because it believes the returns are too difficult and would take too much time to examine. IRS can only verify the accuracy of the reported basis and gains and losses from securities sales through face-to-face examinations. However, these examinations are resource intensive and only cover a small percentage of individual taxpayers. For example, in fiscal year 2004, IRS conducted approximately 200,000 face-to-face examinations for the 130 million individual taxpayers that filed tax returns in 2003, including the estimated 22.7 million taxpayers that filed a Schedule D with their tax returns. Even when IRS selects individual taxpayers to examine face-to- face, IRS often places a greater focus on issues it believes are more productive than securities sales, such as business income or the sale of personal or business real property, according to an IRS official responsible for examination planning. In providing taxpayer services, IRS faces challenges in communicating information to taxpayers on complying with capital gains reporting requirements. Taxpayers may not use the services IRS offers or may not understand the information that IRS provides. For example, IRS recently changed the instructions for filing Schedule D to include language that specifies taxpayers must include the details of all their capital gains transactions when filing their tax returns. Although IRS included this language to clarify an existing reporting requirement, some taxpayers and tax practitioners perceived that the instructions required taxpayers to report each capital asset transaction on Schedule D itself and not on attached brokerage statements, as otherwise allowed. This misconception required IRS to clarify on its Web site that taxpayers could continue to report the details of their transactions on attached statements as long as all transactions were included and they reported aggregate information on Schedule D. Through its enforcement programs, IRS assessed additional taxes for taxpayers who misreported their securities gains and losses for tax year 2001; however, neither IRS nor we know the extent to which these assessments reduced the securities tax gap for that year. IRS has not estimated the portion of the capital gains tax gap attributed to securities for tax year 2001, and we were not able to estimate this portion of the tax gap from our review of NRP case files. Likewise, IRS does not have complete information on the amount of additional taxes it assessed for taxpayers who underreported their income from securities sales for 2001. Through AUR for tax year 2001, IRS assessed around $190 million in additional taxes for securities sales and around another $5 million for capital gain distributions, and refunded over $8 million to taxpayers who overreported securities income. For tax year 2001 examinations, IRS does not have complete data for the amount of taxes it assessed for misreported capital gains or losses. IRS maintains a database that tracks examination results by the type of issue examined, such as capital gains or losses. However, prior to October 2004, the database only captured examination results for around 60 percent of individual examinations, according to IRS officials.As such, the database does not include all capital gains noncompliance that IRS identified in tax year 2001 examinations. Even when it includes such noncompliance, the database does not distinguish between misreported capital gains income from securities versus other capital assets. Likewise, the database does not specify the portion of additional tax assessments that is attributable to misreported capital gains income versus other types of noncompliance. Finally, IRS does not maintain data on additional taxes assessed and collected because of capital gains noncompliance through the Math Error or ASFR programs. Expanded reporting of cost basis information has the potential to reduce the individual capital gains tax gap for securities. Making administrative changes to IRS’s compliance programs that address capital gains also has some potential to reduce the tax gap, but enforcement programs can be resource intensive and taxpayers do not always use IRS’s taxpayer service programs. With such limitations, these changes likely would not significantly boost taxpayers’ voluntary compliance involving securities sales. Information reporting of adjusted cost basis to taxpayers and IRS would likely help reduce the tax gap from securities sales by improving taxpayers’ voluntary compliance and IRS’s ability to cost effectively address noncompliant taxpayers. Consistent reporting of basis information would involve challenges that would need to be, and to some extent can be, mitigated. IRS could seek to reduce the capital gains tax gap for securities by increasing examination coverage of taxpayers with gains or losses from securities, either by considering them when selecting taxpayers to examine through correspondence or by increasing face-to-face examinations of these taxpayers. Conducting more of each type of examination could increase the amount of taxes assessed for misreporting securities income. However, absent an increase in resources or access to basis information, which would help IRS better target its resources toward truly noncompliant taxpayers, focusing on taxpayers with securities gains or losses would divert IRS’s examination resources away from other productive areas of noncompliance, according to IRS officials. An increased focus on securities sales could reduce the capital gains tax gap, but a diversion of resources could result in greater noncompliance for other types of income. Moreover, although increasing examination coverage could induce taxpayers who are misreporting willfully to voluntarily comply, expanded coverage would not significantly affect voluntary compliance for taxpayers who make mistakes while trying to comply, such as taxpayers who made errors calculating basis, according to an IRS research official who has studied the impact of enforcement on taxpayer compliance. Addressing capital gains tax noncompliance for securities sales by enhancing IRS’s taxpayer service efforts might improve taxpayers’ voluntary compliance by helping them to better understand and fulfill their capital gains tax obligations for securities. However, the effects of any additional guidance that IRS might develop, for example on reporting losses or on resources for determining basis, would be tempered by challenges similar to those previously discussed, such as taxpayers not using or understanding information IRS provides. Although IRS attempts to generally ensure tax compliance through its service efforts, IRS researchers have found it difficult to determine the extent to which taxpayer services improve compliance among taxpayers who want to comply. As such, it is hard to know if these improvements to IRS’s service efforts would have a substantial impact on taxpayer’s reporting compliance for securities sales. Regardless, IRS’s instructions for reporting capital gains and losses and related guidance do not contain some information related to the causes for taxpayers misreporting the basis of securities they sold or failing to report sales at all—the leading types of noncompliance when taxpayers erred in reporting capital gains and losses. In many cases, we could not determine and IRS did not know exactly why taxpayers made these errors. However, some taxpayers did not know they had to report gains or losses and others did not understand how to determine basis. One counterintuitive situation existed among the cases we reviewed, that is some taxpayers did not report losses, which generally help them by lowering their tax liabilities. IRS’s instructions for filing Schedule D direct taxpayers to report their capital gains or losses but the instructions do not clarify the appropriate use of capital losses to offset capital gains or other income. Further, although IRS provides guidance on how to calculate basis for a variety of securities transactions, the instructions to Schedule D do not contain guidance on resources available to taxpayers and tax practitioners to determine basis for securities. Some examples of resources taxpayers might use to determine the basis of their securities holdings include brokers, tax preparers, or Web sites for companies that issue stocks or other information. Providing taxpayers more information on the benefits of reporting losses and resources available to them on calculating basis would be consistent with IRS’s responsibility to ensure that taxpayers pay the right amount of tax. Further, compared to other steps such as enforcement actions, providing additional guidance to taxpayers would be a low cost option to potentially increase their capital gains reporting compliance. Finally, any improvement in taxpayers’ compliance due to better guidance would reduce IRS’s enforcement expenses related to capital gains. According to IRS officials and some representatives related to the securities industry, taxpayers would likely report their gains or losses from securities sales more accurately and at a reduced burden if brokers consistently provided them with the adjusted basis of the securities they sold. Likewise, basis reporting would allow IRS to verify taxpayers’ securities gains and losses through its automated enforcement programs and take more efficient enforcement actions to address noncompliant taxpayers, according to IRS compliance officials. The likely increase in taxpayers’ voluntary compliance and in the productiveness of IRS enforcement actions resulting from basis reporting would likely substantially reduce the capital gains tax gap for securities. Taxpayers would benefit from basis reporting because, in many cases, they would not have to track and compute the adjusted basis of the securities they sold. Therefore, basis reporting would likely reduce the chance that taxpayers who had not been tracking their adjusted basis would misreport it for securities they sold. Also, if taxpayers received basis information from their brokers for the securities they sold, they would enjoy a reduced burden in filing Schedule D with their tax returns because, in many cases, they would not need to make basis calculations on their own. For taxpayers, the greater accuracy and reduced burden of reporting basis that would result from basis reporting would likely improve their voluntary compliance. As shown in figure 2, taxpayers tend to accurately report income that third parties report on information returns because the income is transparent to taxpayers as well as to IRS. For example, individual taxpayers misreport nearly twice the percentage of their income from sources subject only to some information reporting, which is the case with income from securities sales now, compared to income subject to substantial information reporting, such as income from dividends and interest, and which would be close to the case for securities sales if basis were consistently reported, according to an IRS research official. Also, as discussed previously, based on our file review, taxpayers were much less likely to misreport capital gain distributions (13 percent), which are similar to dividends and are subject to substantial information reporting, compared to income from securities sales (36 percent), for which information reporting only covers gross proceeds but not cost basis. The smallest percentage of misreporting is for wage and salary income, for which substantial information reporting exists and taxes are withheld by taxpayers’ employers. Cost basis reporting would also benefit IRS, to the extent the reporting was complete and accurate. IRS could use basis information to verify securities gains and losses through its automated enforcement programs and could more effectively allocate its enforcement resources to focus on the most noncompliant taxpayers. For AUR and ASFR, IRS officials told us that basis information would allow it to more precisely determine taxpayers’ income for securities sales and would allow it to identify which taxpayers who misreported securities income have the greatest potential for additional tax assessments. IRS’s examination program could similarly benefit. Specifically, IRS officials told us that receiving cost basis information might enable IRS to examine noncompliant taxpayers through correspondence because it could productively select tax returns to examine. Also, having cost basis information could help IRS identify the best cases to examine face-to-face, making the examinations more productive while simultaneously reducing the burden imposed on compliant taxpayers who otherwise would be selected for examination. As a result of all these benefits, basis reporting would allow IRS to better allocate its resources that focus on securities misreporting across its enforcement programs. IRS has endorsed the concept of matching information returns to tax returns for the purpose of identifying unreported income since the 1960s and Congress has created a number of statutes requiring information reporting for various types of income or taxpayer information. The related GAO products section at the end of this report provides references to selected GAO reports related to information reporting. We previously discussed the notion of basis reporting to help reduce capital gains tax noncompliance in our May 1994 report on the tax gap. Also, based on discussions we had with officials from IRS’s Taxpayer Advocate Service when we initiated our review, the National Taxpayer Advocate recommended that brokers be required to track and report cost basis for stocks and mutual funds in her 2005 Annual Report to Congress. In March 2006 a bill was introduced in the U.S. Senate and in April and May 2006 bills were introduced in the House of Representatives that would require brokers to report taxpayers’ basis for their securities transactions. Expanding information reporting on securities sales to include basis information would involve challenges for brokers and IRS. There are various ways to mitigate each challenge. Tables 7 and 8 list some major challenges for brokers and IRS, respectively, as well as some ways to start mitigating the challenges. Discussion after the tables covers some issues to consider when evaluating these mitigation strategies. Although not all inclusive, the strategies discussed above could help mitigate many of the challenges facing brokers and IRS if information reporting were expanded to include cost basis. However, the strategies also involve a number of trade-offs that would need to be considered in terms of the costs and burdens associated with basis reporting for taxpayers, IRS, and brokers, and the impact on reducing the capital gains tax gap for securities. Representatives from the securities industry we interviewed said that brokers would incur additional costs to develop and maintain systems to track and report basis, although they did not provide precise costs. However, we were also told that almost all of the largest brokers directly provide basis information to a significant portion of their clients, and many smaller brokers provide basis to a significant portion of their clients through outsourcing. Also, representatives of the mutual fund industry estimated that 80 to 90 percent of mutual funds provide average cost basis information to their shareholders. Likewise, from a societal perspective, the cost that brokers would incur in reporting basis information would be offset to some extent by the reduced costs to taxpayers in researching, calculating, and reporting basis, or paying a return preparer to perform such services. However, some brokers may pass on the costs of reporting basis information to their customers. Further, decisions about the scope and details of basis reporting, as further discussed below, could constrain how much brokers’ costs would increase. Also, representatives from the securities industry told us that their ability to provide taxpayers and IRS with accurate basis information would be challenged when taxpayers move their securities holdings from one broker to another. Some brokers use a system to transfer basis among one another, but the system is not used by all brokers. In addition, brokers do not always track and transfer basis in a consistent manner; that is, some track original cost basis while others track adjusted cost basis. Without a system through which all brokers transfer standardized basis information, the effectiveness of basis reporting would be limited. Additionally, brokers do not always know or may be challenged in determining the basis of taxpayers’ holdings. For example, some taxpayers may hold securities that they purchased long ago or received as a gift, for which neither they nor their brokers know the original purchase dates. In these cases, brokers cannot know the basis of the securities. However, this challenge could be mitigated to a large extent if brokers were to track and report basis prospectively, that is, only for securities purchased after a specified future date. The trade-off to prospective basis reporting, however, is that it would not help some taxpayers report basis for securities they owned before brokers began to report basis, which for a period of time would limit the impact basis reporting would have on reducing the tax gap. Also, prospective reporting would be complicated in cases where a taxpayer held a security prior to the specified date and then purchased additional shares of the same security after the specified date. Brokers would likely incur some additional costs to separately account for shares of stock purchased before and after the specified date for prospective reporting on information returns. Likewise, it is difficult for brokers to determine basis for some complicated securities transactions, according to representatives of the securities industry. For example, when taxpayers sell stock for a loss and then buy shares of the same stock within 30 days, they are prohibited from claiming a loss on the original sale. For these sales, known as wash sales, basis is difficult for the broker to determine because the taxpayer is required to add the disallowed loss from the wash sale to the basis of the subsequently purchased stock. The difficulty in determining basis for wash sales is compounded when taxpayers sell a stock at a loss through one broker and then buy the same stock within 30 days from another broker. In this case, the second broker would not know of the wash sale the taxpayer executed through the first broker and would not know to adjust the taxpayer’s basis accordingly. We only found two cases through our file review where taxpayers had misreported basis because of wash sales. Regardless, transactions such as wash sales may be too complex for brokers to feasibly report basis. Excluding these transactions from basis reporting, however, would further reduce the impact of basis reporting on closing the securities tax gap. For IRS, having basis information, along with gross proceeds information, for each of a taxpayer’s securities sales would best enable the agency to check whether taxpayers properly reported their capital gains and losses. However, storing and making use of such information would be challenging because of the costs and difficulty involved in storing and computer matching the large volume of information that transactional reporting would entail. However, if brokers were to report only aggregate basis amounts to IRS for all of a taxpayer’s transactions, the costs and difficulties of storing and using the information for matching would be reduced. Aggregate reporting would also reduce the costs to brokers of reporting basis to IRS, although they could still report basis for all transactions to taxpayers. Another complication for IRS and brokers is that taxpayers can choose among various methods for reporting basis in cases where they sell some of their shares of a security they purchased on multiple occasions. Taxpayers may choose to report basis in a different way than brokers would otherwise choose because taxpayers can (1) specifically identify which shares they sell among many they hold and report basis for those shares; (2) use the basis of the first shares they bought; or (3) in the case of mutual funds, use the average cost of the shares they own. Taxpayers could indicate the method they chose to determine basis when they sell their securities, and brokers then could report the method selected and the related basis amount on information returns. However, this additional layer of tracking would likely add to costs to taxpayers, brokers, and IRS. Although this challenge could be alleviated if taxpayers were required to report basis in a consistent manner, this requirement would end taxpayers’ ability to determine basis in the most advantageous manner for their particular tax situations. Given the number of decisions that would need to be made in conjunction with basis reporting, IRS may not be able to require such reporting given its current authority. Although IRS has long had the authority to require information reporting related to securities, an official from IRS’s Office of Chief Counsel told us that IRS may not have the authority to require all of the actions that would be needed to implement cost basis information reporting, such as regulating a system through which brokers transfer standardized basis information. Therefore, it may be difficult for IRS to implement cost basis information reporting without further statutory authority. Representatives from the securities industry told us that in order to implement basis reporting, a set of rules would need to be developed to clearly establish, for example, what types of securities transactions would be covered by any requirement and how a system to transfer basis would be standardized. These representatives thought their input could be helpful in designing any set of rules. Although neither IRS nor we know the size of the tax gap related to securities sales, tens of millions of taxpayers hold securities outside of their retirement accounts and, according to our analysis of IRS data, an estimated 36 percent of taxpayers who sold securities in 2001 erred in reporting their gains and losses (an estimated 7.3 million out of an estimated 20.3 million taxpayers). Of those erring, an estimated 64 percent underreported their income and 33 percent overreported income. Also, an estimated 9 percent of individual taxpayers who sold securities misclassified their holding periods, either reporting short-term holdings as long-term, or vice versa. Enhancing IRS’s current enforcement and service efforts is an option for addressing these compliance problems, but the most effective tool for improving taxpayers’ compliance levels has long been information reporting and tax withholding. Individual taxpayers misreport nearly twice the percentage of their income from sources subject only to some information reporting—which is the case for securities income now—compared to income subject to substantial information reporting. Also, given that the tax consequences associated with the holding period of securities are significant, broker reporting on this specific issue, whether as part of basis reporting or separately, would help taxpayers apply the proper tax rules to their gains or losses and help IRS in identifying compliance problems. Extending information reporting for securities sales to include basis information is not a simple and straightforward proposition. The manner in which basis reporting is designed would affect how the costs of basis reporting are distributed among taxpayers, brokers, and IRS, and the extent to which basis reporting would close the securities-related tax gap. In addition, although IRS has the general authority to require basis reporting, IRS officials were not certain the agency had sufficient authority to regulate how such reporting is implemented, such as regulating a system through which brokers transfer standardized basis information. In the event that brokers were required to report basis for securities purchased as of a specific future date, some taxpayers may continue to misreport their gains and losses from the securities holdings they currently hold. For these taxpayers, additional guidance on reporting basis and gains or losses for securities sales could be a low cost way to help them voluntarily comply with their tax obligations. For example, an estimated 28 percent of taxpayers who failed to report their securities sales had losses. Clarification of IRS’s instructions for Schedule D on the appropriate use of capital losses to offset capital gains or other income could be a means to help ensure that taxpayers do not disadvantage themselves when they experience losses from their investments. Also, given the complexity involved in determining some securities’ basis because of events such as stock splits, guidance on the resources available to taxpayers on determining basis, such as utilizing brokers, or services offered by companies that issue stocks or other information available on Web sites, could help improve taxpayers’ ability to determine their securities’ basis. In order to reduce the capital gains tax gap for securities, Congress may want to consider requiring brokers to report to both taxpayers and IRS the adjusted basis of securities that taxpayers sell and ensuring that IRS has sufficient regulatory authority to implement the requirement. Either in connection with requiring basis reporting or separately, Congress could also require brokers to report to taxpayers and IRS whether the securities sold were short-term or long-term holdings. Additionally, Congress could direct IRS to work with brokers and related parties to develop rules that seek to mitigate some of the challenges associated with requiring basis reporting. To assist taxpayers in accurately reporting their capital gains and losses from securities, in the instructions to Schedule D the Commissioner of Internal Revenue should (1) clarify the appropriate use of capital losses to offset capital gains or other income and (2) provide guidance on resources available to taxpayers to determine their basis. In written comments on a draft of this report, which are reprinted in appendix II, the Commissioner of Internal Revenue agreed with our recommendations. He also concurred that for some securities, basis reporting involves unique challenges and noted that IRS is committed to working with industry stakeholders to develop cost effective methods to mitigate such reporting challenges. IRS also provided comments on several technical issues, which we incorporated in this report where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Chairman and Ranking Minority Member, House Committee on Ways and Means; the Secretary of the Treasury; the Commissioner of Internal Revenue; and other interested parties. Copies will be made available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To provide information on the extent of and primary types of noncompliance that cause individual taxpayers to misreport capital gains from securities, we performed a number of activities that relied on data from IRS’s National Research Program (NRP). Through NRP, IRS selected and reviewed a stratified random sample of 45,925 individual income tax returns from tax year 2001. The NRP sample is divided across 30 strata by the type of individual tax return filed and income levels. IRS accepted as filed some of the NRP returns, accepted others with minor adjustments, and examined the remainder of returns either through correspondence or face-to-face meetings with taxpayers. If IRS examiners determined that taxpayers misreported income for any aspect of the selected tax returns, they adjusted the taxpayers’ income accordingly and assessed additional taxes. IRS captured data from taxpayer returns and examination results in the NRP database, including capital gains income. However, the data on capital gains do not indicate the type of capital asset for which taxpayers reported gains or losses or for which examiners made income adjustments. Therefore, to obtain information on the extent and primary types of capital gains tax noncompliance specific to securities, we selected a statistical sample of NRP examination files to review. The sample we selected contained 1,017 cases spread across 90 substrata, defined by replicating each of the 30 NRP strata across 3 GAO substrata. The first GAO substratum consisted of examination cases for which the adjustments to capital gain income the examiners made had the largest impact on the total amount of these adjustments for all taxpayers when weighted for the entire population of individual taxpayers. We focused on cases with the largest adjustments, in weighted terms, because including these cases would improve the level of confidence of any estimates of the total amount of capital gains income adjustments for securities. Because our sample is a subsample of the NRP sample and is subject to sampling error, we added cases, when applicable, to ensure that each of the 30 NRP strata in this GAO substratum contained a minimum of 5 cases. In total, we selected 290 cases for the first GAO substratum, and these cases accounted for around 75 percent of the total capital gains adjustments in NRP when weighted for the population of individual taxpayers. The second substratum consisted of 187 cases for which IRS did not identify misreported capital gains income when it reviewed or examined the tax returns. We included these returns as part of our sample to verify that the NRP examinations had correctly recorded when taxpayers were compliant with respect to reporting capital gains and losses. We selected these cases at random and in proportion to the NRP sample through an iterative process, ensuring that a minimum of 5 cases and a maximum of 15 cases was included in each of the 30 NRP strata. The remaining 540 cases that constitute the third GAO substratum were selected from cases for which IRS examined taxpayers’ capital gain income. We selected these cases at random and in proportion to the number of NRP returns for which IRS examined capital gains income, ensuring that we selected a minimum of 5 cases for each NRP stratum. For one stratum, we only included 2 cases because they were the only cases in the corresponding NRP stratum. Of the 1,017 cases we selected for our sample, we reviewed 849 cases. We did not review the remaining 168 cases because either IRS did not provide the files in time to include in our review (164 cases) or the files did not contain examination workpapers essential to determining if examiners made adjustments to taxpayers income from securities (4 cases). Based on an analysis of the response rates by the 90 GAO substrata, we concluded that the missing cases did not bias our analyses. We requested the cases at two points, in late-December 2005 and late-January 2006, and periodically checked on the status of our requests with IRS. We were only able to review cases that arrived by April 21, 2006 in order to meet our agreed upon issue date for the report. We reviewed each selected case file to determine if the taxpayers reported securities transactions on their returns or if examiners discovered any misreported securities transactions. For returns where examiners discovered misreported income from securities transactions, we determined, when possible, the related security type, holding period, adjustment amount, and reason for the adjustment, along with other information. We recorded all determinations on a data collection instrument (DCI) that we developed. To ensure that our data collection efforts conformed to GAO’s data quality standards, each DCI that a GAO analyst completed was reviewed by another GAO analyst. The reviewers compared the data recorded on the DCI to the data in the corresponding case file to determine whether they concurred with how the data were recorded. When the analysts differed on how the data were recorded, they met to reconcile any differences. We input the data we recorded on the DCIs into a computer data collection program. To ensure the accuracy of the transcribed data, each electronic DCI entry was compared to its corresponding paper DCI by analysts other that those that electronically entered the data. If the reviewers found any errors, changes were made to the electronic entries, and the entries were reviewed again to ensure that all data were transcribed accurately. The estimates we included in this report were based on the NRP database and the data we collected through our file review and were generated using statistical software. All computer programming for the resulting statistical analyses were checked by a second, independent analyst. Our final sample size was large enough to generalize the results of our review or had margins of error small enough to produce meaningful estimates in terms of percentages of taxpayers who were noncompliant in reporting capital gains from securities transactions. However, we could not produce meaningful estimates of the total amount of net misreported capital gain income from securities or determine the securities tax gap, in part because (1) in selecting our sample, we could not distinguish which cases included misreported securities transactions as opposed to misreported transactions for other types of capital assets, (2) some cases with large amounts of misreported capital gains or losses were due to noncompliance for assets other than securities, (3) 53 of the cases we requested from IRS from our first substratum, which represented a large percentage of the total amounts of misreported capital gains or losses, were not provided in time to include in our review, and (4) taxpayers misreported a wide range of dollar amounts from the transactions. We discussed our estimates with IRS officials to obtain their perspectives on the results of our analysis. Because we followed a probability procedure based on random selection, our sample is only one of a large number of samples that we might have selected. Since each sample could have resulted in different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval, plus or minus the margin of error indicated along with each estimate in the report. This interval would contain the actual population value for 95 percent of the samples we could have selected. We assessed whether the examination results and data contained in the NRP database were sufficiently reliable for the purposes of our review. For this assessment, we interviewed IRS officials about the data, collected and reviewed documentation about the data and the system used to capture the data, and performed electronic testing of relevant data fields for obvious errors in accuracy and completeness. We compared the information we collected through our case file review to corresponding information in the NRP database to identify inconsistencies. Based on our assessment, we determined that the NRP database was sufficiently reliable for the purposes of our review. We also used IRS’s Statistics of Income (SOI) file for individual taxpayers, which relies on a stratified probability sample of individual income tax returns, to develop estimates for categories of individual taxpayers on adjusted gross income, the percentage of individual taxpayers that used paid tax preparers, and the number of taxpayers that filed a Schedule D with their tax returns for tax year 2003. We compared our analyses against published IRS data to determine that the SOI database was sufficiently reliable for the purposes of our review. To provide information on actions IRS takes in attempting to reduce the individual capital gains tax gap for securities and on challenges that IRS faces with these actions, we reviewed documents from IRS compliance programs as they related to capital gains and interviewed IRS officials knowledgeable about the subject. We reviewed documentation for IRS’s enforcement programs that address capital gains and reviewed IRS publications and other documents that provided information on how to accurately report capital gains and losses. To provide additional information on IRS’s compliance programs and identify challenges IRS faces in using these programs to reduce the individual capital gains tax gap for securities, we interviewed IRS officials from various areas of the agency, including the enforcement, taxpayer service, and research functions. To identify options with the potential to improve taxpayers’ voluntary compliance for reporting securities gains and losses and IRS’s ability to find noncompliance related to the individual capital gains tax gap for securities, we reviewed prior GAO reports and other documents on capital gains reporting and compliance such as those from IRS compliance programs and industry reports on securities holdings and information reporting. We also spoke with IRS officials and numerous representatives from, and related to, the securities industry. At IRS, we spoke with officials from various areas of the agency, including the enforcement, taxpayer service, and research functions. Additionally, we spoke with officials from the Taxpayer Advocate Service and members of IRS’s Information Return Program Advisory Committee (IRPAC). We also spoke with representatives of the Securities Industry Association; Investment Company Institute, which represents the mutual fund industry; Bond Market Association; American Banking Association Securities Association; American Institute of Certified Public Accountants; and the American Bar Association to get their perspectives on capital gains tax noncompliance, ways to reduce noncompliance, and any challenges related to reducing noncompliance and how those challenges could be mitigated. In addition to the contact named above, Wes Phillips and Tom Short, Assistant Directors; Jeff Arkin; Susan Baker; Candace Carpenter; Keira Dembowski; Fred Jimenez; Matthew Keeler; Donna Miller; John Mingus; Franklin Ng; Karen O’Conor; Cheryl Peterson; Sam Scrutchins; Jay Smale; and Jennifer Li Wong made key contributions to this report. Tax Gap: Making Significant Progress in Improving Tax Compliance Rests on Enhancing Current IRS Techniques and Adopting New Legislative Actions. GAO-06-453T. Washington, D.C.: February 15, 2006. Tax Gap: Multiple Strategies, Better Compliance Data, and Long-term Goals Are Needed to Improve Taxpayer Compliance. GAO-06-208T. Washington, D.C.: October 26, 2005. Tax Compliance: Better Compliance Data and Long-term Goals Would Support a More Strategic IRS Approach to Reducing the Tax Gap. GAO-05- 753. Washington, D.C.: July 18, 2005. Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of Strategies. GAO-05-527T. Washington, D.C.: April 14, 2005. Tax Administration: More Can Be Done to Ensure Federal Agencies File Accurate Information Returns. GAO-04-74. Washington, D.C.: December 5, 2003. Tax Administration: IRS Should Continue to Expand Reporting on Its Enforcement Efforts. GAO-03-378. Washington, D.C.: January 31, 2003. Tax Administration: IRS Can Improve Information Reporting for Original Issue Discount Bonds. GAO/GGD-96-70. Washington, D.C.: March 15, 1996. Reducing the Tax Gap: Results of a GAO-Sponsored Symposium. GAO/GGD-95-157. Washington, D.C.: June 2, 1995. Options Reporting to IRS. GAO/GGD-95-145R. Washington, D.C.: May 5, 1995. Tax Gap: Many Actions Taken, But a Cohesive Compliance Strategy Needed. GAO/GGD-94-123. Washington, D.C.: May 11, 1994. Tax Administration: Computer Matching Could Identify Overstated Business Deductions. GAO/GGD-93-133. Washington, D.C.: August 13, 1993. Information Reporting. GAO/GGD-93-55R. Washington, D.C.: July 22, 1993. Tax Administration: Information Returns Can Improve Reporting of Forgiven Debts. GAO/GGD-93-42. Washington, D.C.: February 17, 1993. Tax Administration: Overstated Real Estate Tax Deductions Need to Be Reduced. GAO/GGD-93-43. Washington, D.C.: January 19, 1993. Tax Administration: Federal Agencies Should Report Service Payments Made to Corporations. GAO/GGD-92-130. Washington, D.C.: September 22, 1992. Tax Administration: Approaches for Improving Independent Contractor Compliance. GAO/GGD-92-108. Washington, D.C.: July 23, 1992. Tax Administration: Benefits of a Corporate Document Matching Program Exceed the Costs. GAO/GGD-91-118. Washington, D.C.: September 27, 1991. IRS Needs to Implement a Corporate Document Matching Program. GAO/T-GGD-91-40. Washington, D.C.: June 10, 1991. Tax Administration IRS Can Improve Its Program to Find Taxpayers Who Underreport Their Income. GAO/GGD-91-49. Washington, D.C.: March 13, 1991. Tax Administration: Expanded Reporting on Seller-financed Mortgages Can Spur Tax Compliance. GAO/GGD-91-38. Washington, D.C.: March 29, 1991. IRS’ Compliance Programs to Reduce the Tax Gap. GAO/T-GGD-91-11. Washington, D.C.: March 13, 1991. IRS Can Use Tax Gap Data to Improve Its Programs for Reducing Noncompliance. GAO/T-GGD-90-32. Washington, D.C.: April 19, 1990. Tax Administration: Information Returns Can Be Used to Identify Employers Who Misclassify Workers. GAO/GGD-89-107. Washington, D.C.: September 25, 1989. Tax Administration: Missing Independent Contractors’ Information Returns Not Always Detected. GAO/GGD-89-110. Washington, D.C.: September 8, 1989. Tax Administration: IRS’ Efforts to Establish a Business Information Returns Program. GAO/GGD-88-102. Washington, D.C.: July 22, 1988. The Merits of Establishing a Business Information Returns Program. GAO/T-GGD-87-4. Washington, D.C.: March 17, 1987. | For tax year 2001, the Internal Revenue Service (IRS) estimated a tax gap of at least $11 billion from individual taxpayers misreporting income from capital assets (generally those owned for investment or personal purposes). IRS did not estimate the portion of this gap from securities (e.g., stocks, bonds, and mutual fund capital gains distributions). GAO was asked for information on (1) the extent and types of noncompliance for individual taxpayers that misreport securities capital gains, (2) actions IRS takes to reduce the securities tax gap, and (3) options with the potential to improve taxpayer voluntary compliance and IRS's ability to address noncompliant taxpayers. For estimates of noncompliance, GAO analyzed a probability sample of examination cases for tax year 2001 from the most recent IRS study of individual tax compliance. GAO estimates that 38 percent of individual taxpayers with securities transactions misreported their capital gains or losses in tax year 2001. A greater estimated percentage of taxpayers misreported gains or losses from securities sales (36 percent) than capital gain distributions from mutual funds (13 percent). This may be because taxpayers must determine the taxable portion of securities sales' income whereas they need only add up their capital gain distributions. Among individual taxpayers who misreported securities sales, roughly two-thirds underreported and roughly one-third overreported. Furthermore, about half of these taxpayers who misreported failed to accurately report the securities' cost, or basis, sometimes because they did not know the basis or failed to adjust the basis appropriately. IRS attempts to reduce the securities' tax gap through enforcement and taxpayer service programs, but challenges limit their impact. Through enforcement programs, IRS contacts taxpayers who may have misreported capital gains or losses and seeks to secure the correct tax amount. IRS also offers services to help taxpayers comply with capital gains tax obligations, such as guidance on how to determine securities' gains and losses. Challenges that limit these programs' impact include the lack of information on basis, which IRS needs to verify most gains and losses, and uncertainty as to whether taxpayers use or understand the guidance. Expanding the information brokers report on securities sales to include adjusted cost basis has the potential to improve taxpayers' compliance and help IRS find noncompliant taxpayers. IRS research shows that taxpayers report their income much more accurately when it is reported to them and IRS. Basis reporting also would reduce taxpayers' burden. For IRS, basis reporting would provide information to verify securities gains or losses and to better target enforcement resources on noncompliant taxpayers. However, basis reporting would raise challenges that would need to be addressed. For instance, brokers would incur costs and burdens--even as taxpayers' costs and burdens decrease somewhat--and many issues would arise about how to calculate adjusted basis, which securities would be covered, and how information would be transferred among brokers. However, industry representatives said that many brokers already provide some basis information to many of their clients and some use an existing system to track and transfer basis and other information about securities. Many of the challenges to implementing basis reporting also could be mitigated. For example, many of the challenges could be addressed by only requiring adjusted basis reporting for future purchases, and by developing consistent rules to be used by all brokers. To the extent that actions to mitigate the challenges to basis reporting delay its implementation or limit coverage to only certain types of securities, the resulting improvements to taxpayers' voluntary reporting compliance would be somewhat constrained. |
You are an expert at summarizing long articles. Proceed to summarize the following text:
The new IRS Commissioner and IRS management have expressed a commitment to ensure that taxpayers are treated properly. Even so, problems with current management information systems make it impossible to determine the extent to which allegations of taxpayer abuse and other taxpayer complaints have been reported, or the extent to which actions have been taken to address the complaints and prevent recurrence of systemic problems. That is because, as we reported to you in 1996, information systems currently maintained by IRS, Treasury OIG, and the Department of Justice do not capture the necessary management information. These systems were designed as case tracking and resource management systems intended to serve the management information needs of particular functions, such as IRS Inspection’s Internal Security Division. None of these systems include specific data elements for “taxpayer abuse”; instead, they contain data elements that encompass broad categories of misconduct, taxpayer problems, and legal and administrative actions. Information contained in these systems relating to allegations and investigations of taxpayer abuse and other taxpayer complaints is not easily distinguishable from information on allegations and investigations that do not involve taxpayers. Consequently, as currently designed, the information systems cannot be used individually or collectively to account for IRS’ handling of instances of alleged taxpayer abuse. Officials of several organizations indicated to us that several information systems might include information related to taxpayer abuse allegations—five maintained by IRS, one by Treasury OIG, and two by Justice. (See attachment for a description of these systems.) also said the system could not be used to identify such instances without a review of specific case files. From our review of data from these systems for our 1996 report, we concluded that none of them, either individually or collectively, have common or comparable data elements that can be used to identify the number or outcomes of taxpayer abuse allegations or related investigations and actions. Rather, each system was developed to provide information for a particular organizational function, usually for case tracking, inventory, or other managerial purposes relative to the mission of that particular function. While each system has data elements that could reflect how some taxpayers have been treated, the data elements vary and in certain cases may relate to the same allegation and same IRS employee. Without common or comparable data elements and unique allegation and employee identifiers, these systems do not collect information in a consistent manner that could be used to accurately account for all allegations of taxpayer abuse. As we also reported in our 1996 report, IRS has not historically had a definition of taxpayer abuse. In response to the report, IRS adopted a definition for taxpayer complaints that included the following elements: (1) allegations of IRS employees’ violating laws, regulations, or the IRS Code of Conduct; (2) overzealous, overly aggressive, or otherwise improper behavior of IRS employees in discharging their official duties; and (3) breakdowns in IRS systems or processes that frustrate taxpayers’ ability to resolve issues through normal channels. Also in response to the report, IRS established a Customer Feedback System in October 1997, which IRS managers are to use to report allegations of improper employee behavior toward taxpayers. IRS used this system to support its first required annual reporting to Congress on taxpayers’ complaints through December 31, 1997. IRS officials acknowledged, however, that there were changes needed to ensure the accuracy and consistency of the reported data. The 1988 amendments to the Inspectors General Act, which created the Treasury OIG, did not consolidate IRS Inspection into the Treasury OIG, but authorized the Treasury OIG to perform oversight of IRS Inspection and conduct audits and investigations of the IRS as appropriate. The act also provided the Treasury OIG with access to taxpayer data under the provisions of Section 6103 of the Internal Revenue Code as needed to conduct its work, with some recording and reporting requirements for such access. Currently, Treasury OIG is responsible for investigating allegations of misconduct, waste, fraud, and abuse involving senior IRS officials, GS-15s and above, as well as IRS Inspection employees. Treasury OIG also has oversight responsibility for the overall operations of IRS Inspection. Since November 1994, Treasury OIG has had increased flexibility for referring allegations involving GS-15s to IRS for investigation or administrative action. The need to make more referrals of GS-15 level cases was due to resource constraints and an increased emphasis by Treasury OIG on investigations involving criminal misconduct and procurement fraud across all Treasury bureaus. In fiscal year 1996, Treasury OIG conducted 43 investigations—14 percent of the 306 allegations it received—many of which implicated senior IRS officials. Treasury OIG officials said that these investigations rarely involved allegations of taxpayer abuse because senior IRS officials and IRS Inspection employees usually do not interact directly with taxpayers. The IRS Chief Inspector, who reports directly to the IRS Commissioner, is responsible for conducting IRS investigations and internal audits done by IRS Inspection, as well as for coordinating IRS Inspection activities with Treasury OIG. IRS Inspection is to work closely with Treasury OIG in planning and performing its duties. IRS Inspection is also to provide information on its activities and results, as well as constraints or limitations placed on its activities, to Treasury OIG for incorporation into Treasury OIG’s Semiannual Report to Congress. Disputes that the IRS Chief Inspector may have with the IRS Commissioner are to be resolved through Treasury OIG and the Secretary of the Treasury, to whom the Treasury OIG reports. In September 1992, Treasury OIG issued Treasury Directive 40-01, which summarizes the authority vested in Treasury OIG and the reporting responsibilities of various Treasury bureaus. Treasury law enforcement bureaus, including IRS, are to (1) provide a monthly report to Treasury OIG concerning significant internal investigative and audit activities; (2) notify Treasury OIG immediately upon receiving allegations involving senior IRS officials, internal affairs employees, or IRS Inspection employees; and (3) submit written responses to Treasury OIG detailing actions taken or planned in response to Treasury OIG investigative reports and Treasury OIG referrals for agency management action. Under procedures established in a Memorandum of Understanding between Treasury OIG and IRS Commissioner in November 1994, the requirement for immediate referrals to Treasury OIG of all misconduct allegations covered in the Directive was reiterated and supplemented. Treasury OIG has the discretion to refer any allegation to IRS for appropriate action, that is, either investigation by IRS Inspection or administrative action by IRS management. If IRS officials believe that an allegation referred by Treasury OIG warrants Treasury OIG attention, they may refer the case back to Treasury OIG, requesting that Treasury OIG conduct an investigation. During our review for the 1996 report, Treasury OIG officials advised us that under the original 1992 Directive, they generally handled most allegations implicating Senior Executive Service (SES) and IRS Inspection employees, while reserving the right of first refusal on GS-15 employees. Under the procedures adopted in 1994, which were driven in part by resource constraints and Treasury OIG’s need to do more criminal misconduct and procurement fraud investigations across all Treasury bureaus, Treasury OIG officials stated they have generally referred allegations involving GS-15s and below to IRS for investigation or management action. The same is true for allegations against any employees, including those in the SES, involving administrative matters and allegations dealing primarily with disputes of tax law interpretation. of the allegations; referred 214 to IRS—either for investigation or administrative action; investigated 43; and closed 9 others for various administrative reasons. Treasury OIG officials stated that, based on their investigative experience, most allegations of wrongdoing by IRS staff that involve taxpayers do not involve senior-level IRS officials or IRS Inspection employees. Rather, these allegations typically involve IRS Examination and Collection employees who most often interact directly with taxpayers. Treasury OIG officials are to assess the adequacy of IRS’ actions in response to Treasury OIG investigations and referrals as follows: (1) IRS is required to make written responses on actions taken within 90 days and 120 days, respectively, on Treasury OIG investigative reports of completed investigations and Treasury OIG referrals for investigations or management action; (2) Treasury OIG investigators are to assess the adequacy of IRS’ responses before closing the Treasury OIG case; and (3) Treasury OIG’s Office of Oversight is to assess the overall effectiveness of IRS Inspection capabilities and systems through periodic operational reviews. In addition to assessing IRS’ responses to Treasury OIG investigations and referrals, each quarter, the Treasury Inspector General, Deputy Inspector General, and Assistant Inspector General for Investigations are to brief the IRS Commissioner, IRS Deputy Commissioner, and Chief Inspector on the status of allegations involving senior IRS officials, including those being investigated by Treasury OIG and those awaiting IRS action. referrals inclusion in discussions during quarterly Inspector General briefings with the IRS Commissioner. Since 1996, there has been some indication of problems between the two offices. Specifically, in its most recent Semiannual Report to Congress, Treasury OIG concluded, after reviewing IRS’ compliance with Treasury Directive 40-01, that “both IRS and Treasury OIG need to make improvements, particularly in the area of timely, prompt referrals.” It is not clear what steps Treasury OIG officials plan to take to resolve the problems. At the Committee’s September 1997 IRS oversight hearings, some IRS employees raised concerns about the effectiveness of IRS Inspection and its independence from undue pressures and influence from IRS management. Since that time, debate has continued on the issue of where IRS Inspection would be optimally placed organizationally to provide assurance that taxpayers are treated properly. This is not a new issue. During the debate preceding the passage of the 1988 amendments to the Inspectors General Act that established the Treasury OIG and left IRS Inspection intact, as well as on several other occasions since, concerns have been raised about the desirability of having a separate IRS Inspection Service. Historically, we have supported a strong statutory Treasury OIG, believing that such an office could provide independent oversight of the Department, including IRS. That is, reviews of IRS addressed to the Secretary of the Treasury, rather than the IRS Commissioner, should improve executive branch oversight of tax administration in general and provide greater assurance that taxpayers are treated properly, fairly, and courteously. We have also noted that under the statute, Treasury OIG is authorized to enhance the protection of taxpayer rights by conducting periodic independent reviews of IRS dealings with taxpayers and IRS procedures affecting taxpayers. We have also recognized that, to meet his managerial responsibilities, the IRS Commissioner needs an internal capability to review the effectiveness of IRS programs. IRS Inspection has provided Commissioners with investigative and audit capabilities to evaluate IRS programs since 1952. IRS Inspection currently has roughly 1,200 authorized staff in its budget who are split about equally between its two divisions, Internal Security and Internal Audit. The Treasury OIG, on the other hand, has fewer than 300 authorized staff to provide oversight of IRS Inspection activities as well as to carry out similar investigations and audits for Treasury and its 10 other very diverse bureaus. IRS officials have been concerned that if IRS Inspection is transferred to the Treasury OIG, the transferred resources will be used to investigate or audit other Treasury bureaus to the detriment of critical IRS oversight. The Inspectors General Act provides guidance on the authorities, qualifications, safeguards, resources, and reporting requirements needed to ensure independent investigative and audit capabilities. No matter where IRS Inspection is placed organizationally, certain mechanisms need to be in place to ensure that it is held accountable and can achieve its mission without undue pressures or influence. For example, a key component of accountability and protection against undue pressures or influence is reporting of investigative and audit activities and findings to both those responsible for agency management and oversight. Another IRS organization responsible for protecting the rights of taxpayers is the Taxpayer Advocate. The position was originally codified in the Taxpayer Bill of Rights 1 as the Taxpayer Ombudsman, although IRS has had the underlying Problem Resolution Program (PRP) in place since 1979. In the Taxpayer Bill of Rights 2, the Taxpayer Advocate and the Office of the Taxpayer Advocate replaced the Taxpayer Ombudsman position and the headquarters PRP staff. The authorities and responsibilities of this new office were expanded, for example, to address taxpayer cases involving IRS enforcement actions and refunds. The most significant change may have been to emphasize that the Advocate and those assigned to the Advocate’s Office are expected to view issues from the taxpayers’ perspective and find ways to alleviate individual taxpayer concerns as well as systemic problems. The Advocate reported that it resolved 237,103 cases in fiscal year 1997. Its reported activities included establishing cases to resolve taxpayer concerns, providing relief to taxpayers with hardships, resolving cases in a proper and timely manner, and analyzing and addressing factors contributing to systemic problems. The report also discussed activities and initiatives and proposed solutions for systemic problems. Even with the enhanced legislative authorities and numerous activities and initiatives, questions about the effectiveness of the Taxpayer Advocate persist. The questions relate to the Advocate’s (1) organizational independence within IRS; (2) resource commitments to achieve its mission; and (3) ability to identify and correct systemic problems adversely affecting taxpayers. We have recently initiated a study of the Advocate’s Office to address these questions about the Advocate’s effectiveness. The first question centers on the Advocate’s organizational placement at headquarters and field offices. The Taxpayer Advocate reports to the IRS Commissioner. Taxpayer Advocates in the field report to the IRS Regional Commissioner, District Director, or Service Center Director in their particular geographic area. Thus, these field advocate officials report to the IRS executives who are responsible for the operations that may have frustrated taxpayers and created the Advocate’s caseloads. The second question involves the manner in which the Advocate’s Office is staffed and funded. For fiscal year 1998, the Advocate’s Office was authorized 442 positions to handle problem resolution duties. These authorized Advocate Office staff must rely on assistance from more than 1,000 other field employees, on a full-time or part-time basis, to carry-out these duties. These 1,000 employees are funded by their functional office, such as Collection or Customer Service. While working PRP cases, these employees receive program direction and guidance from the Advocate’s Office. They are administratively responsible to their Regional Commissioners, District Directors, or Service Center Directors—again, the same managers responsible for the operations that may have frustrated taxpayers. The third question was debated during oversight hearings last year regarding the Advocate’s ability to identify and correct IRS systems or processes that have frustrated taxpayers. The question historically has been the amount of attention afforded the analysis of problem resolution cases to identify systemic issues in light of the Advocate’s workload and available staff. The more recent question, however, has been the ability of the Advocate’s Office to bring about needed administrative or legislative changes to address systemic problems. detract from its ability to focus on its overall mission. Our recently initiated study is designed to provide such an assessment of the Advocate’s effectiveness. Two of the IRS systems—Inspection’s Internal Security Management Information System (ISMIS) and Human Resources’ Automated Labor and Employee Relations Tracking System (ALERTS)—are designed to capture information on cases involving employee misconduct, which may also involve taxpayer abuse. ISMIS is designed to determine the status and outcome of Internal Security investigations of alleged employee misconduct; ALERTS is designed to track disciplinary actions taken against employees. While ISMIS and ALERTS both track aspects of alleged employee misconduct, these systems do not share common data elements or otherwise capture information in a consistent manner. IRS also has three systems that include information on concerns raised by taxpayers. These systems include two maintained by the Office of Legislative Affairs—the Congressional Correspondence Tracking System and the IRS Commissioner’s Mail Tracking System—as well as the Taxpayer Advocate’s system known as the Problem Resolution Office Management Information System (PROMIS). The two Legislative Affairs systems are designed to track taxpayer inquiries, including those made through congressional offices, to ensure that responses are provided by appropriate IRS officials. PROMIS is to track similar inquiries to ensure that taxpayers’ problems are resolved and to determine whether the problems are recurring in nature. Treasury OIG has an information system known as the Treasury OIG Office of Investigations Management Information System. It is designed to track the status and outcomes of Treasury OIG investigations as well as the status and outcomes of actions taken by IRS in response to Treasury OIG investigations and referrals. Justice has two information systems that include data that may be related to taxpayer abuse allegations and investigations. The Executive Office for the U.S. Attorneys maintains a Centralized Caseload System that is designed to consolidate the status and results of civil and criminal prosecutions conducted by U.S. Attorneys throughout the country. Cases involving criminal misconduct by IRS employees are to be referred to and may be prosecuted by the U.S. Attorney in the particular jurisdiction in which the alleged misconduct occurred. The Tax Division of Justice also maintains a Case Management System that is designed for case tracking, time reporting, and statistical analysis of litigation cases the Division conducts. Lawsuits against either IRS or IRS employees are litigated by the Tax Division, with representation provided to IRS employees if the Tax Division determines that the actions taken by the employees were within the scope of employment. 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: (1) adequacy of the Internal Revenue Service's (IRS) controls over the treatment of taxpayers; (2) responsibilities of the Offices of the Chief Inspector (IRS Inspection) and the Department of the Treasury Office of the Inspector General (OIG) in investigating allegations of taxpayer abuse and employee misconduct; (3) organizational placement of IRS Inspection; and (4) role of the Taxpayer Advocate in handling taxpayer complaints. GAO noted that: (1) in spite of IRS management's heightened awareness of the importance of treating taxpayers properly, GAO remains unable to reach a conclusion as to the adequacy of IRS' controls to ensure fair treatment; (2) this is because IRS and other federal information systems that collect information related to taxpayer cases do not capture the necessary management information to identify instances of abuse that have been reported and actions taken to address them and to prevent recurrence of those problems; (3) Treasury OIG and IRS Inspection have separate and shared responsibilities for investigating allegations of employee misconduct and taxpayer abuse; (4) IRS Inspection has primary responsibility for investigating and auditing IRS employees, programs, and internal controls; (5) Treasury OIG is responsible for the oversight of IRS Inspection investigations and audits and may perform selective investigations and audits at IRS; (6) the two offices share some responsibilities as reflected in a 1994 IRS Commissioner-Treasury OIG Memorandum of Understanding; (7) in the Committee's September 1997 hearings, questions were raised about the independence of IRS Inspection; (8) subsequently, suggestions have been made to remove IRS Inspection from IRS and place it in Treasury OIG; (9) regardless of where IRS Inspection is placed organizationally, within IRS or Treasury OIG, mechanisms need to be in place to ensure its accountability and its ability to focus on its mission independent from undue pressures or influences; (10) the Inspectors General Act as amended in 1988, provides guidance on the authorities, qualifications, safeguards, resources, and reporting requirements needed to ensure independent investigation and audit capabilities; (11) in 1979, the Taxpayer Ombudsman was established administratively within IRS to advocate for taxpayers and assume authority for IRS' Problem Resolution Program; (12) in 1988, this position was codified in the Taxpayer Bill of Rights 1; (13) in 1996, the Taxpayer Bill of Rights 2 replaced the Ombudsman with the Taxpayer Advocate and expanded the responsibilities of the new Office of the Taxpayer Advocate; (14) the Advocate was charged under the legislation with helping taxpayers resolve their problems with the IRS and with identifying and resolving systemic problems; and (15) it is now nearly 20 years after the creation of the first executive-level position in IRS to advocate for taxpayers, and questions about the effectiveness of the advocacy continue to be asked. |
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The United States has the largest, most extensive aviation system in the world with over 19,000 airports ranging from large commercial transportation centers handling millions of passengers annually to small grass airstrips serving only a few aircraft each year. Of these, roughly 3,300 airports are designated by FAA as part of the national airport system and thus are eligible for federal assistance. The national airport system consists of two primary types of airports— commercial service airports, which have scheduled service and enplane 2,500 or more passengers per year, and general aviation (GA) airports, which have no scheduled service and enplane fewer than 2,500 passengers annually. FAA divides commercial service airports into primary airports (enplaning more than 10,000 passengers annually) and commercial service nonprimary airports. The 395 current primary airports are classified by hub type—large-, medium-, small-, and nonhub—based on passenger traffic. Passenger traffic is highly concentrated: 88 percent of all passengers in the United States enplaned at the 63 large- or medium-hub airports in 2013 (see fig. 1). More than 2,900 airports in the national system are designated as GA airports. These airports range from large business aviation and cargo shipment centers that handle thousands of operations a year to small rural airports that may handle only a few hundred operations per year but may provide important access to the national transportation system for their communities. Generally, the level of aviation activity, whether commercial passenger and cargo or general aviation business and private aircraft, helps to generate the funds that finance airport development. The three primary sources of funding for airport development are Airport Improvement Program (AIP) grants, PFCs, and locally generated revenue. All three sources of funds are linked to passenger aviation activity. AIP is supported by the Airport and Airway Trust Fund (AATF), which is funded by airline ticket taxes and fees; GA flights contribute to the AATF through a tax on aviation jet fuel. Airports included in FAA’s NPIAS are eligible to receive AIP entitlement (apportionment) grants based on airports’ size and can also compete for AIP discretionary grants. AIP grants can only be used for eligible capital projects, generally those that enhance capacity, safety, and environmental conditions, such as runway construction and rehabilitation, airfield lighting and marking, and airplane noise mitigation. The amount made available in AIP appropriations totaled $3.35 billion in fiscal year 2014. The grants generally require matching funds from the local match ranging from 10 to 25 percent depending on the size of the airport and type of project. PFCs, another source of funding for airport development projects, are a federally authorized, statutorily-capped, airport-imposed fee of up to a maximum of $4.50 per enplaned passenger per flight segment, and a maximum of $18 per round trip ticket. The PFC is collected by the airline on the passenger ticket and remitted to the airports (minus a small administrative fee retained by the airline). Introduced in 1991, and capped at $3.00 per flight segment, PFC collections can be used by airports for the same types of projects as AIP grants, but also to pay interest costs on debt issued for those projects. Since its inception, landside development projects—including, for example, new terminal projects—and interest payments on debt used to finance eligible projects have each accounted for 34 percent of total PFC collections spent. The maximum level of PFCs was last increased in Collections totaled almost $2.8 billion in calendar year 2014. 2000.According to FAA, 358 commercial service airports are collecting PFCs as of February 2015. Airports also fund development projects from revenues generated directly by the airport. Airports generate revenues from aviation activities such as aircraft landing fees and terminal rentals, and non- aviation activities such as concessions, parking, and land leases. Aviation revenues are the traditional method for funding airport development and, along with PFCs, are used to finance the issuance of local tax-exempt debt. Because of the size and duration of some airport development projects—for example, a new runway can take more than a decade and several billion dollars to complete—long-term debt can be the only way to finance these types of projects. FAA’s main planning tool for identifying future airport-capital projects is the NPIAS. FAA relies on airports, through their planning processes, to identify individual projects for funding consideration. According to FAA officials, FAA reviews input from individual airports and state aviation agencies and validates both eligibility and justification for the project over the ensuing five-year period. Because the estimated cost of eligible airport projects that airports plan to perform greatly exceeds the available grant funding available for these projects, FAA uses a priority system based on airport and project type to allocate the available funds. The Airports Council International-North America (ACI-NA), a trade association for airports, also estimates the cost of planned airport capital projects. While almost all airport sponsors in the United States are states, municipalities, or specially created public authorities, there is still a significant reliance on the private sector for finance, expertise, and control of airport assets. For example, we have previously reported that the majority of airport employees at the nation’s major airports are employed by private sector firms, such as concessionaires, and some airports are also operated by private companies. Pursuant to statutory authorization, since 1996, FAA has been piloting an airport privatization program that relaxes certain restrictions on the sale or lease of airports to private entities. A variety of factors has had a substantial impact on the airline industry. We reported in June 2014 that economic issues such as volatile fuel prices and the economic recession have affected the industry as have airlines’ consolidation and an adoption of business models that focus For instance, the 2007-2009 recession more on capacity management.combined with a spike in fuel prices, helped spur industry mergers and a change in airline business models. Specifically, Delta acquired Northwest in 2008, United and Continental merged in 2010, Southwest acquired AirTran in 2011, and US Airways and American Airlines merged in 2014. Although passenger traffic has generally rebounded as the economy has recovered, the number of commercial aircraft operations has not returned to 2007 levels as airlines are flying larger and fuller aircraft. In June 2014, we found that one outcome of economic pressures and industry changes had been reductions in U.S. passenger aircraft operations as measured by scheduled flight operations. Many airports lost both available seats and flights since 2007 when aircraft operations last peaked. However, medium- and small-hub airports had proportionally lost more service than large-hub or nonhub airports, as major airlines merged and consolidated their flight schedules at the largest airports. In June 2014, we found—based on our analysis of Department of Transportation’s (DOT) data—that there were about 1.2 million fewer scheduled domestic flights in 2007 as compared to 2013 at large-, medium-, small-hub, and nonhub airports. The greatest reduction in scheduled flights occurred at medium-hub airports, which decreased nearly 24 percent from 2007 to 2013, compared to a decrease of about 9 percent at large-hub airports and about 20 percent at small-hub airports. Medium-hub airports also experienced the greatest percentage reduction in air service as measured by available seats (see fig. 2). While 2014 passenger activity as represented by the number of passengers onboard aircraft departing U.S. airports has rebounded nearly back to 2007 levels (down 4 percent), the total number of commercial passenger and cargo aircraft departures (operations) in 2014 is still down 18.5 percent since 2007. Declining operations reduces pressure on airports’ airside capacity, while rebounding passenger traffic could put pressure on airports’ terminals and gates to accommodate passengers. We found in June 2014 that air service to small airports, which generally serve small communities, has declined since 2007 due, in part, to volatile fuel costs and declining populations in small communities. According to a study by the Massachusetts Institute of Technology (MIT), regional aircraft—those mostly used to provide air service to small communities— are 40 to 60 percent less fuel efficient than the aircraft used by mainline carriers at larger hub airports. Further, from 2002 to 2012, fuels costs quadrupled and became the airlines’ largest expense at nearly 30 percent of airlines’ operating costs. While more recently oil prices have dropped, it remains uncertain whether currently low oil prices will continue. The second major factor affecting small community service is declining population in many regions of the country over the last 30 years. As a result, in previous work, we have found that population movement has decreased demand for air service to certain small communities. For example, geographic areas, especially in the Midwest and Great Plains states, lost population from 1980 through 2010, as illustrated in figure 3 below. As a result, certain areas of the country are less densely populated than they were 35 years ago when the airlines were deregulated and the Essential Air Service (EAS) was created. For small communities located close to larger cities and larger airports, a lack of local demand can be exacerbated by passengers choosing to drive to airports in larger cities to access better service and lower fares. The EAS program was created in 1978 to provide subsidies to some small communities that had service at the time of deregulation. We reported last year that EAS has grown in cost but did help stem the declines in service to those communities as compared to other airports. In June 2014, we reported that GA activity has also declined since 2007, particularly affecting airports that rely on general aviation activity for a large share of their revenue. For GA airports—which generate revenues from landing fees, fuel sales, and hangar rents—the loss of traffic can have a significant effect on their ability to fund development. A 2012 MIT study that examined trends for GA operations at U.S. airports with air- traffic control towers indicated that from 2000 to 2010, total GA operations dropped 35 percent. According to the MIT study, the number of annual hours flown by GA pilots, as estimated by FAA, has also decreased over the past decade. Numerous factors affect the level of GA operations including the level of fuel prices, the costs of owning and operating personal aircraft, and the total number of private pilots and GA aircraft. For example, we recently reported on the availability of airline pilots and found that the GA pilot supply pipeline has decreased as fewer students enter and complete collegiate pilot-training programs and fewer military pilots are available than in the past. Earlier this year, FAA reported on airport capacity needs through 2030. The focus of FAA’s analysis was not on the broad range of investments airports make to serve passengers and aircraft, but on the capacity of airports to operate without significant delay. Therefore, the primary focus was on airside capacity, especially runway capacity. To do this, FAA modeled recent and forecasted changes in aviation activity, current and planned FAA investments in air-traffic-control modernization, and airport investments in infrastructure, such as new runways, to determine which airports are likely to be congested or capacity constrained in future years.with previous studies in 2004 and 2007 following a similar methodology. The most recent study found that the number of capacity-constrained airports expected in the future has fallen dramatically from the number projected in earlier reports, referred to as FACT1 and FACT2 (see fig. 4). For example, in 2004, FAA projected that 41 airports would be capacity constrained by 2020 unless additional investment occurred. However, in the 2015 report, FAA projected that 6 airports will be capacity constrained in 2020. FAA attributed this improvement to changes in aviation activity, investment in air-traffic-control modernization, and the addition of airport runways. In the September 2014 NPIAS, FAA estimated that airports have roughly $33.5 billion in planned development projects for the period 2015 through 2019 that are eligible for federal support in the form of AIP grants.estimate is roughly 21 percent less than FAA’s previous estimate of $42.5 billion for the period 2013 through 2017 (see fig. 5). FAA reported a decrease in estimated needs for most hub-airport categories and all types of airport development except projects to reconstruct or rehabilitate airport facilities, security related infrastructure projects, and safety projects (see fig. 6). Notably, according to FAA, planned capacity-related development decreased to $4.9 billion, a 50-percent decrease. Planned terminal-related development also saw a major decline, down by 69 percent from the previous estimate. The ACI-NA also estimated airports’ planned development for the 2015 through 2019 period for projects both eligible and not eligible for AIP funding. According to ACI-NA, the total estimated planned-development cost for 2015 through 2019 is $72.5 billion, more than twice FAA’s estimate for just AIP eligible projects.percent over its prior estimate of $68.7 billion for the prior 2013–2017 ACI-NA’s estimate increased 6.2 estimating period. According to ACI-NA, the difference in the respective estimates is attributable to ACI-NA’s including all projects rather than just AIP-eligible projects like the NPIAS, as well as including projects with identified funding sources, which the NPIAS excludes. For example, ACI- NA’s estimate includes AIP-ineligible projects such as parking facilities, airport hangars, and commercial space in large passenger terminal buildings. ACI-NA attributed more than half of the development costs to the need to accommodate growth in passenger and cargo activity. ACI- NA estimated that 36 percent of planned development costs were for terminal projects. We are currently analyzing FAA and ACI-NA’s most recent plan estimates and will be reporting later this year on the results. In Fiscal Year 2015, Congress made $3.35 billion available in appropriations acts for AIP funding, a reduction from the annual appropriations of $3.52 billion for fiscal years 2007 through 2011. The President’s 2016 budget proposal calls for a reduction in annual AIP funding to $2.9 billion in conjunction with an increase in the PFC cap. As we testified in June 2014, if amounts made available in appropriations acts for AIP fall below the $3.2 billion level established in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century of 2000and no adjustments are made, under the 2000 Act the amount of AIP entitlement grants would be reduced, but more AIP discretionary grants could be made as a result. The larger amount of AIP funding that would go to discretionary grants would give FAA greater decision-making power over the development projects that receive funding. Previous proposals have considered changing how GA airports are allocated their share of AIP funds, which represented approximately one- quarter of total AIP funds in fiscal year 2014. For example, in 2007, the Administration’s FAA reauthorization proposal suggested changing the funding structure for GA airports. Specifically, FAA would have tiered GA airports’ funding based on level of and type of aviation activities. AIP entitlement funding would then range, based on the tier, up to $400,000. While this proposal was not adopted, FAA recently undertook an exercise to classify GA airports based on their activity levels. reported that 281 airports remained unclassified because they did not meet the criteria for inclusion in any of the new categories, thus having no clearly defined federal role.airports with few or no based aircraft. According to the most recent NPIAS report, many of these 227 airports have received AIP funding in the past and may be considered for future funding if and when their activity levels meet FAA’s criteria for inclusion. In a 2012 report, FAA categorized GA airports as National (84), Regional (467), Local (1,236), and Basic (668). In addition, another 497 GA airports were unclassified. Federal Aviation Administration, General Aviation Airports: A National Asset (ASSET 1), May 2012. large- and medium-hub airports collecting PFCs must return a portion of their AIP entitlement grants, which are then redistributed to smaller airports through the AIP. As previously noted, 68 percent of PFCs have been used to pay for landside development (terminals) and interest charges on debt. In addition, many airports’ future PFC collections are already committed to pay off debt for past projects, leaving little room for new development. For example, at least 50 airports have leveraged their PFCs through 2030 or later, according to FAA data. The President’s fiscal year 2016 budget proposal and airports have called for increasing the PFC cap to $8—which is intended to account for inflation since 2000, when the maximum PFC cap was last raised—and eliminate AIP entitlements for large-hub airports. reported on the effects of increasing PFCs on airport revenues and passenger demand. Specifically, we found that increasing the PFC cap would significantly increase PFC collections available to airports under the three scenarios we modeled but could also marginally slow passenger growth and therefore the growth in revenues to the AATF. We modeled the potential economic effects of increased PFC caps for fiscal years 2016 through 2024 as shown in figure 7 below. Under all three scenarios, trust fund revenues, which totaled $12.9 billion in 2013 and fund FAA activities, would likely continue to grow overall based on current projections of passenger growth; however, the modeled cap increases could reduce the growth in total AATF revenues by roughly 1 percent because of reduced passenger demand if airlines pass the full amount of the PFC increase along to consumers in the form of increased ticket prices. Airport trade associations, the ACI-NA and the American Association of Airport Executives, have made prior proposals to raise the PFC cap to $8.50 with periodic adjustments for inflation. Pub. L. No. 112-95, § 112, 126 Stat. 11, 18 (2012). totaled $5.2 billion, while nonaviation revenues were just over $5 billion. According to ACI-NA, non-aviation revenue has grown faster than passenger growth since 2004, over 4 percent on average for non-aviation revenue versus 1.5 percent average growth in passenger boardings over the same period. Further, some airports have developed unique commercial activities with stakeholders from local jurisdictions and the private sector to help develop airport properties into retail, business, and leisure destinations. Some examples include: Non-aviation development on airport property: Airports have turned to an increasing range of unique developments on airport property, including high-end commercial retail and leisure activities, hotels and business centers, and medical facilities for non-aviation revenues. For example, airports in Denver, Miami, and Indianapolis have built cold storage facilities on airport property in an effort to generate revenue by leasing cold storage space to freight forwarders and businesses that transport low-volume, high-valued goods, including pharmaceuticals, produce, and other time-sensitive or perishable items. Public-private partnerships: Airports can fund airport improvements with private sector participation. Public-private partnerships, involving airports and developers, have been used to finance airport development projects without increasing the amount of debt already incurred by airports. For example, the Port Authority of New York and New Jersey has recently received responses for its request for proposals for the private sector to demolish old terminal buildings and construct, partially finance, operate, and maintain a new Central Terminal Building for LaGuardia Airport in New York City. Privatization: FAA’s Airport Privatization Pilot Program (APPP), which was established in 1997 to reduce barriers to airport privatization that we identified in 1996, has generated limited interest from the public and private sectors. As we reported in November 2014, 10 airports have applied to be part of the pilot program and one airport—San Juan Luis Muñoz Marín International Airport in Puerto Rico—has been privatized (see fig. 8). In our report, we noted that several factors reduce interest in the APPP—such as higher financing costs for privatized airports, the lack of state and local property tax exemptions, and the length of time to complete a privatization under the program. Public sector airport owners have also found ways to gain some of the potential benefits of privatization without full privatization, such as entering airport management contracts and joint development agreements for managing and building an airport terminal. In conclusion, last year commemorated one century since the first commercial airline flight,commercial aviation has grown at an amazing pace to become an and in that relatively short time span ubiquitous and mature industry in the United States. While commercial aviation still has many exciting growth prospects for its second century, it also faces many challenges—among them how to ensure that the aviation system can accommodate millions of flights and hundreds of millions of passengers every year in the midst of shifting aviation activity and constrained federal funding. Despite recent declines in airport operations, it remains important for airports to be maintained as well as upgraded to maintain safety and accommodate future growth. Declines in airport operations have reduced demands on AIP, but rebounded passenger activity could continue to put pressure on PFCs to finance terminal and other projects. Developing airports will require the combined resources of federal, state, and local governments, as well as private companies’ capital and expertise. Effectively supporting this development involves focusing federal resources on FAA’s key priorities of maintaining the world’s safest aviation system and providing adequate system capacity, while allowing sufficient flexibility for local airport sponsors to maximize local investment and revenue opportunities. In deciding the best course for future federal investment in our national airport system, Congress is faced with weighing the interests of all aviation stakeholders, including airports, airlines, other airport users, and most importantly passengers, to help ensure a safe and vibrant aviation system. Madam Chair Ayotte, Ranking Member Cantwell, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this testimony, please contact Gerald L. Dillingham at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Paul Aussendorf (Assistant Director), Amy Abramowitz, David Hooper, Delwen Jones, Josh Ormond, Melissa Swearingen, and Russell Voth. 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. | U.S. airports are key contributors to the national and regional economies, providing mobility for people and goods, both domestically and internationally. Since 2007 when GAO last reported on airport funding, airports of all sizes have experienced significant changes in aviation activity. Financing for airport capital improvements is based on a mix of federal AIP grants, federally authorized but statutorily-capped PFCs, and locally generated aviation-related and non-aviation-related revenues. As deliberations begin in advance of FAA's 2015 reauthorization, Congress is faced with considering the most appropriate type, level, and distribution of federal support for development of the National Airspace System. This testimony discusses trends in (1) aviation activity at airports since 2007, (2) forecasted airport capacity needs and airports' planned development costs, and (3) financing for airport development. This testimony is based on previous GAO reports issued from June 2007 through December 2014, with selected updates conducted through April 2015. To conduct these updates, GAO reviewed recent information on FAA's program activities and analyses outlined in FAA reports, including the 2015 aviation forecast, and the 2015–2019 planned airport-development estimates. Economic factors, since 2007, have led to fewer scheduled commercial flights, a trend more pronounced for some types of airports. These economic factors include not just the volatile fuel prices and the 2007 to 2009 recession but also evolving airline practices, such as airline mergers and the adoption of business models that demonstrate capacity management. For example, as GAO reported in June 2014, the number of scheduled flights at medium- and small-hub airports has declined at least 20 percent from 2007 to 2013, compared to about a 9 percent decline at large-hub airports. General Aviation (GA) has also declined in activity, as measured by the number of GA aircraft operations and hours flown, due to similar economic factors. In recent years, however, passenger growth has rebounded. According to the Federal Aviation Administration's (FAA) projections, U.S. airline passenger growth is predicted to grow 2 percent per year through 2035—a growth rate that is slightly lower than that of past forecasts. According to FAA estimates, the number of airports that require additional capacity to handle flight operations to avoid delays has declined since 2004. Similarly, the future cost of planned airport development has also declined in recent years. Earlier this year, FAA projected that 6 airports will be capacity constrained in 2020 compared to 41 in the 2004 projection. Even with this improvement, some airports—like those in the New York City area region—will remain capacity constrained, according to FAA. The overall improved capacity situation is also reflected in reduced estimates of future airport-development costs that are eligible for federal grants. In September 2014, the FAA estimated that for the period 2015 through 2019, airports have about $33.5 billion in planned development projects eligible for federal Airport Improvement Program (AIP) grants—a 21 percent reduction from the $42.5 billion estimate for the time period 2013 through 2017. The biggest decline in planned development costs among project categories is in capacity projects such as new runway projects. However, an airport industry association estimated planned airport capital project costs, both those eligible and not eligible for AIP, of $72.5 billion for 2015 through 2019, an increase of 6.2 percent from the association's prior 5-year estimate for 2013 through 2017. As traditional funding sources for airport development have generally declined, airports have increasingly relied on other sources of financing. Specifically, federal AIP grants and Passenger Facility Charges (PFC) are two primary sources of federally authorized funding for airports. The amount made available for AIP decreased from over $3.5 billion for fiscal years 2007 through 2011 to less than $3.4 billion for fiscal year 2015. Further the President's 2016 proposed budget calls for additional reductions in AIP, though it would be offset with a proposed increase in the PFC cap, which is currently $4.50 per flight segment. Airports have sought additional opportunities to collect non-aviation revenues. As a result, according to FAA, non-aviation revenue has increased each year from 2008 through 2014. For example, airports have 1) partnered with the private sector to fund airport improvements; 2) identified new business ventures on airport property including the development of commercial retail, leisure activities, and medical facilities; and 3) explored options for privatization. |
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In July 2007, we reported on weaknesses in the Navy’s business case for the Ford-class aircraft carrier and focused mainly on the lead ship, CVN 78. We noted that costs and labor hours were underestimated and critical technologies were immature. Today, all of this has come to pass in the form of cost growth, testing delays, and reduced capability—in other words, less for more. In August 2007, we also observed that in consequence of its optimistic business case, the Navy would likely face the choice of (1) keeping the ship’s construction schedule intact while deferring key knowledge-building events—such as land-based tests of technologies—until later, or (2) slipping the ship’s construction schedule to accommodate technology and other delays. Today, those choices have been made—the ship’s construction schedule has been delayed slightly by a few months, while other events, like land-based tests for critical technologies, have slid by years. The result is a final acquisition phase in which construction and key test events are occurring concurrently, with no margin for error without giving something else up. In its simplest form, a business case requires a balance between the concept selected to satisfy warfighter needs and the resources— technologies, design knowledge, funding, and time—needed to transform the concept into a product, in this case a ship. In a number of reports and assessments since 2007, we have consistently reported on concerns related to technology development, ship cost, construction issues, and overall ship capabilities. Absent a strong business case, the CVN 78 program deviated from its initial promises of cost and capability, which we discuss below. In August 2007, before the Navy awarded a contract to construct the lead ship, we reported on key risks in the program that would impair the Navy’s ability to deliver CVN 78 at cost, on time, and with its planned capabilities (as seen in table 1 below). Specifically, we noted that the Navy’s cost estimate of $10.5 billion and 2 million fewer labor hours made the unprecedented assumption that the CVN 78 would take fewer labor hours than its more mature predecessor—the CVN 77. The shipbuilder’s estimate—22 percent higher in cost was more in line with actual historical experience. Moreover, key technologies, not part of the shipbuilder’s estimates because they would be furnished by the government, were already behind and had absorbed much of their schedule margin. Congress expressed similar concerns about Ford-class carrier costs. The John Warner National Defense Authorization Act for Fiscal Year 2007 included a provision that established (1) a procurement cost cap for CVN 78 of $10.5 billion, plus adjustments for inflation and other factors, and (2) a procurement cost cap for subsequent Ford-class carriers of $8.1 billion each, plus adjustments for inflation and other factors. The legislation in effect required the Navy to seek statutory authority from Congress in the event it determined that adjustments to the cost cap were necessary, and the reason for the adjustments was not one of six factors permitted in the law. The risks we assessed in 2007 have been realized, compounded by additional construction and technical challenges. Several critical technologies, in particular, EMALS, AAG, and DBR, encountered problems in development, which resulted in delays to land-based testing. It was important for these technologies to be thoroughly tested on land so that problems could be discovered and fixes made before installing production systems on the ship. In an effort to meet required installation dates aboard CVN 78, the Navy elected to largely preserve the construction schedule and produce some of these systems prior to demonstrating their maturity in land-based testing. This strategy resulted in significant concurrency between developmental testing and construction, as shown in figure 1 below. The burden of completing technology development now falls during the most expensive phase of ship construction. I view this situation as latent concurrency in that the overlap between technology development, testing, and construction was not planned for or debated when the program was started. Rather, it emerged as a consequence of optimistic planning. Concurrency has been made more acute as the Navy has begun testing the key technologies that are already installed on the ship, even as land based testing continues. Moreover, the timeframes for post-delivery testing, i.e. the period when the ship would demonstrate many of its capabilities, are being compressed by ongoing system delays. This tight test schedule could result in deploying without fully tested systems if the Navy maintains the ship’s ready-to-deploy date in 2020. The issues described above, along with material shortfalls, engineering challenges, and delays developing and installing critical systems, drove inefficient out-of-sequence work, which resulted in significant cost increases. This, in turn, required the Navy to seek approval from Congress to raise the legislative cost cap, which it attributed to construction cost overruns and economic inflation (as shown in figure 2 below). Along with costs, the Navy’s estimates of the number of labor hours required to construct the ship have also increased (see table 2). Recalling that in 2007, the Navy’s estimate was 2 million hours lower than the shipbuilder’s, the current estimate is a big increase. On the other hand, it is more in line with a first-in-class ship like CVN 78; that is to say, it was predictable. To manage remaining program risks, the Navy deferred some construction work and installation of mission-related systems until after ship delivery. Although this strategy may provide a funding reserve in the near term, it still may not be sufficient to cover all potential cost risks. In particular, as we reported in November 2014, the schedule for completing testing of the equipment and systems aboard the ship had become increasingly compressed and continues to lag behind expectations. This is a particularly risky period for CVN 78 as the Navy will need to resolve technical deficiencies discovered through testing—for critical technologies or the ship—concurrent with latter stage ship construction activities, which is generally more complex than much of the work occurring in the earlier stages of construction. Risks to the ship’s capability we identified in our August 2007 report have also been realized. We subsequently found in September 2013 and November 2014 that challenges with technology development are now affecting planned operational capability beyond the ship’s delivery (as shown in table 3). Specifically, CVN 78 will not demonstrate its increased sortie generation rate due to low reliability levels of key aircraft launch and recovery systems before it is ready to deploy to the fleet. Further, required reductions in personnel remain at risk, as immature systems may require more manpower to operate and maintain than expected. Ultimately, these limitations signal a significant compromise to the initially promised capability. The Navy believes that, despite these pressures, it will still be able to achieve the current $12.9 billion congressional cost cap. While this remains to be seen, the Navy’s approach, nevertheless, results in a more expensive, yet less complete and capable ship at delivery than initially planned. Even if the cost cap is met, it will not alter the ultimate cost of the ship. Additional costs will be borne later—outside of CVN 78’s acquisition costs—to account for, for example, reliability shortfalls of key systems. In such cases, the Navy will need to take costly actions to maintain operational performance by adding maintenance personnel and spare parts. Reliability shortfalls, in turn, will drive ship life cycle cost increases related to manning, repairs, and parts sparing. Deferred systems and equipment will at some point be retrofitted back onto the ship. Although increases have already been made to the CVN 79’s cost cap and tradeoffs made to the ship’s scope, it still has an unrealistic business case. In 2013, the Navy requested congressional approval to increase CVN 79’s cost cap from $8.1 billion to $11.5 billion, citing inflation as well as cost increases based on CVN 78’s performance. Since the Ford-class program’s formal system development start in 2004, CVN 79’s planned delivery has been delayed by 4 years and the ship will be ready for deployment 15 months later than expected in 2013. The Navy recently awarded a construction contract for CVN 79 which it believes will allow the program to achieve the current $11.5 billion legislative cost cap. Similar to the lead ship, the business case for CVN 79 is not commensurate with the costs needed to produce an operational ship. By any measure, CVN 79 should cost less than CVN 78, as it will incorporate important lessons learned on construction sequencing and other efficiencies. While it may cost less than its predecessor, CVN 79 is likely to cost more than estimated. As we reported in November 2014, the Navy’s strategy to achieve the cost cap: 1) relies on optimistic assumptions of construction efficiencies and cost savings; (2) shifts work—including installation of mission systems—needed to make the ship fully operational until after ship delivery; and (3) delivers the ship with the same baseline capability as CVN 78, with the costs of a number of planned mission system upgrades and modernizations postponed until future maintenance periods. Even with ambitious assumptions and planned improvements, the Navy’s current estimate for the CVN 79 stands at $11.5 billion—already at the cost cap. For perspective, the Director of the Department of Defense’s (DOD) Cost Assessment and Program Evaluation office projects that the Navy will exceed the congressional cost cap by about $235 million. The Congressional Budget Office estimates for CVN 79 are even higher; at a total cost of over $12.5 billion—which, if realized, would be over $1 billion above the current congressional cost cap. Similar to CVN 78, the Navy is assuming the shipbuilder will achieve efficiency gains that are unprecedented in aircraft carrier construction. While the shipbuilder has initiated significant revisions in its processes for building the ship that are expected to reduce labor hours, the Navy’s cost estimate for CVN 79 is predicated on an over 9 million labor hour reduction compared to CVN 78. For perspective, this estimate is not only lower than the 42.7 million hours originally estimated for CVN 78, it is 10 percent lower than what was achieved on CVN 77, the last Nimitz-class carrier. Previous aircraft carrier constructions have reduced labor hours by 3.2 million hours at most. Further, the Navy estimates that it will save over $180 million by replacing the dual band radar in favor of an alternative radar system, which it expects will provide a better technological solution at a lower cost. Cost savings are assumed, in part, because the Navy expects the radar to work within the current design parameters of the ship’s island. However, the Navy has not yet awarded a contract to develop the new radar solution. If design modifications are needed to the ship’s island, CVN 79 costs will increase, offsetting the Navy’s estimate of savings. Again for perspective, the Navy initially planned to install DBR on CVN 77 and it has taken the Navy over 10 years to develop the DBR, which is still not yet through testing. Finally, achieving the legislative cost cap of $11.5 billion is predicated on executing a two-phased delivery strategy for CVN 79, which will shift some construction work and installation of the warfare and communications systems to after ship delivery. By design, this strategy will result in a less capable and less complete ship at delivery—the end of the first phase—as shown in figure 3 below: According to the Navy, delaying procurement and installation of warfare and communications systems will prevent obsolescence before the ship’s first deployment in 2027 and allow the Navy to introduce competition for the ship’s systems and installation work after delivery. As we reported in November 2014, the Navy’s two-phased approach transfers the costs of a number of known capability upgrades, including decoy launching systems, torpedo defense enhancements, and Joint Strike Fighter aircraft related modifications, previously in the CVN 79 baseline to other (non-CVN 79 shipbuilding) accounts, by deferring installation to future maintenance periods. While such revisions reduce the end cost of CVN 79 in the near term, they do not reduce the ultimate cost of the ship, as the costs for these upgrades will eventually need to be paid—just at a later point in the ship’s life cycle. That CVN 78 will deliver at higher cost and less capability, while disconcerting, was predictable. Unfortunately, it is also unremarkable, as it is a typical outcome of the weapon system acquisition process. Along these lines, what does the CVN 78’s experience say about the acquisition process and what lessons can be learned from it? In many ways, CVN 78 represents a familiar outcome in Navy shipbuilding programs. Across the shipbuilding portfolio, cost growth for recent lead ships has been on the order of 28 percent (see figure 4). Figure 4 above further illustrates the similarity between CVN 78 and other shipbuilding programs authorized to start construction around the same time. Lead ships with the highest percentages of cost growth, such as the Littoral Combat Ships and DDG 1000, were framed by steep programmatic challenges. Similar to the CVN 78, these programs have been structured around unexecutable business cases in which ship construction begins prior to demonstrating key knowledge, resulting in costly, time-consuming, and out-of-sequence work during construction and undesired capability tradeoffs. Such outcomes persist even though DOD and Congress have taken steps to address long-standing problems with DOD acquisitions. These reforms emphasize sound management practices—such as realistic estimating, thorough testing, and accurate reporting—and were implemented to enhance DOD’s acquisition policy, which already provided a framework for managers to successfully develop and execute acquisition programs. Today these practices are well known. However, outcomes of the Ford-class program illustrate the limits of focusing on policy-and-practice related aspects of weapon system development without understanding incentives to sacrifice realism to win support for a program. Strong incentives encourage deviations from sound acquisition practices. In the commercial marketplace, investment in a new product represents an expense. Company funds must be expended and will not provide a return until the product is developed, produced, and sold. In DOD, new products represent a revenue, in the form of a budget line. A program’s return on investment occurs as soon as the funding is initiated. The budget process results in funding major program commitments before knowledge is available to support such decisions. Competition with other programs vying for funding puts pressure on program sponsors to project unprecedented levels of performance (often by counting on unproven technologies) while promising low cost and short schedules. These incentives, coupled with a marketplace that is characterized by a single buyer (DOD), low volume and limited number of major sources, create a culture in weapon system acquisition that encourages undue optimism about program risks and costs. To the extent Congress funds such programs as requested, it sanctions—and thus rewards—optimism and unexecutable business cases. To be sure, this is not to suggest that the acquisition process is foiled by bad actors. Rather, program sponsors and other participants act rationally within the system to achieve goals they believe in. Competitive pressures for funding simply favor optimism in setting cost, schedule, technical, and other estimates. The Ford-class program illustrates the pitfalls of operating in this environment. Optimism has pervaded the program from the start. Initially, the program sought to introduce technology improvements gradually over a number of successive carriers. However, in 2002, DOD opted to forgo the program’s evolutionary acquisition strategy, in favor of achieving revolutionary technological achievements on the lead ship. Expectations of a more capable ship were promised, with cost and schedule goals that were out of balance with the technical risks. Further, the dynamics of weapon system budgeting—and in particular, shipbuilding—resulted in significant commitments made well in advance of critical acquisition decisions, most notably, the authorization to start construction. Beginning in 2001, the Ford Class program began receiving advanced procurement funding to initiate design activities, procure long-lead materials, and prepare for construction, as shown in figure 5 below. By the time the Navy requested funding for construction of CVN 78 in 2007 it had already received $3.7 billion in advance procurement. It used some of these funds to build 13 percent of the ship’s construction units. Yet, at that time the program had considerable unknowns—technologies were immature and cost estimates unreliable. Similarly, in 2013, Congress had already appropriated nearly $3.3 billion in funding for CVN 79 construction. This decision was made even though the Navy’s understanding of the cost required to construct and deliver the lead ship was incomplete. A similar scenario exists today, as the Navy is requesting funding for advanced procurement of CVN 80, while also constructing CVN 78 and CVN 79. While these specifics relate to the Ford-class carrier, the principles apply to all major weapon system acquisitions. That is, commitments to provide funding in the form of budget requests, Congressional authorizations, and Congressional appropriations are made well in advance of major program commitments, such as the decision to approve the start of a program. At the time the funding commitments are made, less verifiable knowledge is available about a program’s cost, schedule, and technical challenges. This creates a vacuum for optimism to fill. When the programmatic decision point arrives, money is already on the table, which creates pressure to make a “go” decision, regardless of the risks now known to be at hand. The environment of Navy shipbuilding is unique as it is characterized by a symbiotic relationship between buyer (Navy) and builder. This is particularly true in the case of aircraft carriers, where there is only one domestic entity capable of constructing, testing, and delivering nuclear- powered aircraft carriers. Consequently, the buyer has a strong interest in sustaining the shipbuilder despite shortfalls in performance. Under such a scenario, the government has a limited ability to negotiate favorable contract terms in light of construction challenges and virtually no ability to walk away from the investment once it is underway. The experiences of the Ford-class program are not unique—rather, they represent a typical acquisition outcome. The cost growth and other problems seen today were known to be likely in 2007—before a contract was signed to construct the lead ship. Yet CVN 78 was funded and approved despite a knowingly deficient business case; in fact, the ship has been funded for nearly 15 years. It is too simplistic to look at the program as a product of a broken acquisition process; rather it is indicative of a process that is in equilibrium. It has worked this way for decades with similar outcomes: weapon systems that are the best in the world, but cost significantly more, take longer, and perform less than advertised. The rules and policies are clear about what to do, but other incentives force compromises of good judgment. The persistence of undesirable outcomes such as cost growth and schedule delays suggests that these are consequences that participants in the process have been willing to accept. It is not broken in the sense that it is rational; that is, program sponsors must promise more for less in order to win funding approval. This naturally leads to an unexecutable business case. Once funded and approved, reality sets in and the program must then offer less for more. Where do we go from here? Under consideration this year are a number of acquisition reforms. While these aim to change the policies that govern weapon system acquisition, they do not sufficiently address the incentives that drive the behavior. As I described above, the acquisition culture in general rewards programs for moving forward with unrealistic business cases. Early on, it was clear that the Ford-class program faced significant risks due to the development, installation and integration of numerous technologies. Yet, these risks were taken on the unfounded hope that they were manageable and that risk mitigation plans were in place. The budget and schedule did not account for these risks. Funding approval— authorizing programs and appropriating funds are some of the most powerful oversight tools Congress has. The reality is once funding starts, other tools of oversight are relatively weak—they are no match for the incentives to over-promise. Consequently, the key is to ensure that new programs exhibit desirable principles before they are approved and funded. There is little that can be done from an oversight standpoint on the CVN 78. In fact, there is little that can be done on the CVN 79, either. Regardless of how costs will be measured against cost caps, the full cost of the ships—as yet unknown—will ultimately be borne. For example, while the Joint Precision Approach and Landing System has been deferred from the first two ships, eventually it will have to be installed on them to accept the F-35 fighter. The next real oversight opportunity is on the CVN 80, which begins funding in fiscal year 2016. Going forward, there are two acquisition reform challenges I would like to put on the table. The first is what to do about funding. Today, DOD and Congress must approve and fund programs ahead of major decision points and key information. With money in hand, it is virtually impossible to disapprove going forward with the program. There are sound financial reasons for making sure money is available to execute programs before they are approved. But they are also a cause of oversold business cases. Second, in the numerous acquisition reform proposals made recently, there is much for DOD to do. But, Congress, too, has a role in demanding realistic business cases through the selection and timing of the programs it chooses to authorize and fund. What it does with funding sets the tone for what acquisition practices are acceptable. Mr. Chairman and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff has any questions about this statement, please contact Paul L. Francis at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Diana Moldafsky, Assistant Director; Charlie Shivers; Burns C. Eckert; Laura Greifner; Kelsey Hawley; Jenny Shinn; Ozzy Trevino; Abby Volk; and Alyssa Weir. Improve the realism of CVN 78’s budget estimate. Improve Navy’s cost surveillance capability. DOD Response and actions While the department agreed with our recommendations in concept, it has not fully taken action to implement them. The CVN 78 cost estimate continues to reflect undue optimism. Conduct a cost-benefit analysis on required CVN 78 DOD agreed with the need for a cost-benefit capabilities, namely reduced manning and the increased sortie generation rate prior to ship delivery. analysis, but did not plan to fully assess CVN 78 capabilities until the completion of operational testing after ship delivery. Update the CVN 78 test plan before ship delivery to allot sufficient time after ship delivery for land based testing to complete prior to shipboard testing. Adjust the CVN 78 planned post-delivery test schedule to ensure that system integration testing is completed before IOT&E. DOD agreed with our recommendation to update Defer the CVN 79 detail design and construction the CVN 78 test plan before delivery and has since updated the test and evaluation master plan (TEMP). However, it did not directly address our recommendation related to ensuring that sufficient time is allotted to complete land-based testing prior to beginning integrated testing. contract until land-based testing for critical systems was complete and update the CVN 79 cost estimate on the basis of actual costs and labor hours needed to construct CVN 78 during the recommended contract deferral period of CVN 79. DOD partially agreed with our recommendation to adjust the CVN 78 planned post-delivery schedule but current test plans still show significant overlap between integrated test events and operational testing. DOD disagreed with our recommendation to defer the award of the CVN 79’s detail design and construction contract. However, shortly after we issued our report, the Navy postponed the contract award citing the need to continue contract negotiations. While DOD did not agree to defer the CVN 79 contract as recommended, it did agree to update the CVN 79 cost estimate on the basis of CVN 78’s actual costs and labor hours. DOD has updated CVN 79’s budget estimate which we note is based on optimistic assumptions. 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 Navy set ambitious goals for the Ford-class program, including an array of new technologies and design features that were intended to improve combat capability and create operational efficiencies, all while reducing acquisition and life-cycle costs. The lead ship, CVN 78, has experienced significant cost growth with a reduced capability expected at delivery. More cost growth is likely. While CVN 78 is close to delivery, examining its acquisition history may provide an opportunity to improve outcomes for the other ships in the class and illustrate the dynamics of defense acquisition. GAO has reported on the acquisition struggles facing the Ford-class, particularly in GAO-07-866 , GAO-13-396 , and GAO-15-22 . This statement discusses: (1) the Navy's initial vision for CVN 78 and where the ship stands today; (2) plans for follow-on ship cost and construction; and (3) Ford-class experiences as illustrative of acquisition decision making. This statement is largely based on the three reports as well as GAO's larger work on shipbuilding and acquisition best practices, and also incorporates updated audit work where appropriate. The Ford-class aircraft carrier's lead ship began construction with an unrealistic business case. A sound business case balances the necessary resources and knowledge needed to transform a chosen concept into a product. Yet in 2007, GAO found that CVN 78 costs were underestimated and critical technologies were immature—key risks that would impair delivering CVN 78 at cost, on-time, and with its planned capabilities. The ship and its business case were nonetheless approved. Over the past 8 years, the business case has predictably decayed in the form of cost growth, testing delays, and reduced capability—in essence, getting less for more. Today, CVN 78 is more than $2 billion over its initial budget. Land-based tests of key technologies have been deferred by years while the ship's construction schedule has largely held fast. The CVN 78 is unlikely to achieve promised aircraft launch and recovery rates as key systems are unreliable. The ship must complete its final, more complex, construction phase concurrent with key test events. While problems are likely to be encountered, there is no margin for the unexpected. Additional costs are likely. Similarly, the business case for CVN 79 is not realistic. The Navy recently awarded a construction contract for CVN 79 which it believes will allow the program to achieve the current $11.5 billion legislative cost cap. Clearly, CVN 79 should cost less than CVN 78, as it will incorporate lessons learned on construction sequencing and other efficiencies. While it may cost less than its predecessor, CVN 79 is likely to cost more than estimated. As GAO found in November 2014, the Navy's strategy to achieve the cost cap relies on optimistic assumptions of construction efficiencies and cost savings—including unprecedented reductions in labor hours, shifting work until after ship delivery, and delivering the ship with the same baseline capability as CVN 78 by postponing planned mission system upgrades and modernizations until future maintenance periods. Today, with CVN 78 over 92 percent complete as it reaches delivery in May 2016, and the CVN 79 on contract, the ability to exercise oversight and make course corrections is limited. Yet, it is not too late to examine the carrier's acquisition history to illustrate the dynamics of shipbuilding—and weapon system—acquisition and the challenges they pose to acquisition reform. The carrier's problems are by no means unique; rather, they are quite typical of weapon systems. Such outcomes persist despite acquisition reforms the Department of Defense and Congress have put forward—such as realistic estimating and “fly before buy.” Competition with other programs for funding creates pressures to overpromise performance at unrealistic costs and schedules. These incentives are more powerful than policies to follow best acquisition practices and oversight tools. Moreover, the budget process provides incentives for programs to be funded before sufficient knowledge is available to make key decisions. Complementing these incentives is a marketplace characterized by a single buyer, low volume, and limited number of major sources. The decades-old culture of undue optimism when starting programs is not the consequence of a broken process, but rather of a process in equilibrium that rewards unrealistic business cases and, thus, devalues sound practices. GAO is not making any new recommendations in this statement but has made numerous recommendations to the Department of Defense in the past on Ford-class acquisition, including strengthening the program's business case before proceeding with acquisition decisions. While the Department has, at times, agreed with GAO's recommendations it has taken little to no action to implement them. |
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The Air Force recognized that reductions in spare parts inventories since the early 1990s have negatively affected aircraft readiness indicators such as mission capable rates, not-mission-capable supply, not-mission- capable maintenance, and cannibalizations. Recognizing the need to reverse this trend and that previous attempts to pinpoint specific spare parts shortages were piecemeal, temporary, and lacked adequate personnel to implement, the Air Force began a 5 to7 year logistics transformation effort in 1999 aimed at improving the efficiency and economy of the entire logistics process to enhance support to the warfighter. Rather than focusing on fully eliminating specific spare parts shortages, the Air Force chose to focus on addressing the process disconnects that caused the shortages. This included an end-to-end look at all aspects of the logistics process including commercial supply chain management, supply, maintenance, transportation, logistics planning, and financial management. The Spares Campaign initiated in February 2001 and the Depot Maintenance Reengineering and Transformation (DMRT) effort started in July 2001 were two key parts of the end-to-end review. In total, they identified the need for 84 initiatives, 43 of which related to spare parts. The Spares Campaign focused on supply process deficiencies, and it was intended to improve parts supportability to weapon systems and reverse declining readiness related to spares management. This was considered a major transformation effort and included five teams that reviewed the processes needed to produce spares and identified disconnects and solutions that would improve mission capability and manage cost (see table 1). Each team developed a flowchart showing how it believed processes related to its focus area should function and be managed to improve weapon system availability and cost management. The teams also identified disconnects or barriers preventing the processes from functioning as they should and recommended solutions to correct these disconnects. Twelve major deficiencies were noted, and more than 190 corrective actions were identified, which resulted in 20 initiatives, 19 of which were related to spare parts shortages. As of February 2003, 7 of 19 spare parts initiatives have been started. The DMRT effort, focused on deficiencies in depot maintenance processes. Various teams identified disconnects and barriers in these processes, reviewed Air Force current initiatives that affected depot maintenance, and identified industry best practices and benchmarking, receiving input from Air Force management, major commands, and Air Logistics Centers. More than 300 barriers to depot maintenance operational and financial performance were identified and consolidated into more than 40 major issues organized around 8 overarching focus areas. This resulted in 64 initiatives, 24 of which were related to spare parts. All 24 of the spare parts related initiatives have been started. Table 2 below summarizes the status of the Spares Campaign and DMRT initiatives as of February 2003. Appendix II provides a description of the 31 Spares Campaign and DMRT initiatives that have been started and estimated completion dates. The Air Force Strategic Plan is appropriately structured to provide a framework for mitigating spare parts shortages, but its two subordinate plans are not aligned with it in terms of performance measures. Consistent with sound management principles underlying the Government Performance and Results Act of 1993 (GPRA), the strategic plan includes a mission statement, long-term goals, and performance measures and targets, and some of these elements relate to spare parts shortages. However, the performance measures and targets in the subordinate plans are not consistent with those in the strategic plan or none are stated. This lack of alignment with the Air Force Strategic Plan’s performance measures and targets means that the service cannot measure the contribution of the actions it takes in response to the subordinate plans toward overcoming spare parts shortages and be assured that implementing the subordinate plans will mitigate critical spare parts shortages and give the Air Force its greatest readiness return on investment. The Air Force Strategic Plan, issued between April 1998 and May 2000, generally includes an effective strategy consistent with GPRA guidelines, and it generally represents an effective framework for reducing spare parts shortages. The plan applies to the Air Force as a whole and contains a mission statement, strategic goals, and output-related performance measures and targets. Specifically, the strategic plan has three goals: Goal 1 is to ensure a high quality force of people, Goal 2 is to enable commanders to respond to all types of crises, and Goal 3 is to prepare for an uncertain future by pursuing a modernization program. Each goal contains mission critical tasks (such as “Maximize the efficiency of operating and maintaining Air Force resources”) along with related performance measures and targets for determining progress toward achieving its strategic goals. Of the three strategic goals, Goal 2 addresses the mitigation of spare parts shortages. It has two mission critical tasks and 19 performance measures, many specifically related to improving spare parts inventories. One mission critical task, to “improve mission effectiveness while minimizing risk,” cites the percentage of aircraft that cannot perform their mission because spare parts are not available as a performance measure. It also cites performance targets for each aircraft. For example, the target for the F-15E is 9 percent and for the B-1 it is 22 percent, meaning that percent of the aircraft cannot perform their mission because of spare parts shortages (see appendix III for the not mission capable supply rate targets). The second mission critical task, to “maximize the efficiency of operating and maintaining the Air Force resources,” has the elapsed time between when a customer submits an order and receives the part as a performance measure. The major subordinate plans for implementing the Air Force Strategic Plan include goals similar to those in the strategic plan. However, their performance measures and targets are not linked to those in the strategic plan. The subordinate plans are the Logistics Support Plan and the Supply Strategic Plan (see fig. 1). The Logistics Support Plan was developed to provide authoritative, strategic direction and front-end guidance for Air Force logistics capabilities planning. It includes the same goals as the higher plan, and it contains objectives for accomplishing these goals. The plan does not include quantitative or qualitative output-related performance measures and targets that will yield the performance information needed to assess goal accomplishment at either the subordinate or strategic plan levels in order to measure results. Instead, it includes measures that will only yield information about whether or not a specific process was implemented. For example, the completion of combat support doctrine is the performance measure cited for accomplishing the objective to improve combat support to warfighters by developing and applying an Agile Combat Support doctrine. Another nonquantitative or qualitative performance measure was full fielding of identified total asset visibility capabilities for the objective to fully implement total asset visibility. The Supply Strategic Plan was intended to (1) create an integrated process for Air Force supply planning, (2) establish the planning infrastructure to facilitate information exchange throughout Air Force Supply, and (3) improve Air Force Supply’s measures of effectiveness. This plan contains five long-term goals that are consistent with the higher plan’s goals, and it has 19 objectives, 71 tasks to accomplish these objectives, and a projected end-state for some of these tasks. Some end-states are similar to the strategic plan’s output-related performance measures, but do not have corresponding performance targets. For example, one end-state discusses incidents of aircraft being not mission capable due to the lack of spare parts, but it does not specify a target (i.e., the desired percentage of incidences) against which to measure improvement. Other end-states did not discuss performance measures at all. For example, one end-state is completion of the new Air Force Supply Stockage Policy Guide and making it available to supply officers worldwide. Without effective quantitative and qualitative measures that flow from the Strategic Plan structure to the subordinate plans, the Air Force cannot determine the extent to which the implementation of these plans is contributing to its overall strategic goal relating to overcoming spare parts shortages. Furthermore, the Air Force cannot be assured that implementing the subordinate plans will give them the greatest readiness return on their investment. Key logistics initiatives being implemented by the Air Force may help to mitigate spare parts shortages, but their potential effectiveness is limited for several reasons. The Air Force has begun a major logistics transformation effort intended to improve the entire logistics process and identified numerous initiatives to improve its logistics process by addressing deficiencies, barriers, or disconnects. However, it has not implemented 12 of the 43 initiatives it identified as needed to address spare parts shortages nor demonstrated that all key aspects of these 12 have been incorporated into other initiatives underway. In addition, 23 of the 31 initiatives being implemented lack performance measures and targets. The Air Force also chose not to use the results of one of its initiatives, which identified a new consolidated requirement for spare parts; consequently, additional spare parts shortages could occur. Lastly, management problems identified by an Air Force review team in 2002 have hampered implementation of the initiatives, and its new directorate, established in February 2003, has not established a plan or priorities to address these problems. In 2001, the Air Force identified 43 initiatives to improve processes related to spare parts shortages—19 as part of the Spares Campaign and 24 as part of the DMRT. As of February 2003, 31 of the 43 initiatives have been started. The Air Force has started all 24 DMRT initiatives that relate to improving spare parts shortages, but has started only 7 of the 19 initiatives that relate to spare parts shortages arising from the Spares Campaign. Table 3 shows the implementation status of Spares Campaign initiatives. According to the Air Force, it chose to start the seven Spares Campaign initiatives that reflected its highest priorities, provided greatest impact to the logistics processes, and resulted in highest payback to the Air Force. The remaining 12 initiatives have not been started because the Air Force said it did not have the needed personnel and funding. Although the Air Force provided a document showing that some aspects of the remaining initiatives had been embedded into the Ten Focus Initiatives of the Spares Campaign, we could not verify that all of these initiatives had been started. Also, we could not validate that all of the deficiencies, disconnects, or barriers intended to be addressed by the remaining 12 initiatives were actually being addressed. Consequently, some of the process problems identified in the Spares Campaign that cause spare parts shortages may not be addressed, thereby reducing the overall effectiveness of the Air Force’s efforts to mitigate spare parts shortages. Twenty-three of the 31 Air Force initiatives that have been started lack output-related performance measures and targets. One of the 23 initiatives, the Material Policy initiative, has revision of all policies as its performance target. The other 22 initiatives were part of the DMRT effort and did not have any performance measure or any performance targets. Air Force officials said they are still trying to develop measures and targets for each of these initiatives. The other eight initiatives—such as the Weapon System Supply Chain Manager, Regional Supply Squadron, and Demand and Repair Workload Forecasting—have output-related measures, including how effective they are in making weapon systems available, the amount of cannibalization done to keep aircraft available, and the amount of aircraft that are not mission capable due to supply or maintenance problems. Without quantitative or qualitative performance-related measures and targets relating to improving spare parts availability, the Air Force lacks the means to determine the extent to which these initiatives have improved readiness by reducing spare parts shortages. One Spares Campaign initiative recently established a new total requirement for spare parts, but the service chose not to request all the funds to meet the requirement. The Spares Campaign’s Improve Spares Budgeting initiative created a Spares Requirement Review Board to identify a single, consolidated requirement for spare parts and consumable items. In the past, the Air Force had budgeted for spares based on annual flying-hour requirements with little consideration for the spares needed to meet non-flying-hour requirements, such as the pipeline or safety stock. As a result, the Air Force experienced parts shortages because demands for non-flying-hour spare parts had not been sufficiently budgeted. The review board compiled flying-hour and non-flying-hour requirements into a single, agreed upon requirement to be used for planning, programming, and budgeting. The Air Force’s new process yielded a new total spare parts requirement of approximately $5.9 billion for the fiscal year 2004 budget submission. However, in its fiscal year 2004 budget the service chose to only request $5.3 billion. After the service submitted its fiscal year 2004 budget, the Secretary of the Air Force reported $578 million in unfunded spares requirements: $166 million of this was for pipeline and other requirements, and $412 million was for the flying-hour program. The Air Force’s decision to request less funding than identified in their most recent requirements determination process raises concerns. Either the Air Force’s new spare parts requirements determination process is not a valid basis for future budget decisions, or by not requesting the full amount to meet the requirement, the Air Force has created the potential for additional spare parts shortages that could negatively affect readiness or has created the need for a supplemental budget request. Air Force officials said they took a risk that the $5.3 billion budget request would be sufficient based on the actual flying-hour cost experienced in fiscal year 2002. That year, they said, the flying-hour program was executed at a cheaper rate than budgeted. The Air Force recently established a new directorate to address several management issues that it believes adversely affects its logistics transformation initiatives, but the extent to which this directorate will improve overall management of these initiatives is not clear. In 2002, the Air Force formed a review team composed of retired general officers, senior executives, and industry leaders that assessed initiative implementation plans, identified problems with its logistics transformation efforts, and developed recommendations to solve these problems. The team concluded that a high risk of failure existed for the transformation efforts because (1) the Air Force is not clearly articulating throughout its organization the need for changes, (2) top-level commitment to implementing initiatives is not as strong as needed as evidenced by schedule slippage and lack of funding for initiatives, and (3) clear roles and responsibilities concerning the Spares Campaign are not being addressed. One of the team’s recommendations was to merge the Spares Campaign and DMRT efforts into a single, full-time logistics transformation program. In February 2003, the Air Force established the Innovation and Transformation Directorate, a new organization under the Logistics Division, which according to an Air Force briefing, consolidated the two efforts and placed oversight responsibility for all Air Force logistics transformation efforts on top-level leadership within one office. According to the Air Force, some of the first steps for the new directorate will be to review existing Spares Campaign and DMRT initiatives, resolve deficiencies in the two efforts, set aggressive timelines, goals, objectives, and performance measures, and obtain senior leadership approval of their actions. However, according to Air Force officials, the plans and priorities of this new directorate had not been set as of April 2003. Without such plans, priorities, and senior leadership commitment guiding the Air Force’s efforts to overcome these problems, the potential benefits from its initiatives to mitigate spare parts shortages that impact readiness may be delayed or possibly not achieved. The Air Force can show that additional funding for spare parts would improve aircraft supply availability if the funds were provided directly to the working capital fund. However, the Air Force does not link funding for spare parts directly to readiness because other factors also affect readiness. In its fiscal year 2004 budget request for spare parts funding, the Air Force included information on how spare parts funding in the working capital fund affected the supply availability for various types of aircraft (see app. I for projected aircraft availability rates). The budget request indicated that spare parts funding of approximately $5.3 billion would allow for aircraft supply availability ranging from 73 percent for the H-60 to 100 percent for the F-111. The Air Force drew this data from its Funding/Availability Multi-Method Allocator for Spares model, which estimates how many and which additional parts (i.e. supply availability) it can procure with different amounts of operating authority. The Air Force said that the model has some weaknesses, but it does provide a good mechanism for projecting aircraft supply availability. One weakness, according to DOD, is that while the model attempts to optimize supply parts availability, it is generally biased towards the purchase of low cost/high-demand items versus those critical spare parts that would most improve mission capable rates. The Air Force can also use this model to show how additional funding could increase spare parts availability by estimating the cost of additional supply availability in 1 percent increments by weapon system. For example, in 2002 the cost for the F-15E to achieve an 88 percent supply availability rate was approximately $237 million. To increase this availability 1 percent would have cost an additional $7 million. Similarly, it cost the Air Force approximately $301 million for the C-5 to achieve an 82 percent supply availability rate. To achieve an additional 1 percent supply availability would have cost an additional $3.6 million. According to the Air Force, additional supply availability results in improved stockage effectiveness and reduced customer wait time, back orders, and cannibalization rates, which all contribute to increased readiness. However, the Air Force cautioned that increased supply availability does not automatically result in increased mission capable (readiness) rates because other factors, such as maintenance and transportation, affect these rates. For example, if maintenance staffing levels at depots are inadequate, then even with 100 percent supply availability, mission capability will not be at its highest possible level. An Air Force strategic goal is to address problems that adversely affect mission accomplishment, such as critical spare parts shortages that reduce readiness. While it has a strategic plan that provides a good management framework, places emphasis on mitigating spare parts shortages, and cites performance measures and targets for assessing progress, the Air Force’s potential for successful implementation of the plan is hindered by several problems. Subordinate plans have not adopted the Strategic Plan’s readiness-related performance measures and targets; all identified initiatives to deal with the causes of spare parts shortages have not been started or key aspects clearly incorporated into other initiatives; and many of those that have been started lack effective performance measures and targets. Additionally, some management weaknesses could significantly impede successful initiative oversight and implementation. By not adopting specific performance measures and targets related to mitigating the critical spare parts shortages into subordinate plans and initiatives, following through on initiatives to address the causes of parts shortages and determine spare parts requirements, and resolving program management deficiencies, the Air Force has little assurance that its program emphasis and initiatives will improve spare-parts-related readiness. Furthermore, as part of its stewardship and accountability for funds, the Air Force will not be assured that the service’s spare parts spending is yielding the best readiness return on investment. We are recommending that the Secretary of Defense direct the Secretary of the Air Force to take the following steps: Incorporate the Air Force Strategic Plan’s performance measures and targets into the subordinate Logistics Support Plan and the Supply Strategic Plan. Commit to start those remaining initiatives needed to address the causes of spare parts shortages or clearly identify how the initiatives have been incorporated into those initiatives already underway. Adopt performance measures and targets for its initiatives that will show how their implementation will affect critical spare parts availability and readiness. Direct the new Innovation and Transformation Directorate to establish plans and priorities for improving management of logistics initiatives consistent with the Air Force Strategic Plan. Request spare parts funds in the Air Force’s budget consistent with results of its spare parts requirements determination process. In written comments on a draft of this report, the Department of Defense concurred with the intent of all five recommendations, but not all actions. The Department of Defense’s written comments are reprinted in their entirety in appendix IV. In concurring with our first, third, and fourth recommendations concerning incorporating and adopting performance measures and targets into subordinate plans and initiatives, the Department of Defense responded that the establishment of the Directorate of Innovation and Transformation, the directorate’s efforts to develop a balanced scorecard and supporting metrics, and its draft campaign plans which spell out and track milestones for each initiative were consistent with the direction of the Strategic Plan. We believe that if the Department of Defense follows through with its plans for the new directorate, as laid out in its written response, these planned actions should meet the thrust of our recommendations. The Department of Defense concurred with the intent of our second recommendation related to starting those remaining initiatives needed to address the causes of shortages, but not the specific actions. In its comments the Department of Defense stated the original 19 initiatives have been either consolidated into the Ten Focus Initiatives or overtaken by other events making it unnecessary to separately track progress for each of the individual actions. Based on this action, the Department of Defense concluded that it had complied with this recommendation. We disagree that the department’s actions fully respond to our recommendation. The thrust of our recommendation is that the Air Force identify which of the 12 remaining initiatives that were not started were incorporated into the Ten Focus Initiatives and what events have overtaken the others to ensure that all causes of spare parts shortages identified by the Air Force are being adequately addressed. In concurring with our fifth recommendation that the Air Force request spare parts funds consistent with results of its spare parts requirements determination process, the Department of Defense responded that the Air Force’s spare parts budget was developed consistent with the new requirements determination process, but the amount of funding requested was constrained. This response confirms our statement that the Air Force has underfunded its spare parts requirements and thereby created the potential for a supplemental budget request or for additional spare parts shortages that could negatively affect readiness. To accomplish our three objectives, we visited the Air Force Headquarters’ Logistics Directorate, in Washington, D.C., the Air Force Material Command, in Dayton, Ohio and contractor representatives at Bearing Point (formerly KPMG Consulting) in McLean, Virginia. To determine whether the strategic plans address the mitigation of spare parts shortages, we reviewed the Air Force Strategic Plan, its two subordinate plans—Logistics Support Plan and Supply Strategic Plan— as well as other strategic planning documents and interviewed officials to determine whether these plans included key actions targeted at mitigating critical spare parts shortages and improving readiness. We also reviewed these plans to determine if performance measures and targets in the subordinate plans were similar and linked to those in the higher-level strategic plan. Additionally, we reviewed these plans to determine whether they included the elements of a strategic plan as defined by the GPRA. To determine the likelihood of whether key initiatives would mitigate spare parts shortages to improve readiness, we interviewed Air Force officials to identify the initiatives that they believe will mitigate spare parts shortages and improve readiness. We obtained and reviewed documents related to the 31 spare-parts-related initiatives that have been started to determine the likelihood of whether they would mitigate spare parts shortages. We evaluated these initiatives to determine whether they included quantifiable and measurable performance targets as described by GPRA that would allow an assessment of how implementation of the initiatives would impact spare parts shortages. We also assessed whether these initiatives included all identified actions needed to overcome the causes of spare parts shortages. In addition, we obtained a briefing and discussed with Air Force officials the results of an Air Force review team’s assessment of its logistics transformation efforts that identified management weaknesses. To determine what impact the Air Force could identify from additional funding for spare parts, we interviewed officials and obtained documents related to the Air Force’s fiscal year 2004 budget submission. We also discussed with Air Force budget officials their Funding/Availability Multi-Method Allocator for Spares model, which includes projected supply availability rates based on estimated funding amounts and was used to provide the budget information. We performed our review from August 2002 to March 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense; the Secretary of the Air Force; the Director, Office of Management and Budget; and other interested congressional committees and parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me on (202) 512-8365 if you or your staff have any questions concerning this report. Major contributors to this report are included in appendix V. In response to a recommendation in the Inventory Management Study of the Office of the Secretary of Defense, the Air Force included supply availability rates for its weapons systems in its fiscal year 2004 budget submission. As shown in table 4, the Air Force projected aircraft supply availability rates ranging from 73 percent to 100 percent based on requested funding of approximately $5.3 billion. Estimated completion date Feb. 2004 (Weapon system supply chain manager) 3. Standardize use and expand role of regional supply squadron Improve financial management Improve demand & repair workload forecasting Improve spares budgeting (Spares requirement review board) Implement commercial best practices into Air Force supply management. Description Establish and implement a corporate strategy for directing, overseeing, coordinating, improving, and facilitating depot maintenance operations. Develop a maintenance training organization as a single training entity for all depot maintenance training. Build maintenance orientation and technical training plans. Establish program that will train first line supervisory candidates prior to assumption of duties. Train and develop maintenance workers and leaders. Establish performance plans that focus on cost, schedule, performance and quality goals. Motivate work force by establishing incentive programs, which instill a desire to excel. Establish hiring authorities to appoint the best qualified candidates and streamline the staffing process (external & internal). Develop compensation packages competitive with the commercial market. Determine how to employ multi-skilling for best value implementation. Continue to assess impact of data systems on 1st level supervisor’s time. Review regulatory mandates assigning additional duties to first levels. Formalize the depot infrastructure strategic planning process. Incentivize infrastructure investment in maintenance and repair. Train the depot workforce in capital purchase program and economic analysis. Improve preventative maintenance program. Remove impediments to broad use of facility and equipment maintenance system. Improve maintenance and repair facility project delivery process. Provide greater flexibility for implementing workload changes. Add surge requirements to infrastructure planning and programming. Create two depot capital investment funding appropriations lines—new system investments and recap of existing systems (legacy). Establish a comprehensive vision for managing information resources Insert devices used to automate data collection on the shop floor to enhance depot productivity. Establish a lab environment across air logistics centers, which will enhance the ability to rapidly test solutions to meet user requirements/ enhancements across depot maintenance systems. Improve stock levels for low demand items through policy changes. Clarify material support policies to better state objectives and establish standards. Goal 2 of the Air Force Strategic Plan cites the percentage of aircraft that cannot perform their mission because spare parts are not available, referred to as not-mission-capable supply, as a performance measure. Table 5 provides the not-mission-capable supply rates for the Air Force’s weapons systems. In addition to the names above, Gina O. Ruidera, Alfonso Q. Garcia, Susan K. Woodward, and Barry L. Shillito also made significant contributions to this report. | Despite reporting $10.5 billion in appropriations spent on spare parts since fiscal year 2000, the Air Force continues to report shortages of spare parts. The service has taken numerous actions to address these shortages. GAO examined whether the Air Force's strategic plan addresses the mitigation of spare parts shortages, whether key initiatives are likely to mitigate the shortages, and the impact on readiness identified from increased investments for spare parts. The Air Force Strategic Plan generally provides an appropriate framework for mitigating spare parts shortages. However, one of two subordinate plans does not contain performance measures and targets linked to the strategic plan, and the other does not contain any performance targets. Therefore, the Air Force is not in a position to determine if the actions taken pursuant to its subordinate plans overcome spare parts shortages and provide assurance that it is getting the greatest readiness return on its spare parts investment. Key logistics initiatives under the Spares Campaign and Depot Maintenance Reengineering and Transformation (DMRT) efforts may help to mitigate spare parts shortages, but the initiatives' potential effectiveness is limited because of some key problems. First, the Air Force is not starting all identified initiatives that relate to the causes of shortages because it did not have needed personnel and funding. It assessed its logistics processes and identified more than 80 initiatives to solve more than 300 deficiencies; 43 initiatives were to improve processes that affect spare parts shortages, with about half relating to depot maintenance and the other half to supply. Although all depot maintenance-related initiatives have been started, 12 of the supply related initiatives have not been started. Second, 23 of the 31 initiatives lack both output-related performance measures and targets. Without output-related measures and targets to assess the initiatives' impact, the Air Force has little means of determining the extent to which it has successfully mitigated spare parts shortages and improved readiness. Third, the Air Force chose not to use the results of one of its initiatives, which identified a new total spares requirement as the basis for its fiscal year 2004 budget request. This decision resulted in a $578 million unfunded spare parts requirement. Finally, management problems--including failure to articulate the need for change, a lack of top-level commitment, and failure to address organizational issues--have hampered implementation of the initiatives. In February 2003, the Air Force established the Innovation and Transformation Directorate to address these problems, but its plans and priorities have not been set. The Air Force can estimate the impact of increased funding on individual weapon systems' supply availability and has done so. Based on its approximately $5.3 billion fiscal year 2004 spare parts budget request, the Air Force reported that aircraft supply availability would range from 73 to 100 percent. However, it cautioned that higher supply availability does not automatically result in higher mission capable rates because of other factors. |
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Originally, SSNs were used to keep track of earnings, contributions, and old-age, disability, and survivor benefits for people covered by the Social Security program. Increasingly, however, SSNs have been used for a wide variety of purposes by private firms and federal, state, and local governments. Cases in which ineligible foreign-born individuals have obtained or used SSNs to secure employment and receive Social Security benefits, and increasing incidents of identity theft, have focused attention on the need to prevent abuse of SSNs. An estimated 96 percent of workers in the U.S., including many foreign- born citizens and noncitizens, are required to pay Social Security payroll taxes, also called Federal Insurance Contribution Act (FICA) taxes. When workers pay Social Security taxes, they earn up to 4 coverage credits each year. Generally 40 credits—equal to at least 10 years of work—entitle workers to Social Security benefits when they reach retirement age. Social Security benefits are based on workers’ covered earnings during their career. Different requirements apply in cases where workers become disabled or die with relatively short work careers. Although the Social Security Act provides that people meeting the work and contribution requirements accrue benefits, the act also generally prohibits payment of benefits to people who are not lawfully present in the U.S. as specified by DHS regulations. In fiscal year 2005, SSA assigned about 1.1 million original SSNs to noncitizens, representing about one-fifth of the 5.4 million original SSNs issued that year. Fewer than 15,000 of these were cards with “nonwork” SSNs issued to noncitizens unauthorized to work in the U.S. under immigration law. SSA also issues replacement cards to people who have already been assigned SSNs, but have lost their card. In fiscal year 2005, SSA issued over 800,000 such replacement cards to noncitizens, about 7 percent of the 12.1 million replacement cards issued that year. SSA uses different procedures for assigning SSNs depending on whether individuals are born in the U.S. or are foreign-born and depending on their citizenship or immigration status. Almost all individuals born in the U.S. or in U.S. jurisdictions are U.S. citizens at birth; however, some foreign-born individuals can also become U.S. citizens if their adoptive or birth parents are U.S. citizens or if they become naturalized citizens. Because foreign-born citizens are eligible for the same types of SSNs and benefits as U.S.-born citizens, we will focus for the remainder of this testimony on noncitizens. Immigrants are noncitizens who may lawfully reside and work permanently in the U.S. About 600,000 to 1.1 million noncitizens come to the US each year as immigrants. Nonimmigrants include noncitizens who come to the U.S. lawfully (for example, with temporary visas) and those who reside in the U.S. unlawfully (in violation of the Immigration and Nationality Act). Nonimmigrants who remain in the U.S. without DHS authorization overstay their nonimmigrant visas or enter the country illegally. As of 2004, an estimated 10.3 million unauthorized noncitizens lived in the U.S., according to the Pew Hispanic Center’s analysis of March 2004 Current Population Survey and other Census data. The State Department, DHS, SSA, and employers have responsibilities to help ensure that noncitizens who are not authorized to work are denied employment. The State Department identifies who among people abroad seeking to come to the U.S. is eligible to enter the U.S. and who is eligible to work in the U.S. DHS denies entry to people who are ineligible and enforces immigration requirements in cases where people enter the U.S. illegally or work without authorization. In cooperation with the State Department and DHS, SSA assigns SSNs to eligible noncitizens. Employers are required to inspect employees’ work authorization documents. A regular Social Security card can be one of the key documents that employers use to verify that employees are authorized to work. In some cases, however it may be difficult to distinguish a regular card from a nonwork card. Specifically, cards for individuals not eligible to work did not contain the restriction “NOT VALID FOR EMPLOYMENT” until May 1982. Finally, the SSA ensures that benefit payments go only to people who have earned them and who are lawfully present in the U.S. or in another country with which the U.S. has an agreement for reciprocal cross border payment of benefits. The Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA) was enacted in response to the terrorist attacks of September 11, 2001 to reform our nation’s intelligence community and strengthen terrorism prevention and prosecution, border security, and international cooperation and coordination. IRTPA included several specific provisions for strengthening the SSN enumeration process and documentation requirements for obtaining SSNs and cards. For example, the act required minimum standards for birth certificates and directed the Department of Health and Human Services to establish these standards in consultation with DHS, SSA, and others. IRTPA also required that SSA limit the number of replacement cards it issues annually; adopt measures to improve verification of documents presented to obtain an original or replacement Social Security card; independently verify any birth record presented to obtain an SSN; prevent the assignment of SSNs to unnamed children and adopt additional measures to prevent assignment of multiple SSNs to the same child; form an interagency taskforce to establish standards to better protect Social Security cards and SSNs from counterfeiting, tampering, alteration, and theft; and provide for implementation of security requirements by June 2006. The Social Security Protection Act (SSPA) of 2004 imposed new restrictions on the payment of Social Security benefits to noncitizens. Before these provisions went into effect, all payments into the system would count toward insured status, regardless of whether or not the noncitizen was authorized to work by DHS. Under this new law, noncitizens who apply for benefits with an SSN originally assigned after 2003 must have work authorization at the time their SSN is assigned or at some later point before applying for benefits to gain insured status under the Social Security program. If the individual never had authorization to work in the United States, none of his or her earnings would count toward insured status and neither the worker nor dependent family members could receive Social Security benefits. SSA also has specific procedures to award benefits for foreign-born workers who work in both the U.S. and in another country with which the U.S. has a totalization agreement. These are bilateral agreements intended to accomplish three purposes. First, they eliminate dual social security coverage and taxes that multinational employers and employees encounter when workers temporarily reside in a foreign country with its own Social Security program. Under these agreements, U.S. employers and their workers sent temporarily abroad benefit by paying only U.S. social security taxes, and foreign businesses and their workers benefit by paying only Social Security taxes to their home country. Second, the agreements provide benefit protection to workers who have divided their careers between the U.S. and a foreign country, but do not qualify for benefits under one or both Social Security systems, despite paying taxes into both. Totalization agreements allow such workers to combine (totalize) work credits earned in both countries to meet minimum benefit qualification requirements. Third, totalization agreements generally improve the portability of Social Security benefits by authorizing the waiver of residency requirements. The U.S. has totalization agreements in effect with 21 countries—several western European countries, and others including Canada, Australia, Japan, South Korea, and Chile. (See table 4 in App. I for a list of countries with which the U.S. has totalization agreements.) In coordination with the State Department and DHS, SSA determines who is eligible for an SSN by verifying certain immigration documents and determining if an individual’s card requires a work restriction. Our 2003 report identified improvements SSA had made in its enumeration processes, but also pointed to continued weaknesses, some of which SSA and the Congress have since addressed. Under current law U.S. citizens are eligible for SSNs whether they were born in the U.S. or elsewhere. Depending on their immigration status, noncitizens may be eligible for one of three types of Social Security cards: regular cards, those cards valid for work only with authorization from the DHS, and nonwork SSN cards. 1. Regular Social Security card: The first and most common type of card is for individuals who are eligible to work. Individuals issued these SSNs receive a Social Security card showing their name and SSN without marked restriction. To be eligible for this card an individual must be one of the following U.S. citizen (whether foreign-born or not), noncitizen lawfully admitted to the U.S. for permanent residence (an immigrant), noncitizen with permission from the DHS to work permanently in member of a group eligible to work in the U.S. on a temporary basis (e.g., with a work visa, certain authorized workers in an approved exchange program). 2. DHS-authorized work card: A much less common type of Social Security card is issued to noncitizens who are eligible to work under limited circumstances. They receive a card showing the inscription “VALID FOR WORK ONLY WITH DHS AUTHORIZATION.” To be eligible for these cards noncitizens must have DHS permission to work temporarily in the U.S. SSA issues these cards to eligible workers, such as certain foreign students and spouses and children of exchange visitors. 3. Nonwork card: The third type of card is for people not eligible to work in the U.S. SSA sends recipients of these SSNs a card showing their name, SSN, and the inscription “NOT VALID FOR EMPLOYMENT.” To be issued these cards, noncitizens who are legally in the U.S. and do not have DHS permission to work must have been found eligible to receive a federally-funded benefit or are subject to a state or local law that requires them to have an SSN to get public benefits. Examples include Temporary Assistance for Needy Families, Supplemental Security Income, Social Security Survivor benefits, Medicaid, and Food Stamps. As of 2003, SSA had issued a total of slightly more than 7 million nonwork Social Security cards, but in recent years SSA has greatly reduced the number it issues. Our 2003 report identified improvements SSA had made in its enumeration processes, but also pointed to continued weaknesses, some of which SSA and the Congress have since addressed. We found that SSA has over the years improved document verifications and developed new initiatives to prevent the inappropriate assignment of SSNs to noncitizens. For example, SSA requires third-party verification of all noncitizen documents, such as a birth certificate, with DHS and the State Department before issuing an SSN. SSA also requires field staff to visually inspect documents before issuing an SSN. However, many field staff we interviewed at that time were relying heavily on DHS’s verification and neglecting SSA’s standard inspection practices, even though both were required. We found that SSA’s automated system for assigning SSNs was not designed to prevent issuing SSNs if field staff bypass required verification steps. We also found that SSA has undertaken new initiatives to shift the burden of processing noncitizen SSN applications and verifying documents away from its field offices. In late 2002, SSA began phasing in a new process for issuing SSNs to noncitizens, called “Enumeration at Entry” (EAE). Through this initiative, immigrants 18 and older can visit a State Department post abroad to apply for an SSN at the same time they apply for a visa to come to the U.S. The State Department and DHS authenticate the documents and transmit them to SSA, which then issues the SSN. Also, SSA was planning to expand the program over time to include other noncitizen groups, such as students and exchange visitors. In addition, SSA established a specialized center in Brooklyn, New York, which focuses exclusively on enumeration and utilizes the expertise of DHS immigration status verifiers and investigators from SSA’s Office of the Inspector General. More recently, SSA established a similar center in Las Vegas, Nevada. At the time we did our field work for the 2003 report, SSA had not tightened controls in two key areas of its enumeration process that could be exploited by individuals seeking fraudulent SSNs: the assignment of SSNs to children under age 1 and the replacement of Social Security cards. SSA requires third-party verification of the birth records for U.S.-born children age 1 and over, but calls only for a visual inspection of birth documents for children under age 1. In our field work, we found that this remains an area vulnerable to fraud. Working undercover and posing as parents of newborns, our investigators were able to obtain two SSNs using counterfeit documents. Since then the IRTPA was enacted and requires SSA to independently verify any birth documents other than for purposes of enumeration at birth. Until the passage of the IRTPA, SSA’s policy allowed individuals to obtain up to 52 replacement cards per year, leaving it vulnerable to misuse. While SSA requires noncitizens applying for a replacement SSN card to provide the same identity and immigration documents as if they were applying for an original SSN, SSA’s requirements for citizens were much less stringent. Individuals could obtain numerous replacement SSN cards with relatively weak or counterfeit documentation for a wide range of illicit uses, including selling them to noncitizens. Our 2003 report contained six recommendations to SSA. As shown in table 1 below, SSA has implemented all, except one concerning enhancement of its Modernized Enumeration System to prevent issuance of SSNs without use of required verification procedures. In the interim, however, SSA now requires staff to use a software tool that documents verification procedures. Although SSA has implemented our recommendation concerning an evaluation of the Enumeration at Entry program, the results of the evaluations prompted the SSA’s Office of Inspector General and Office of Quality Assurance and Performance Assessment to recommend several additional measures to correct errors during the early implementation of the program. To determine whether noncitizens are eligible for SSA benefits, SSA has implemented new procedures including some required by the SSPA. The SSPA tightened restrictions on payment of benefits to noncitizens who are not authorized to work. Generally both citizens and noncitizens in the U.S. accrue credits through paying Social Security payroll taxes. Noncitizens must also have authority to work in the U.S., and be lawfully present in the U.S. at the time they apply for benefits. Under some circumstances, unauthorized workers may receive benefits based on work credits they accrued while working without an immigration status permitting employment in the U.S., with a nonwork SSN or without a valid SSN during their work years. If noncitizens later receive a valid SSN and become eligible to work, they can show SSA their wage records and request credit for earnings from prior unauthorized work. If they establish legal immigration status, they may then receive benefit payments based on the earlier periods of unauthorized work. There are some exceptions for the lawful presence requirement, such as for workers covered under the terms of a totalization agreement. However, our work shows that SSA’s processes for entering into totalization agreements have been largely informal and do not mitigate potential risks. The enactment of the SSPA in 2004 tightened the eligibility requirements for paying Social Security benefits to noncitizens. Before SSPA, noncitizens who worked in covered employment could in some circumstances eventually earn SSA benefits without obtaining a work- authorized SSN. If noncitizens had no SSN, but were entitled to benefits, SSA would assign a nonwork SSN so their Social Security eligible earnings could be recorded. SSPA provides that in order to accrue benefits noncitizens with a SSN issued on or after January 1, 2004 must have authorization to work in the U.S. at the time that the SSN is assigned, or at some later time. Without work authorization, noncitizens and their dependents or surviving family members cannot receive any benefits. See table 2 below. Nonetheless to receive benefits while in the U.S., noncitizens must be legally present in the U.S. under immigration law regardless of when they were first assigned an SSN. Previously if noncitizens accrued Social Security benefits and resided outside the U.S., they could under some circumstances receive those benefits without ever having been legally present in the U.S. Since SSPA required all noncitizens originally assigned an SSN on or after January 1, 2004, to have a work authorized SSN to accrue benefits, those living outside the country must also obtain a work- authorized SSN. Obtaining a work-authorized SSN requires both lawful presence in the U.S. and an immigration status permitting work in the U.S. However, a noncitizen may receive benefits outside the U.S. if he or she is a citizen of a country that has a social insurance or pension system that pays benefits to eligible U.S. citizens residing outside that country or is a worker covered under a totalization agreement. A noncitizen not meeting any of these exceptions will have his or her benefits suspended beginning with the seventh month of absence. In general, totalization agreements between the U.S. and other countries provide mutually beneficial business, tax and other incentives to employers and employees, but the agreements also expose both countries to financial costs and risk. Our recent reports on totalization agreements identified two fundamental vulnerabilities in SSA’s existing procedures when entering into totalization agreements. First, our analysis demonstrated that the agency’s actuarial estimates for the number of foreign citizens who would be affected by an agreement (and thus entitled to U.S. Social Security benefits) have overstated or understated the number, usually by more than 25 percent. As a result, depending on the size of the foreign population covered by an agreement, the actual cost to the Social Security trust fund from a given agreement could be greater or smaller than predicted. In response to our recommendation to improve its process for projecting costs to the trust fund from totalization agreements, SSA responded that it cannot eliminate all variations between projected costs and subsequent actual experience. Secondly, our work has shown that SSA’s processes for entering into these agreements have been largely informal and have not included specific steps to assess and mitigate potential risks to the U.S. Social Security system. For example, we found that SSA’s procedures for verifying critical information such as foreign citizens’ earnings, birth, and death data were insufficient to ensure the integrity of such information. Inaccurate or incomplete information could lead to improper payments from the Social Security trust fund. In response to our recommendations, SSA developed several new initiatives to identify risks associated with totalization agreements. For example, SSA developed a standardized questionnaire to help the agency identify and assess the reliability of earnings data in countries that may be considered for future totalization agreements. In addition, SSA is conducting numerous “vulnerability assessments” to detect potential problems with the accuracy of foreign countries’ documents. SSA is also exploring a more systematic approach for independently verifying foreign countries’ data, such as the use of computer matches. (For a summary of the status of recommendations, see table 3 below.) Laws and policies are in place to ensure that SSA treats noncitizens fairly in the issuance of SSNs, the provision of benefits, and in cases where they are covered under the terms of totalization agreements. Recent legislation and revisions to SSA policies represent some progress in these areas. While SSA is making progress in improving the program’s integrity by strengthening its procedures for verifying documents and coordinating with other agencies and foreign governments, opportunities remain for additional progress. SSA plans further enhancements to the Enumeration at Entry program in order to protect against errors, fraud and abuse. In addition, a more systematic approach to verifying data from other countries with which we have totalization agreements can help ensure proper payments of benefits and prompt notice of the death of beneficiaries. SSA will, however, continue to face challenges in its dealings with noncitizens. Changes in immigration laws and shortcomings in the enforcement of those laws make it difficult for SSA to identify noncitizens who are eligible for SSNs and for benefit payments. Continued attention to these issues by both SSA and the Congress is essential to ensure that noncitizens receive benefits to which they are entitled and the integrity of the Social Security program is protected. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I’d be happy to answer any questions you may have. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues at (202) 512-7215. Blake L. Ainsworth, Assistant Director; Alicia Puente Cackley, Assistant Director; Benjamin P. Pfeiffer; Anna H. Bonelli; Jeremy D. Cox; Jacqueline Harpp; Nyree M. Ryder; Daniel A. Schwimer; and Paul C. Wright also contributed to this report. | In 2004, an estimated 35.7 million foreign-born people resided in the United States, and many legitimately have SSNs. Many of these individuals have Social Security numbers (SSNs) which can have a key role in verifying authorization to work in the United States. However, some foreign-born individuals have been given SSNs inappropriately. Recent legislation, aimed at protecting the SSN and preventing fraud and abuse, changes how the Social Security Administration (SSA) assigns numbers and awards benefits for foreign-born individuals. The chairman of the Subcommittee on Social Security asked GAO to address two questions. First, how does SSA determine who is and is not eligible for an SSN? Second, how does SSA determine who is and is not eligible for Social Security benefits? SSA determines who is eligible for an SSN by verifying certain immigration documents and determining if an individual's card requires a work restriction. Some foreign-born individuals are eligible for one of three kinds of Social Security cards depending in part on their immigration status: (1) regular cards, (2) those valid for work only with authorization from the Department of Homeland Security (DHS), and (3) those that are not valid for work--non-work cards. As of 2003 SSA had issued slightly more than 7 million non-work cards to people who need them to receive benefits for which they were otherwise entitled. Both SSA's Inspector General and GAO have identified weaknesses in SSA procedures for assigning SSNs and issuing cards, also known as enumeration. For example, working undercover and posing as parents of newborns, GAO investigators were able to obtain Social Security cards by using counterfeit documents. Congress has enacted recent legislation strengthening the SSN enumeration process and documentation requirements. SSA is implementing the law and is improving document verification and now requires third-party verification of noncitizen documents such as birth certificates and visual inspection of documents before issuing an SSN. SSA also continues to strengthen program integrity by, for example, restricting the number of replacement cards. Congress and SSA have also improved laws and procedures designed to strengthen program integrity in the payment of benefits to the foreign-born. Due to provisions of the Social Security Protection Act of 2004, some foreign-born individuals who were not authorized to work will no longer be eligible for benefits. To be entitled to benefits, the law requires noncitizens originally assigned an SSN after 2003 to have a work-authorized SSN. Amendments to the Social Security Act in 1996 require individuals to be lawfully present in the U.S. to receive Social Security benefits, though some noncitizens can receive benefits while living abroad, such as noncitizens who have worked in the U.S. and in a country with which the U.S. has a totalization agreement. SSA's totalization agreements coordinate taxation and public pension benefits. The agreements help eliminate dual taxation and Social Security coverage that multinational employers and employees encounter when workers temporarily reside in a foreign country with its own Social Security program. Successful implementation of these agreements requires the countries involved to carefully coordinate and verify data they exchange. Computer matches with foreign countries, for example, may help protect totalization programs from making payments to ineligible individuals. SSA is exploring options for undertaking such exchanges. |
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The U.S. government participates in a number of international organizations established to serve specialized but limited functions. Membership in these organizations is generally restricted to national governments, and they have comparatively small budgets. Although some of the organizations permit nongovernmental entities to participate in their activities, only member governments have voting rights to set policy agendas and budgets (with one exception, the World Conservation Union). The organizations depend largely on membership dues to finance their operations, but each uses a different basis to assess contributions from member governments. In most instances, the organizations permit memberships to be withdrawn only after 1 year’s prior written notification. In 1995, State received funding for 26 “other” special-purpose international organizations through appropriations made to its Contributions to International Organizations account. Our review included all of these organizations except the World Trade Organization, which was in an early formative stage. As your office requested, we also included in our review two inter-American organizations (the Inter-American Indian Institute and the Pan American Railway Congress Association). Table 1 shows 1995 data on the U.S. government’s assessed dues for the 27 organizations we reviewed, the U.S. assessment rates, and the percentage of professional staff who are U.S. citizens for each organization. In response to congressional directives, State conducted a comprehensive review beginning in May 1995 to decide whether each international organization to which it makes assessed contributions continued to serve important U.S. interests. However, State did not report to the Congress on the results of this review until December 1996 (after it was asked to comment on a draft of our report). State officials told us the review consisted of a series of interagency meetings to discuss raw assessment data provided by the key U.S. stakeholders in the organizations, but that they did not prepare a formal record of the review or at that time prioritize funding by organization. State officials said that assigning a priority to each organization would have been very difficult, given the differences in their size, mission, cost, and program effectiveness. Nonetheless, as a result of its review, in December 1995 State informed three entities—the International Cotton Advisory Committee (ICAC), the Pan American Railway Congress Association, and the World Tourism Organization—that the United States intended to withdraw from them. State acknowledged that the withdrawals were budget driven, but it also justified the withdrawals on the basis that the private industries that were the focus of these organizations were already adequately served. A State official said that while there may be other organizations that the United States could withdraw from in the future, decisions on withdrawal would likely continue to be hindered by a lack of quantitative performance indicators for each organization and by objections raised by the organizations’ political supporters and constituency groups. In testifying on the administration’s fiscal year 1997 budget request before a House Subcommittee on May 2, 1996, the U.S. Permanent Representative to the United Nations said the criteria that are applied in determining whether to retain membership in international organizations are (1) the level of direct U.S. benefit in political, strategic, or economic terms determined on the basis of consultations with end users; (2) the percentage of the organization’s budget that is devoted to activities that benefit the United States; (3) the scope and depth of the U.S. constituency; (4) the relevancy of the organization’s mandate to contemporary global issues; (5) the organization’s program effectiveness and quality of management; (6) the organization’s budgetary restraint and transparency; and (7) the organization’s responsiveness to the U.S. government’s overall reform efforts. State’s December 1996 report to the Congress assembled the 50 organizations, including the 27 discussed in this report, into 3 broad cluster groups according to a priority ranking based on the importance of their mandates to the U.S. national interest and their cost-effectiveness. These cluster groups, in order of priority, were (1) peace and security; (2) health, safety, and economic well-being; and (3) selective interest. Our analysis indicated that none of the 27 organizations discussed in this report were included in State’s top priority category (peace and security); 4 were in State’s second priority category (health, safety, and economic well-being); 20 were in State’s third priority category (selective interest); and 3 were no longer being funded by State. As a further delineation of priority, State’s report showed that, of the four organizations discussed in our report that fell within the second priority category, contributions to one would be reduced by 18 percent and contributions to three would be reduced 19 percent from the full requirement for fiscal year 1997. Similarly, of the 20 organizations discussed in this report that were in State’s third priority category, contributions to 11 would be reduced by 19 percent; 1 would be reduced by 21 percent; 7 would be reduced by 23 percent; and 1 would receive no funding for fiscal year 1997. (See tables 2 and 3.) For most of the organizations that we examined, U.S. government officials we contacted believe either that the benefits derived from them clearly exceeded the cost of membership or that it was very worthwhile for the United States to be represented and have an active voice in their activities, but there were mixed views on the value of continuing membership in some organizations. U.S. government officials also stated that in many cases the organizations serve specific U.S. government or commercial interests that cannot be served as efficiently by other means. Further, they considered most of the organizations’ program focus to be generally clear, valid, and in conformity with U.S. interests, but some primarily benefited their related industries. U.S. officials in many instances were active and influential participants in the organizations—often serving on their governing boards and with some Americans serving in top management posts. In general, U.S. government participation in these organizations is designed to help ensure that U.S. interests are fairly and equitably considered in international commercial activities and disputes, and that the United States has access to vital public health, transportation safety, and other information. U.S. participation also allows active engagement in exchanging and promoting ideas for reducing trade barriers, unifying common standards of business trading practice (such as weights, measurements, and quality control), influencing environmental policy and providing voluntary support for conservation programs and sustaining endangered natural resources, and deliberating other issues of broad public interest. These are matters that officials from the relevant agencies told us the U.S. government either cannot do alone or cannot address as effectively through other bilateral or multilateral means. Nonetheless, there may be opportunities for cost savings in some of the organizations. For example, the assessed U.S. rates for two organizations (the Customs Cooperation Council and the International Center for the Study, Preservation, and Restoration of Cultural Property), both based on U.N. formulas at 25 percent, are significantly higher than most of the other special-purpose international organizations. Although U.S. officials see no viable alternative at this time to membership in the customs organization to support the broad trade interests it serves, its work is closely tied to that of the World Trade Organization to which the United States pays a much lower (15 percent) assessment rate. The cultural property organization by contrast has a narrow and important national historic (but not foreign policy-related) constituency and, though U.S. officials generally consider it to be well managed, the benefits are difficult to quantify and some officials believe that they do not appear to be proportionate to the cost. Our review also found that State has addressed to some extent the issue of whether functions or organizations could be combined or whether similar services were available from other sources that could eliminate possible areas of overlap and duplication. For example, a possible merger of some functions between organizations (including the IBWM/IOLM and IARC/World Health Organization) had been identified and was being examined by the respective organizations as a way to achieve cost savings. Also, rapid technological change may soon permit private sector sources to translate customs tariff schedules at less cost than IBPCT, and we found some areas of possible overlap between certain organizations, such as those involving the tropical timber (ITTO) and vine and wine (IOVW) groups and the Food and Agriculture Organization that U.S. officials had not fully addressed or resolved. We noted that five commodity organizations—four that produce and disseminate market data and one that helps stabilize raw material supplies and prices through a stock fund—were all designed to primarily benefit their related industries; and officials we interviewed indicated that three others in which the U.S. government participated had minimal benefits. However, as discussed below, there are also reasons for retaining membership in them. The primary functions of ICAC, ICSG, ILZSG, and IRSG are to produce information on worldwide production and consumption of individual commodities, information that primarily benefits the related industries but provides less direct or essential benefit to the U.S. government. Nonetheless, there are benefits to U.S. membership. According to government officials we interviewed, the information the organizations develop on worldwide production and consumption of the respective commodity is objective and current, and generally not available elsewhere. In addition, the organizations provide a useful forum for encouraging or promoting intergovernmental and business cooperation and exchanging views on matters of joint interest without violating antitrust laws. However, based on the criteria adopted by State, the question appears to be whether government or public interests are sufficiently served by membership in these organizations to justify continued financing of activities that primarily benefit specific U.S. industries. U.S. membership in the organizations seems to be especially important to specific industry groups, which participate actively in them at their own expense. They send representatives to parliamentary meetings and working group sessions (their experts have been selected to serve on technical study groups), and they finance cooperative projects, and generate subscriptions and other fees that reduce the cost to member countries. The International Natural Rubber Organization administers an international natural rubber agreement, which the United States has participated in since it took effect in 1979. The agreement was designed to reduce price volatility and ensure an adequate supply of natural rubber by managing a buffer stock. In September 1996, the U.S. Senate ratified the agreement to participate for an additional 4 years. As the world’s largest consumer of natural rubber and with just three countries—Thailand, Indonesia, and Malaysia—producing 75 percent of the world’s rubber supply, the United States has a significant interest in assuring an adequate long-term supply of this commodity at reasonable and stable prices. The executive branch supported the agreement’s extension, but expressed a preference for free market forces to operate in the belief that they better serve the interest of consumers and producers. However, it believed that the rubber industry needed more time to develop alternative institutions to manage market risk. Nevertheless, several unresolved issues emerged during the debate, including whether the agreement resulted in lower prices for U.S. consumers and whether the level of cash reserves used to support it—the current U.S. share of which is about $80 million—is needed and adequately safeguarded. The executive branch has made clear its intention that this will be the last agreement extension the United States will join. U.S. participation in the Interparliamentary Union (IPU) is within the provenance of the Congress and not a matter for the executive branch to decide. IPU was the first worldwide political organization to promote the concept of international peace and cooperation. While its goals are similar to those of the United Nations, IPU differs from it in that it seeks to improve personal contact between delegates of member nations’ parliamentary groups by restricting membership to elected participants of these legislative bodies. The United States participated in its first meeting and has been a member since its establishment in 1889. Membership gives congressional delegates the opportunity to discuss with foreign colleagues—especially those from emerging democracies—U.S. principles of multiparty democracy and rule of law. IPU also enables them to share their experiences relating to the legislative process and executive-legislative-judiciary relations. However, Members of Congress have not been active IPU participants in recent years. We found that no Senator has attended any IPU meeting since 1989, and no Representative has attended any IPU meeting since March 1994. State officials and congressional staff attributed the inactive U.S. participation in the organization in recent years to changes in the Congress and inconvenient scheduling of IPU meetings (its meetings are normally held in April and September when the Congress is in session, making it inconvenient for members to attend). IPU also sought to raise the U.S. assessment rate from 12.58 percent ($1.1 million in 1995) to 15 percent, or above a statutory limitation of 13.61 percent. The administrative responsibility for IPU shifts with each Congress and, for the 104th Congress, it rested with the House of Representatives (administered by the Clerk’s Office). Fiscal year 1996 appropriations legislation initially held up IPU funding until IPU agreed to reverse the proposed assessment increase and adjust its schedule to better accommodate U.S. participation. The House leadership subsequently agreed to continue U.S. participation in IPU and maintain the assessment at the prevailing rate. The Bureau of International Expositions provides for orderly scheduling and planning of international expositions. As such, it primarily serves those member governments whose cities are vying to hold such events. The United States joined BIE in 1968, 40 years after its creation, with the aim of ending a then-existing proliferation of officially sanctioned expositions and assisting U.S. cities that were bidding to host them. Since then, the frequency of expositions has been drastically reduced and no U.S. city is currently seeking to host any scheduled international exposition. Moreover, recent funding for U.S. pavilions at expositions has been provided entirely from the private sector. The U.S.-assessed contribution for BIE is modest ($33,000 in 1995), but it pays the highest assessment rate (8.9 percent) of any member nation. The assessment rate is based in part on the U.N. scale of assessments and on the member states’ size and economic production. State and other agency officials said that there was strong sentiment both in favor of and in opposition to U.S. membership in BIE. Proponents argue that the membership could be justified if the federal government seeks to continue to officially support and maintain an active role in determining where and how future world’s fairs are to be held. They further contend that it might be in the public interest to assist potential sponsors in attaining the rights to hold future events since memberships are limited to national governments and BIE members are in more advantageous policy decision-making positions. However, those who oppose continued U.S. membership in BIE say that such official sponsorship is unnecessary and that the chief U.S. goal of more orderly scheduling of worlds’ fairs has been met. IAII, a specialized organization of the Organization of American States (OAS), serves as a research center and forum for member states to plan for the economic, social, and cultural advancement of Native Americans. Although U.S. budget support has demonstrated solidarity with Central and South American countries that have large Indian populations, U.S. officials have been dissatisfied with IAII management and its activities in recent years and have shown little interest or involvement in the organization. In response to reform efforts encouraged and led by Mexico and the United States, IAII installed a new director in 1996 who is reported to be making positive structural changes in the organization. In the meantime, State has adopted a “wait-and-see” approach regarding future U.S. funding and participation. The United States does not recognize IAII’s assessment rates, which are based on outdated Indian population figures. Instead, it has capped its annual assessment contribution at $120,000 annually, which in 1995 represented 44 percent of IAII’s budget. Although the rate is high relative to other participants (Mexico paid 30 percent in 1995, with no other country paying more than 4 percent; Canada is not a member), it is less than what the United States would have to pay if the assessment rate were based on the current OAS scale (59 percent) or on gross national product data (estimated at 80 percent). No funding was provided to IAII in fiscal year 1996 and congressional conferees have agreed that none should be given in fiscal year 1997. State officials said they recognize that stringent government budgets make it imperative that costs be kept low in all areas, including the cost of membership in international organizations. Thus, they have attempted to link funding decisions for the small special-purpose international organizations to performance indicators, established a more systematic budget review and coordination process, and tried to secure increased private sector funding for the organizations in an effort to keep assessed contributions low. State’s Bureau for International Organization Affairs is responsible for these efforts and is assisted by the designated State contact point and interagency group that have the lead or significant program responsibility for U.S. interests in the international organization’s work. Travel and accreditation to conferences are handled by State’s Office of International Conferences. In June 1995, State’s Bureau for International Organization Affairs revised its budget policy from one of having zero real growth for U.S. participation in international organizations (which had been in effect since 1986) to one of seeking actual reductions in the organizations’ budgets through a combination of improved program management, structural reform, and indicators that can be used to measure management performance. Exceptions to this policy were to be dealt with on a case-by-case basis. According to Bureau officials, the budget review process has been facilitated by requiring the organizations to submit audited financial statements and closely coordinating U.S. budget positions with officials from the U.S. agencies having lead programming responsibility. Bureau officials make the final determination concerning the U.S. position on an organization’s budget and provide instructions to U.S. delegates in advance of the organizations’ budget conferences. U.S. delegates to these budget conferences are encouraged to seek out and build coalitions for consensus on cost-cutting and reinvention measures with other like-minded member nations for improved leverage. They are instructed to vote against or abstain from voting on program budgets if the U.S. budget targets are not met—and they have done so. Over the past year, in consonance with State’s new and more restrictive budget policy, U.S. delegates were obliged to cast negative votes on several organizational budgets—including the International Agency for Research on Cancer, the International Copper Study Group, the International Seed Testing Association, and the International Bureau of the Permanent Court of Arbitration—although other than signaling a U.S. determination to oppose unwarranted budget increases, it is not clear what impact these votes may have had. Nonetheless, U.S. delegates succeeded in rolling back some other proposed budget increases through consensus actions with other member states. Although not specifically related to assessments, State officials said they are also employing a more restrictive policy on sending delegates to the organizations’ meetings. This should enable them to reduce travel costs for U.S. government delegates attending the organizations’ meetings. Usually, State seeks to cover such meetings with staff that are assigned to local embassy posts or funds a single designated representative from the department or lead agency (which may fund travel for additional representatives out of its own budget). According to data provided by State’s Office of International Conferences, as of March 1996, it had spent about $166,000 for staff travel to 15 of the 27 small organizations’ functions during the preceding 18 months; it did not fund any travel to 10 of the organizations’ conferences during this period. State also accredits but does not provide any funding for private sector participants. While State has authority to accept gifts under certain circumstances, it does not accept contributions from private sources to pay for assessed dues to international organizations. The Foreign Affairs Manual prohibits it from accepting gifts from any outside source that could create an appearance of conflict of interest between the donor and the performance of State’s responsibilities or might otherwise cause people to believe that accepting officials would lose objectivity or be influenced in their decision-making because of the donation. State has interpreted this guidance as precluding it from accepting contributions for assessed dues to international organizations from private sources. A State official said that while State serves industry interests to some extent, especially in its efforts to increase U.S. exports, it must do so in an objective manner—regardless of whether or not the donor has a stake in the outcome of any State action. Another State official told us that the use of gift contributions to fund such ongoing operational activities puts at risk State’s long-range ability to plan and carry out promised actions. Officials from other U.S. government agencies dealing with these international organizations agreed with State’s position. Nevertheless, State and other lead U.S. agencies have made some efforts to get private and nongovernmental organizations to contribute directly to these organizations with mixed results. For example, they have attempted to open or expand membership, on a nonvoting basis, to private sector participants. Some organizations (notably those engaged in conservation efforts such as the World Conservation Union and the International Center for the Study, Preservation, and Restoration of Cultural Property) currently receive a significant portion of their budgetary funds from associate memberships, revenue-producing activities, donations, and various sources other than assessed member state contributions. IGC, ICAC, and ISTA are all considering allowing industry organizations to be nonvoting members in an effort to raise additional revenue. However, there is opposition to these proposals in all three organizations. Most government members of ICAC oppose this idea, according to Department of Agriculture officials, because they fear industry representatives will then want to have a say in how the organization is run. Also, some IGC members have expressed concern over how the integrity of the organization would be maintained. They fear that IGC’s work would no longer be unbiased if industry representatives were included in all meetings. Another way in which State and the other agencies have sought to increase the organizations’ budgetary resources through private participation is to encourage interested private groups to contribute to voluntary programs or subscribe to publications or events that are run by some of the organizations. For example, U.S. industry and environmental groups have occasionally made small donations toward ITTO voluntary projects in which they were interested. However, there does not seem to be much organizational interest in expanding their contributions. Nonetheless, agency officials said that some organizations have had good success in raising revenue from projects or services, securing free office space and logistic support, and generating other extra-budgetary resources that have had the effect of reducing dues assessments to member countries. Other organizations, including ICSG, also do studies with private sector participation. Private participation also comes in nonfinancial forms. Representatives from industry and academia belong to the working groups and technical committees that do much of the work of ISTA and WRA, as well as providing advice and assistance in a number of other organizations. Private sector participation in these international organizations is usually conducted in uncompensated ways through the national delegation; the industry or trade associations bear the salaries and travel costs of its representatives. For some organizations, including IOE and WRA, non-U.S. government officials serve on the U.S. delegation as official members. For other organizations, industry officials attend as delegation observers, as in IOE, ICSG, and ILZSG, or can present their own positions as industry representatives, as in IOVW and ISTA. Private sector representatives also help formulate the U.S. delegation positions for international organizations. Industry representatives belong to interagency coordinating groups for many organizations. Industry and nongovernmental organizations also provide experts that serve other organizations where no formal coordinating group exists, such as CCC, ISTA, and ITTO. Department of Agriculture officials stated that there is room for more industry participation in IOE at the national level, but not in the IOE itself. State generally agreed with our report and our observations about the value of continued membership in certain organizations, but said that it had evaluated the need for continued U.S. participation in all of the international organizations as part of a continuous review process that began in May 1995. State added that it was on the basis of this review process that prioritization was achieved in the sense that some organizations were identified for withdrawal while others were not. Our draft report acknowledged the review process that State initiated in May 1995, and fully recognized State’s efforts in setting and refining its priorities for these international organizations. However, at the time of our review, State had not formally documented the results of its review process, and its first report was not submitted to the Congress until after our draft report had been provided to the Department. Moreover, neither the documentation that State provided to us during the course of our review nor its December 1996 report to the Congress fully explained the rationale for the judgments that were made. Our draft report took no position on either the level of resources that State needs to make contributions to the organizations discussed in this report or which organizations the United States may wish to withdraw from. However, given the likely decline in discretionary spending in the federal budget and the various proposals for reductions in State’s budget, our draft report contained proposed recommendations that the Secretary of State (1) specifically and systematically apply the criteria announced in May 1996 for retaining membership in international organizations to the organizations discussed in this report; (2) from this process, establish priority groupings or a priority ranking for retaining membership; and (3) report this information to the Congress along with State’s annual budget justifications. While we believe that our proposed recommendations continued to have merit, we also believe that State’s December 1996 report to the Congress began to respond to our concerns about the need to prioritize the funding of international organizations. Because State’s report indicated that “a rigorous assessment of U.S. participation in international organizations must be an ongoing process,” we are not making any recommendations at this time. Nonetheless, we believe that the process State began in May 1995 that culminated in the December 1996 report should continue. State’s comments are reprinted in appendix II. It also suggested some technical corrections and we have incorporated them into the report as appropriate. We conducted our review in Washington, D.C., primarily at the Department of State, in the Bureaus of International Organization Affairs and Economic and Business Affairs, and other State bureaus and offices. We interviewed State officials responsible for budget and program administration and reviewed policy documents, manuals, budget and financial documents, correspondence, assessment data, and background data on the organizations. We also held discussions with and obtained pertinent information from officials of other affected government agencies, including the Departments of Agriculture, Commerce, Health and Human Services, the Interior, Transportation, and the Treasury (including the U.S. Customs Service); the Office of Management and Budget; the National Institutes of Health (including the Cancer and Environmental Health Sciences Institutes); the Smithsonian Institution; the Office of the U.S. Trade Representative; the President’s Council of Economic Advisers and Advisory Council on Historic Preservation; the Congressional Budget Office; Congressional Research Service; the Secretary of the Senate; the Clerk of the House; and U.S. embassies in London, England; Brussels, Belgium; and Kuala Lumpur, Malaysia, to discuss organizations headquartered in those capitals. To determine how State assesses whether government membership in the 27 organizations continues to serve U.S. interests, we requested documentation that would identify and compare the specific objectives that the government sought to achieve in each of the organizations with the results or benefits derived. State provided us with copies of its budget justifications and supporting data, but these documents did not provide clear statements of U.S. goals or program strategies for each of the individual organizations. State officials said that although State had coordinated an interagency review of all international organizations in 1995, it did not formally document the results of this effort. Therefore, they said they could not show us how they made the determinations that continued government membership in the small international organizations served U.S. interests. Nonetheless, when State provided a copy of its December 1996 report to the Congress to us along with its comments on a draft of this report, we evaluated the report to determine whether it clearly stated the U.S. goals and program strategies for each of the organizations. We took State’s prioritization into account in finalizing this report. To examine State’s efforts to keep the government’s assessed contribution costs low, we studied the roles and responsibilities of key officials at State and other affected federal agencies, State’s budget policies and instructions to delegates, reports of meetings, and interviewed cognizant agency officials. In seeking to determine which organizations executive branch officials believe are more justified than others for continued government membership and participation, we relied primarily on the views of those government officials who had principal program responsibility for or contact with the organizations. While these officials were generally supportive of the organizations, we also solicited the views or opinions of independent experts and some who may have opposed continued participation. We discussed these issues with policy-oriented institutions in Washington, D.C., including the Cato Institute, the Heritage Foundation, and the National Policy Forum, and the U.N. Association of the United States of America in New York and Washington. We also reviewed congressional documents and spoke with staff members of House and Senate committees and offices to determine the congressional interest, concern, and provisions that apply to U.S. participation in these organizations. Since the review was aimed at executive branch management of U.S. membership interests, we generally did not contact the organizations directly—except in a few instances to obtain clarifying information. They included the Bureau of International Expositions, the International Natural Rubber Organization, the International Rubber Study Group, the World Conservation Union, the International Cotton Advisory Committee, the International Copper Study Group, and the International Lead and Zinc Study Group. For the same reason, we did not interview officials of other participating member states or interested private sector groups. We performed our review between January and December 1996 in accordance with generally accepted government auditing standards. We did not independently verify or review the organizations’ budgets. Appendix I provides supplemental background and assessment data on each of the individual organizations. The State Department’s comments on this report are shown in appendix II. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations, the Senate and House Budget Committees, the Senate Committee on Governmental Affairs, and the House Committee on Government Reform and Oversight; the Secretaries of Agriculture, Commerce, Health and Human Services, the Interior, State, and the Treasury; the Permanent Representative of the United States of America to the United Nations; the Administrator of the U.S. Agency for International Development; the Directors of the U.S. Information Agency and the Office of Management and Budget; the U.S. Trade Representative; the Chairmen of the Council of Economic Advisers and the Advisory Council on Historic Preservation; and the Secretary of the Smithsonian Institution. Copies will be made available to others upon 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 LeRoy W. Richardson, Rolf A. Nilsson, and Edward D. Kennedy. This appendix provides supplemental data on the 25 international organizations covered in this study that received funds from the Department of State in 1995. The data was compiled from various sources, including State budget documents, reports submitted by the individual organizations, and interviews conducted with cognizant agency officials, and gives a brief discussion of significant issues that we observed in the course of our study. We did not prepare summary data sheets on the Pan American Railway Congress Association (PARCA) and the World Tourism Organization (WTO) because State had notified them as of December 1995 that the United States would not continue its membership in them. To provide for orderly planning of international expositions by establishing intervals between different types of expositions, reviewing themes, and setting rules and requirements; and gives U.S. cities priority consideration when bidding for Bureau of International Expositions (BIE)-sanctioned events. U.S. share (percent) Convention of International Expositions, ratified by the Senate on April 30, 1968. The United States began participation in 1968. Bureau of International Organization Affairs, Department of State; U.S. Information Agency; Department of Commerce; Host U.S. cities and chambers of commerce/major industrial exhibitors. Helps to ensure that there will be no conflicts with and promotes increased foreign participation in U.S.-held expositions. Also, BIE membership provides access to deciding where events will be held and reductions in tariffs and various price concessions that defray the cost of membership. One year after date of receipt of withdrawal notification. While the U.S. contribution is modest, it pays the highest rate (8.9 percent) of any member nation (followed by Japan and Germany at 8.1 percent and four others at 4.5 percent). The assessment rate is based in part on the U.N. scale of assessments and economic production. U.S. membership in BIE lacks strong support in some quarters, but can be justified if the United States officially supports and participates in world fairs. A joint resolution passed by the Congress in December 1995 urged the United States to fully participate in Expo ’98 in Lisbon, Portugal, and encouraged private sector support for this undertaking. To obtain the highest possible degree of uniformity and harmony in and between the customs systems of its members; to prepare draft conventions and amendments; and to ensure uniform interpretation and application of the Customs Cooperation Council (CCC) convention, settle disputes, circulate information, and provide advice to governments. U.S. share (percent) The United States acceded to the convention creating CCC on November 5, 1970, which was also the initial date of U.S. participation (treaty). Bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; Customs Bureau, Department of the Treasury; Department of Commerce; and the U.S. Trade Representative. Harmonization and simplification of customs procedures serve U.S. business interests by contributing to the creation of a stable and predictable international trading environment for U.S exporters and importers. This facilitates commerce while enhancing customs enforcement, particularly in intellectual property rights, textile transshipment, and drug smuggling. Withdrawal shall take effect 1 year after the receipt by the Belgian Ministry of Foreign Affairs of the notification of withdrawal. The member shall pay its full annual contribution for the financial year during which its notice of withdrawal becomes effective. CCC is responsible for technical work related to several World Trade Organization agreements. It harmonizes member states’ customs systems and provides training and assistance on a variety of customs enforcement issues. If the United States did not participate, it would lose these benefits—adversely affecting U.S importers and exporters. Customs sees no viable alternative to membership in CCC. To facilitate private international legal transactions and relationships, especially in the areas of family law, trusts and estates, and sales, through law unification by multilateral treaties. U.S. share (percent) Statute of the Hague Conference on Private International Law (HCOPIL—1951), entered into force for (and participated in since by) the United States, 1964. Bureau of International Organization Affairs and Office of the Legal Adviser, Department of State; Office of Foreign Litigation, Department of Justice; the American Bar Association; the National Conference of Commissioners on Uniform State Laws; the American Law Institute; and other national legal organizations. More predictable application of law to legal transactions and relationships that span international borders, resulting in fewer and easier resolutions of disputes, and an improved business climate. HCOPIL facilitates service of process abroad, eases intercountry adoption procedures, and lowers insurance rates, among other things. At the expiration of the budget year ending June 30, provided that notification of intent to withdraw has been received at least 6 months before the end of that budget year. None. To serve as a forum for developing information for member states to use in planning for the economic, social, and cultural advancement of Indians. U.S. share (percent) November 1940 convention providing for creation of the Inter-American Institute. The United States has been a member since 1941. Bureau of Inter-American Affairs, Department of State; Bureau of Indian Affairs, Department of the Interior; and tribal councils. Provides a policy forum and access to informational resources to address priority issues of concern for Native Americans and their governments. It has a substantial research library that is dedicated to indigenous issues. One year notification required for withdrawal. The Institute has experienced management problems in the past, prompting the State Department to acknowledge that it was poorly managed. However, it is currently undergoing a major reform effort that has been sought and encouraged by the United States. Consequently, the State Department is taking a “watch-and-wait” approach toward continued U.S. funding and participation. The U.S. assessment share (44.1 percent) outpaces that of Mexico (30.3 percent) and all other participants by a factor of at least 10 to 1. Canada is not a member of the Institute. To provide a scientific basis for adoption of effective measures to prevent human cancer by identifying cancer-causing agents, assembling data on cancer cases and environmental factors from around the world, analyzing them, and disseminating data. U.S. share (percent) Public Law 92-484, approved October 14, 1972. The United States was one of the five original participating members and has remained a member since 1965. Bureau of International Organization Affairs, Department of State; the National Cancer Institute, the National Institute of Environmental Health Sciences of the National Institutes of Health, Department of Health and Human Services; the American Cancer Society; numerous cancer research agencies; and the general public. Provides ability to draw upon cancer research materials and resources from all over the globe, including areas usually inaccessible to U.S. officials. Brings together global experience on specific cancers and relation to causes. The United States separately has provided long-standing support for the International Agency for Research on Cancer (IARC) research in evaluating potentially carcinogenic substances in society and the workplace. Withdrawal effective 6 months after receipt of notification by the Director-General of the World Health Organization (WHO). Enjoys strong U.S. agency and congressional support. Narrow functional area (public affairs/literature dissemination) of possible overlap with WHO is currently being addressed for possible consolidation. It has a relatively small membership (16) that exerts budget pressure on organization but seeks to encourage increased membership through lower introductory charges. The United States, along with the United Kingdom, opposed 6.7 percent biennial budget increase adopted in April 1995. To translate and publish the customs tariffs of member governments and to disseminate this information to the members. U.S. share (percent) Authority is convention dated July 5, 1890 (26 Stat. 1518, TS 384). The U.S.-assessed share shall not exceed 6 percent per Public Law 90-569. Tariff translations are provided to the Department of Commerce; the Customs Bureau, Department of the Treasury, and the U.S. Trade Representative; as well as to private importers and exporters (administered by the bureaus of International Organization Affairs and Economic and Business Affairs, Department of State). The U.S. government and U.S. businesses benefit in having full information on foreign customs rates, regulations, and concessions obtained in negotiations available in English. The International Bureau’s translations provide a ready source of basic information needed for responding to questions from businessmen, in particular, in connection with U.S. export promotion programs, and for verifying foreign concessions obtained in negotiations. Per the convention, article 15, notice shall be given to the Belgian government. This is the only international organization that translates the individual country tariff schedules into English. It is therefore important, primarily to U.S. importers and exporters, that the U.S. government remain in this international organization (membership is available only to governments). WTO may at some time in the future provide this information, but the International Bureau is the only organization that does so at the present time. To provide the administrative framework to facilitate the arbitration of international disputes and maintain a worldwide registry of jurists and lawyers for selection to serve as needed on arbitration tribunals. U.S. share (percent) Convention for the Pacific Settlement of International Disputes, ratified by the Senate, April 2, 1908. The United States has been a member of the Permanent Court since 1899. Bureau of International Organization Affairs and the Office of the Legal Adviser, Department of State. Provides expert and cost-effective means to settle international disputes. The United States uses its facilities, as it did to organize the Iran-U.S. Claims Tribunal and in recent years to arbitrate a Heathrow Airport user fee dispute with Great Britain. One year following receipt of notification to withdraw. None. To cooperate with national scientific laboratories to ensure the international standardization of basic metric and nonmetric units of measure throughout the world. These standards have important bearings upon the exchange of goods and knowledge between countries. U.S. share (percent) The United States has been a participant since a convention creating an International Office of Weights and Measures was signed in May 1875. Bureau of International Organization Affairs, Department of State; National Institute of Standards and Technology (NIST), Department of Commerce; and Physics and engineering academicians. Provides access to a stable, accurate, and universally accepted system of measurement; promotes free trade; maintains and coordinates the world’s time scale; and plays an influential role in the development of industrial technology and international comparisons. One year after receipt of notification of intent to withdraw. Forfeits right of any joint ownership in international prototypes. The Bureau has a strong scientific orientation. It has tried unsuccessfully over the years to branch into commercial applications—which is what gave rise to the International Organization for Legal Metrology’s establishment. Effort to merge areas of common effort are being explored at the instigation of the French government. NIST, the designated U.S. national laboratory and a prime user of the Bureau’s services, provides calibration services for industry users on a cost-recoverable basis. To serve as a research and training center and as a clearinghouse for the exchange of information among specialists from around the world to initiate, develop, promote, and facilitate conditions for the conservation and restoration of cultural property. U.S. share (percent) Various public laws, January 1971. Bureau of International Organization Affairs, Department of State; the Smithsonian Institution; the President’s Advisory Council on Historic Preservation; the National Trust for Historic Preservation; and similar organizations, museums, and universities. Assists in important restorations/preservations, including the U.S. Capitol building and the Spanish missions of the American Southwest. Provides various mid-career professionals and students access to highly specialized instructional facilities and services not available elsewhere. Also, the major stakeholders value what they consider to be unparalleled connections made through the organization. One year following notification, provided its contribution payments are current. U.S. contribution rate (25 percent) from the International Center’s scale of assessments is based on 1 percent of the United Nations Educational Scientific and Cultural Organization (UNESCO) appropriation, not to exceed 25 percent (which the United States pays). This rate is more than double that of next highest participating country, Japan (12.38 percent). The United States successfully rolled back proposed budget increases for the 1996-97 biennium when the U.S. delegation joined other member states in approving the budget by consensus. To foster market transparency by collecting and publishing reliable data on copper production, consumption, and trade without intervening in markets. The International Copper Study Group (ICSG) also provides a forum for governmental consultations and supports special studies of market trends, new technologies, and government policies affecting the copper industry. U.S. share (percent) Authority is Public Law 103-236. The United States accepted the terms of reference of ICSG on March 15, 1990. ICSG was established on January 23, 1992. The International Trade Administration, Department of Commerce; the bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; and the U.S. mining industry. Increased market transparency enables a competitive market to avoid large fluctuations in price and promotes a better balance between supply and demand (large price fluctuations have traditionally plagued the copper market). It has helped “lift the veil” of the copper industry in the former Soviet Union, which was of significant interest to U.S. industry. It aids members with effective forecasting and long-term planning. A member may withdraw 60 days after written notice is given to the United Nations and the ICSG’s Secretary-General. ICSG was negotiated at U.S. urging to provide better information to prevent market instability, as happened in the 1980s. It primarily benefits the copper industry, but the data provided and the intergovernmental consultation are useful to U.S. agencies, including the Commerce and Defense Departments. ICSG has financed research on potential health problems associated with copper in drinking water. ICSG publications are available for sale to anyone, not just to member countries. To compile and publish statistics on cotton production, trade, consumption, and prices; and to facilitate the exchange of information and the development of more open lines of communication among scientific workers to better understand research problems. U.S. share (percent) Authority is 70 Stat. 890, 1956, 5 U.S.C. 170j. (P.L. 94-350, July 12, 1976.) Initial date of participation was 1939. The Foreign Agricultural Service, Department of Agriculture; the bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; and the U.S. textile industry. The International Cotton Advisory Committee (ICAC) provides cotton price analyses and projections to the international cotton community, something the Department of Agriculture is prohibited from doing. The U.S. cotton industry supports continued membership in ICAC and regularly attends ICAC plenary meetings. Member may withdraw by providing written notification before a new fiscal year (July 1). Although State announced the U.S. intention in December 1995 to withdraw from ICAC effective on June 30, 1996, the Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127) required the President to ensure that the U.S. government participate in ICAC and State to continue to pay the assessed contribution. As a result, State rescinded its letter of intent to withdraw from the organization, and the United States will remain in ICAC. ICAC publications are available for sale to anyone, not just to member countries. To promote expansion of international trade in grains and secure the freest possible flow of this trade, and to provide a forum for the exchange of information and discussion of members’ concerns regarding trade in grains. Through the Food Aid Committee, donors pledge food aid in the form of grain, which some members buy from the United States. U.S. share (percent) The current authority for U.S. participation is Senate advice and consent to the International Wheat Agreement of 1986, on November 17, 1987. Initial U.S. participation was in 1942. The Foreign Agricultural Service, Department of Agriculture; and U.S. grain growers; the bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; and the U.S. Agency for International Development. The United States, as the world’s largest exporter of grains, benefits from the expansion of international trade and from securing the freest possible flow of this trade. The United States also benefits from having the most reliable international data on the grains trade, including data provided by other countries, which would not otherwise be available. There are no specific provisions for withdrawal. Not acceding to the next convention, which will take effect in 1998, would be a way of withdrawing. The International Grains Council (IGC) is considering soliciting more private sector participation to relieve budget problems, but some countries fear for the integrity of the organization if industry interests are included. The U.S. government’s assessed share increased to 23.6 percent in 1996 because a new convention was negotiated that includes all grains and uses more recent data for calculating assessments. IGC publications are sold to anyone. To establish a close and permanent association with the hydrographic offices of member states, with a view to rendering navigation easier and safer throughout the world. U.S. share (percent) International hydrographic convention, approved by the Senate, May 13, 1968 (treaty). The United States has been a participant since 1922. Bureau of International Organization Affairs, Department of State; National Oceanographic and Atmospheric Administration, Department of Commerce; the U.S. Coast Guard; U.S. Geological Survey; National Imagery and Mapping Agency; (formerly Defense Mapping Agency); the U.S. petroleum industry; and oceanographic and academic institutions. Through the International Hydrographic Organization (IHO), the United States obtains high-quality hydrographic survey and chart data that is essential for safe navigation at sea, promotes trade, and reduces the threat of environmental damage from ship groundings. IHO’s President is a retired U.S. admiral. One year following the date of notification. None. To unify or harmonize private law in different countries, thereby facilitating international commerce and removing obstacles created by unnecessary conflicts in law and legal systems; and providing training in the adoption and use of approved international conventions by less developed countries. Initially established in 1926 under the League of Nations; present charter in effect since 1940. The United States has been a member and active participant since 1964. Bureau of International Organization Affairs and Office of the Legal Adviser, Department of State; Office of Foreign Litigation, Department of Justice; the American Bar Association; National Conference on Commissioners on Uniform State Laws; National Law Center for Inter-American Free Trade; American Law Institute; and other national legal organizations. Provides an important forum to ensure that U.S. commercial law and other legal interests are key source for international work on law unification, and that U.S. commercial practices are reflected in and protected under treaties and other documents produced in this process. Participation is for a period of 6 years. Intent to withdraw must be submitted in writing at least 1 year preceding the end of the current 6-year period (which expires in 1999). Two conventions prepared by the Institute on international commercial law reflecting modern U.S. practice are expected to be submitted to the Senate in 1997. The Institute is also drafting a multilateral convention expected to benefit the U.S. aircraft and other industries. To improve transparency in the lead and zinc world markets by producing and disseminating a wide variety of current statistics; to provide for an intergovernmental forum for consultations on international trade in lead and zinc; and to hold discussions of market trends, new technologies, government policies, and environmental issues. U.S. share (percent) Authority is 22 U.S.C. 2672, sec. 5 of Public Law 885, 84th Congress. U.S. participation started in 1960. International Trade Administration, Department of Commerce; the bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; and the U.S. mining industry. It produces a wide variety of statistics, assisting in effective forecasting and long-range planning. These statistics are important to the operation of a competitive market, which should ensure the lowest possible prices to the U.S. consumer. Annual meetings provide a forum for industry/government contacts and discussion of concerns without political agendas or market intervention measures. A member may withdraw at any time by written notification to the Secretary-General. The withdrawal takes effect on the date specified in the notification. Membership in this organization appears to be more important to industry than to the U.S. government. The State Department considers this organization to be a model for similar organizations for other commodities. Publications are available to anyone. It also reports on environmental rules concerning lead and other environmental issues. To manages an international natural rubber agreement designed to stabilize price fluctuations and rubber supplies through maintenance of a buffer stock in a historically volatile market. Successive international rubber agreements, first entered into force in 1980. Bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; Department of the Treasury; and Department of Commerce; the Office of the U.S. Trade Representative; and domestic tire, rubber, steel, and labor industries. With the United States as the world’s largest consumer of rubber products and rubber production being concentrated in three Southeast Asian countries (Indonesia, Malaysia, and Thailand), certain assurances are sought through an international agreement that attempts to stabilize natural rubber prices without disturbing long-term market trends and ensure expanded future supplies of natural rubber at reasonable prices. Agreement of 1987 has expired and a new 4-year extension has been negotiated. Under terms of old (and new) agreements, withdrawal permitted upon 1 year’s written notice. This is the only commodity agreement with economic provisions in which the United States currently participates. Extension of the agreement enjoys strong industry and congressional support, but it has not shown that it reduces long-term price variability or benefits U.S. consumers. Keeping a substantial sum (currently valued at $80 million) of U.S. funds with the International National Rubber Organization (INRO) or under foreign bank management (i.e., no direct U.S. control of the funds) to support a buffer stock operation under the agreement continues to be an unresolved issue. To recommend adoption of uniform international legal standards and requirements and provide an information exchange for scientific and measurement instruments that are used in commerce and industry. U.S. share (percent) Convention on legal metrology, as amended. The United States first participated in 1972. Bureau of International Organization Affairs, Department of State; NIST, Department of Commerce; and U.S. measuring instrument manufacturers. Uniform standards for measuring products in trade, public health, safety, and many other industries are considered essential for their public acceptance and confidence. Also vital for the protection of the import/export industries. International conferences/conventions are required once every 6 years but recently have been held every 4 years. Intention to withdraw must be made known at least 6 months in advance of expiration of the current convention/budget adoption (November 2000). A merger of operations with the International Bureau of Weights and Measures has been proposed by the French government. A working group is currently studying areas of common effort/interest with the objective of reducing costs and sharpening global focus. To collect and disseminate to government veterinary services facts and documents concerning the course and cure of animal diseases; to examine international disease control agreements and assist in their enforcement; and to promote disease research. U.S. share (percent) Senate approval, and presidential signature on June 9, 1975, of the original international agreement. Initial U.S. participation was in May 1976. Animal and Plant Health Inspection Service, Department of Agriculture; the bureau of International Organization Affairs, Department of State; U.S. Centers for Disease Control and Prevention; veterinary medicine; and the meat and poultry industries. The International Office of Epizootics (IOE) is a valuable channel for dissemination of U.S. research findings and helps apprise the United States of overseas research and animal infection developments. U.S. involvement allows the United States to have a prominent voice in developing international trade standards and regulations and conform them to U.S. standards. These standards help make trade without fear possible in this area. As the only international animal health forum in the world, IOE will set animal trade standards for the WTO. It also serves as an early warning system for animal disease outbreaks. Written notice given 1 year in advance of intention to withdraw. If the United States were to withdraw, standards would be set without U.S. participation and in the future might not conform to U.S. standards. This could greatly affect public health and industries that import and export U.S. animal livestock and animal products. To study wine and its production methods, packaging and labeling standards, and associated marketing practices with the object of ensuring product integrity and harmonizing regulatory requirements in the international wine trade. U.S. share (percent) Public Law 98-545 of October 25, 1984 (98 Stat., 2752). The United States began its participation in 1980. Its request for full membership was accepted on July 24, 1984. The Bureau of Alcohol, Tobacco and Firearms, Department of the Treasury; the bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; U.S. vintners; and the California Winegrowers Association. The International Office of the Vine and Wine (IOVW) facilitates the global dissemination of information on the U.S. wine industry, thereby helping promote U.S. wine, brandy, and viticultural exports. It also aids in promoting product integrity, therefore helping to protect public health worldwide. Finally, intergovernmental channels of communication have helped to expedite resolution of international incidents involving trade impediments, contamination, and marketing fraud. Any member may withdraw after giving 6 months’ notice. If the United States were to withdraw, both U.S. industry and consumer protection interests will be left unrepresented. IOVW’s deliberations have significant trade consequences. Differences in acceptable production techniques (which can hinder or promote market access), primarily between European and U.S. wine makers; sanitary practices; labeling; and the presence of chemical products are the subject of IOVW standards. IOVW is petitioning for WTO recognition, which could make the IOVW’s resolutions binding (they are now optional) and backed by the WTO’s enforcement powers. To promote the understanding of long-term trends in future rubber (natural and synthetic) production and consumption, provide accurate statistics, and promote research. It also serves as a forum for consultation among principal producing and consuming countries. U.S. share (percent) Authority is 22 U.S.C. 2672, sec. 5 of Public Law 885, 84th Congress. Initial date of U.S. participation was 1944. Bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; International Trade Administration, Department of Commerce; and the U.S. rubber industry. Quick dissemination of technical information on supply and demand promotes U.S. competitiveness. Information on market trends is important to the United States as the world’s largest rubber consumer. Also, the U.S. contribution leverages contributions from other members. The result is greater market transparency and efficiency, directly benefiting U.S. industry and consumers. The International Rubber Study Group (IRSG) also provides information on worldwide investment opportunities/new technologies. Withdrawal within the first 6 months of the financial year, which starts on July 1, becomes effective at year’s end (effectively 6 months’ notice). If withdrawal occurs within the second half, dues for the following year must still be paid (18 months’ notice). Membership in this organization appears more important to industry than to the U.S. government since it is industry that primarily uses the statistics provided by IRSG for long-range planning and projections. However, the U.S. government does use the information provided for planning and intergovernmental consultation purposes. Publications are available for sale to anyone, not just member countries. To develop official rules for testing seed sold in international trade, to accredit laboratories that issue international seed lot quality certificates, and to promote seed research and technology. U.S. share (percent) Basis for participation is 70 Stat. 890, 1956, 5 U.S.C.170j. Initial date of U.S. participation was 1924. Agricultural Marketing Service, Department of Agriculture; the bureaus of International Organization Affairs and Economic and Business Affairs, Department of State; U.S. agrobusiness; and U.S. land grant colleges. Membership in the International Seed Testing Association (ISTA) ensures that U.S. seed exporters have access to, and are competitive in, world markets through the use of approved uniform testing methods. Membership allows the United States to maintain its influence over the establishment of standards. It also ensures that high-quality imported seed is available to U.S. consumers and that U.S. testing facilities are accepted worldwide as meeting international standards. A government may withdraw by sending written notice to ISTA, but it will be responsible for its dues for that entire calendar year unless withdrawing because of a change in the ISTA constitution. Then the withdrawing government is responsible for its dues up to the change. Membership allows the United States to take part in the process of developing official procedures used to test seed sold in international trade. Withdrawal would deny the U.S. government the opportunity to block proposed international testing rules that could function as trade barriers to U.S. seed. ISTA generates about 40 percent of its operating funds from the sale of goods and services it produces. If ISTA allows additional labs to join as nonvoting members, as was proposed, it could result in lower U.S.-assessed dues. To increase transparency of the tropical timber market, promote sustainable management of tropical production forests, and promote research and development aimed at improving the sustainable management of tropical forests. U.S. share (percent) International Tropical Timber Agreement of 1983, signed by the United States on April 26, 1985. Office of the U.S. Trade Representative; bureaus of Economic and Business Affairs, International Organization Affairs, and Oceans and International Environmental and Scientific Affairs, Department of State; Forest Service and Foreign Agricultural Service, Department of Agriculture; and International Trade Administration, Department of Commerce. Improve availability of market information for U.S. importers of tropical timber for furniture, paneling, and other wood products. Also, ITTO identification of markets for lesser-known species promotes better utilization of resources and provides consumers with greater variety, which helps keep consumer costs down. The United States participates in ITTO’s voluntary program, but its contribution is expected to decrease to $200,000 from about $1 million annually. A member may withdraw 90 days after written notice is received by the United Nations (notice must also be given simultaneously to the ITTO council). U.S. officials believe issues discussed in ITTO, such as certification and labeling of wood products, apply to wood products from all types of forests including temperate forests. They believe that decisions on these issues could have a significant impact upon the global competitiveness of the U.S. timber industry. The United States also has a strong interest in promoting the sustainable management of tropical forests through ITTO because of the relationship of tropical forests to global environmental problems. The leader in influencing, encouraging, and assisting governments and nongovernmental organizations throughout the world to conserve the integrity and diversity of nature and to ensure that any use of natural resources is equitable and ecologically sustainable. (est.) U.S. share (percent) State Department Authorization Act for Fiscal Years 1990 and 1991 (P.L. 101-246). Bureaus of International Organization Affairs and Oceans and International Environmental and Scientific Affairs, Department of State; Fish and Wildlife and National Park Service, Department of the Interior; U.S. Forest Service, Department of Agriculture; National Oceanic and Atmospheric Administration, Department of Commerce; Environmental Protection Agency; the U.S. Agency for International Development; and various environmental organizations. Supports U.S. goals for the maintenance of a healthy, natural global environment and conservation of biological diversity. Supports international conservation conventions of importance to the United States. Provides a unique forum for the coordination of governmental and nongovernmental conservation efforts regarding the use of natural resources and leveraged assistance to international networks of volunteer scientists and specialists. Any time, upon receipt of written notification. Modest assessed contribution is highly leveraged since the International Union for the Conservation of Nature (IUCN) receives about 90 percent of its funding from various contribution sources other than assessed membership dues. Comparatively small (nine) “state” membership provides about 40 percent of IUCN’s assessed budget. In addition to its assessed contribution, the United States provided a voluntary contribution in the amount of $1 million in fiscal year 1995 to support programs of particular interest. To be the focal point for worldwide parliamentary dialogue and to works closely with the United Nations for peace and cooperation among peoples and the firm establishment of representative institutions. The Interparliamentary Union (IPU) is comprised of the world’s parliamentary bodies. U.S. share (percent) Various public laws. United States has been a member since the first meeting in 1889. Bureau of International Organization Affairs, Department of State; the Clerk of the House of Representatives; and the Secretary of the Senate, Parliamentary Services. Promotes personal contact and dialogue between members of the world’s parliamentary bodies—especially emerging democracies—in a formal, secure, but neutral structure to discuss legislative functions and relations and universal values, peace, and cooperation. No withdrawal provision cited. U.S. participation in IPU is within the provenance of the Congress and not a matter for executive branch decision-making. Responsibility shifts each Congress and now rests with the House of Representatives (administered by the Clerk). IPU has sought to raise the U.S. assessment from 12.58 percent to 15 percent, or above the statutory limitation. No Senator has attended any IPU meeting since 1989. No Member of the House has attended any IPU meeting since March 1994. IPU funding was temporarily suspended in December 1995—but subsequently approved—pending IPU reversal of the assessment increase and adjustment of its meeting schedule to better accommodate U.S. participation (meetings are normally scheduled at times when the Congress is in session). To analyze road and road transport policy issues as an aid to national decisionmakers, to encourage research and exchange of information on research results and best practices, to disseminate findings, and to address the concerns of all members. U.S. share (percent) Authority is sec. 164, Public Law 102-138, approved October 28, 1991. The United States regained membership in the World Road Association (WRA) (it lapsed during World War II) in November 1989. Original justification of 22 U.S.C. sec. 269 (44 stat. 754, June 18, 1926) is still valid. Federal Highway Administration, Department of Transportation, and U.S. construction companies. WRA, as the only intergovernmental forum for road issues, has provided ready access to innovations developed abroad that can be applied in the United States. Significant savings accrue to the United States because other countries share their research with the U.S. government through WRA. Also, the U.S. government and industry can increase international awareness of U.S. technical expertise for the purpose of encouraging the export of U.S. goods and services, making U.S. businesses more competitive overseas. WRA’s governing commission accepts resignations based on convention provisions. The American Association of State Highway and Transportation officials pays about one-third of the U.S.-assessed contribution, which the federal government would otherwise have to pay. The Federal Highway Administration pays for extra budgetary projects and, beginning in fiscal year 1997, it will pay the U.S. government-assessed contribution. The following are GAO’s comments on the Department of State’s letter dated December 20, 1996. 1. We acknowledged in our draft report that State had conducted a comprehensive review in 1995 to determine whether international organizations served important U.S. interests and whether continued U.S. membership in them was warranted. However, because the results of this effort were not (1) formally documented in State’s records; (2) made available to us; or (3) reported to the Congress at the time of our review, we could not assess the completeness of State’s evaluation. 2. We agree that the basis for the decision to withdraw from certain organizations was within the range of criteria that State announced in May 1996 and, therefore, have modified our report. 3. Because we believe that State’s December 1996 report to the Congress is a step in the right direction, we are not making any recommendations at this time. (We have not reprinted attachment A, state’s December 1996 report.) 4. In finalizing this report, we categorized the organizations in accordance with the broad priority categories used in State’s December 1996 report to the Congress, rather than be whether the organizations served a “broad” or “narrow” interest. 5. We have clarified our report language. 6. While we do not doubt that ICCROM is a unique organization that provides valuable benefits to some U.S. agencies, some U.S. government officials have questioned whether the cost of belonging to this organization may not be disproportionately high when weighed against the national interest. 7. We revised the report to reflect this information; however, we believe that there are some areas of overlap between these organizations. 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 obtained information on U.S. government membership in 25 special-purpose international organizations and 2 inter-American organizations that received funding support of $10.8 million in 1995 through assessed contributions provided by the Department of State, focusing on: (1) the Department of State's efforts to assess whether U.S. government membership in these organizations continues to serve U.S. interests, including a summary description of the organizations' missions and issues that have been raised about the benefits of U.S. membership; and (2) steps that have been taken to keep the government's contribution costs low. GAO noted that: (1) in May 1995, State began a comprehensive interagency assessment of U.S. membership in all of the international organizations to which it makes assessed contributions; (2) in May 1996, after being urged by Congress to prioritize its funding requirements for international organizations, State announced the criteria that it had used in 1995 in reviewing and evaluating U.S. membership in international organizations; (3) these criteria included the extent to which the United States directly benefits from the organizations' activities, how much of the organizations' budgets are devoted to activities benefitting the United States, the scope and depth of the organizations' constituencies, and their responsiveness to management improvement efforts; (4) in December 1996, State reported to Congress its decisions concerning the allocation of funds from the Contributions to International Organizations account for fiscal years 1996 and 1997 based on an assessment and prioritization of U.S. interests in these organizations; (5) State categorized the organizations according to a priority ranking based on the importance of their mandates to the U.S. national interest and their cost-effectiveness; (6) none of the 27 organizations discussed in this report were in State's top priority category, 4 were in State's second priority category, and 20 were in the third priority category; (7) GAO's interviews with U.S. agency officials indicate that all of the 27 organizations appear to have missions that are broadly consistent with a U.S. interest, but there were mixed views as to the value of the benefits the United States receives from membership; (8) the key concerns raised included the cost of membership in some organizations relative to the benefit received and that some organizations primarily benefit their related industries; (9) State has attempted to keep the U.S. government's assessed contributions to the special-purpose international organizations low; (10) it has sought actual reductions in their budgets, established a systematic coordination process with U.S. agencies having lead programming responsibility, and tried to secure more private sector contributions to these organizations; and (11) however, according to State officials, private financing of membership dues for these international organizations is generally not a viable option under their existing charters or State's funding policy. |
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USPS’s financial condition has continued to deteriorate in the first 5 months of fiscal year 2009 and USPS expects its financial condition to continue deteriorating for the rest of the fiscal year, including: accelerating declines in mail volume after the first quarter, with a total decline of about 11 billion pieces; and accelerating losses after the first quarter, with a total loss of about $2 billion. USPS has updated its projections for fiscal year 2009, projecting a mail volume decline by a record 22.7 billion pieces (11.2 percent) from fiscal year 2008; a record $6.4 billion net loss, and an unprecedented $1.5 billion cash shortfall (i.e., insufficient cash to cover expenses and obligations), assuming cost-cutting targets of $5.9 billion are achieved; and plans to increase outstanding debt by $3 billion (the annual statutory limit) to $10.2 billion, or two-thirds of the total $15 billion statutory limit. USPS attributes much of its net loss this fiscal year to the economic recession that has resulted in unprecedented declines in mail volume and decreased revenues. Thus far in fiscal year 2009, First-Class Mail volume (e.g., correspondence, bills, payments, and statements) dropped about 9 percent, while Standard Mail volume (primarily advertising) dropped about 15 percent. According to USPS, the housing market downturn, the credit crisis, and lower retail sales have contributed to these volume declines. The financial and housing sectors are major mail users, mailing bills, statements, and advertising such as credit card, mortgage, and home equity solicitations. Volume declines have accelerated for both First-Class Mail and Standard Mail, as shown by quarterly data (see fig. 1) and results for January 2009 (see app. I). In addition, USPS projects its financial difficulties will continue in fiscal year 2010 and result in an even greater cash shortfall at the end of that fiscal year, despite plans for additional cost-cutting and additional borrowing of $3 billion, which would bring USPS’s total debt to $13.2 billion. Thus, USPS’s immediate problem is to generate sufficient cash to remain financially viable in fiscal years 2009 and 2010. USPS reports reducing expenses by $773 million in the first 5 months of fiscal year 2009 (compared to the first 5 months of fiscal year 2008), primarily through reductions of 50 million work hours that USPS made as it adjusted to declining mail volumes and workload. USPS reduced overtime and captured additional work hour savings as it reduced the size of its workforce through attrition and implemented other cost-saving initiatives. However, these savings and added revenue from rate increases were insufficient to fully offset the impact of declines in mail volume and rising costs from cost-of-living allowances (COLA) provided to postal employees covered by union contracts, as well as rising workers’ compensation and retirement costs. Also, although almost 8,500 employees accepted USPS’s early retirement offer during the first quarter of fiscal year 2009, the resulting savings to date have been limited because the effective dates for the majority of these retirements were December 31, 2008 or later. USPS has high overhead (institutional) costs that are hard to change in the short term, including providing 6-day delivery and retail services at close to 37,000 post offices and retail facilities. Compensation and benefits for USPS’s workforce, which included about 646,000 career employees and about 98,000 noncareer employees in February 2009, generate close to 80 percent of its costs. Collective bargaining agreements with USPS’s four largest unions include layoff protections and work rules that constrain USPS’s flexibility, as well as semiannual COLAs linked to the Consumer Price Index (CPI) and employee benefits including health and life insurance premium payments. Under these agreements, which expire in 2010 or 2011: USPS paid 85 percent of employee health benefit premiums in fiscal year 2007, about 13 percent more than the share for other federal agencies. USPS’s share is decreasing annually to 81 percent in 2011 or 80 percent in 2012, depending on the agreement. USPS pays 100 percent of employee life insurance premiums, about 67 percent more than most other federal agencies. USPS pays 100 percent of both employee health benefit premiums and life insurance premiums for its Postal Career Executive Service, which included 724 executives in fiscal year 2008. Executives at comparable grades in most other federal agencies do not receive such benefits. USPS’s financial outlook has continued to deteriorate during fiscal year 2009. USPS has increased its estimate of losses in total mail volume in fiscal year 2009 to 22.7 billion pieces (11.2 percent). As a result, USPS now projects a net loss of $6.4 billion for fiscal year 2009, despite increasing its cost-cutting target to $5.9 billion for the fiscal year. Based on these projections, USPS expects cash from operations and borrowing will be insufficient to cover expenses at the end of the fiscal year, with the shortfall projected to be $1.5 billion. This projected net loss and cash shortfall assumes USPS will meet its cost-cutting target and factors in USPS’s plans to borrow $3 billion. USPS’s Chief Financial Officer told us on March 16 that achieving USPS’s target to eliminate 100 million work hours this fiscal year will be critical to achieving its goal of reducing costs by $5.9 billion. He expressed guarded optimism that USPS can reach this ambitious cost-cutting target, explaining that the target is difficult, but achievable. He noted that USPS plans to continue efforts to reduce work hours as it responds to mail volume declines, including reductions in overtime and additional work hour savings achieved through attrition and other initiatives. Additional USPS cost-saving efforts include: Implementing a service-wide hiring freeze and reducing staffing levels for managers and other employees not covered by union agreements by 15 percent at headquarters and 19 percent at the nine Area offices. Evaluating more than 93,000 city delivery carrier routes (more than half of all city routes), eliminating about 2,500 city routes, and adjusting many other city routes, which USPS expects will result in saving about 3.2 million work hours in fiscal year 2009. An agreement between USPS and the National Association of Letter Carriers to expedite evaluation and adjustment of city delivery routes enabled this progress. Consolidating excess capacity in mail processing and transportation networks, including consolidating operations at some mail processing facilities, moving some mail processing employees from the day shift to evening hours, and streamlining transportation. Halting construction starts of new postal facilities. To increase its revenues, USPS has increased rates, including a January 2009 increase for competitive products (e.g., Priority Mail and Express Mail), and a planned May 2009 increase for market-dominant products (e.g., First-Class Mail, Standard Mail, Periodicals, and some types of Package Services). USPS has also introduced volume discounts, negotiated service agreements, and added some enhancements to competitive products since the Postal Accountability and Enhancement Act of 2006 (PAEA) was enacted in 2006. However, these products generated only about 11 percent of USPS’s revenues and covered about 6 percent of its overhead costs in fiscal year 2008. USPS is considering alternatives to try to increase First-Class Mail and Standard Mail revenues. USPS will be challenged to achieve and maintain high-quality service as it works to implement unprecedented cost-cutting measures. USPS recently reported for the first time on the service quality of many market-dominant postal products; thereby making important progress in improving transparency and meeting the requirements of PAEA. USPS has cautioned that limitations have affected the quality of new measurement data and said that it will work to improve data quality. As table 1 shows, on-time delivery of all major types of market-dominant products in the first quarter of fiscal year 2009 fell short of USPS’s targets for the full fiscal year. To put these results into context, the timeliness of mail delivery is an important part of USPS’s mission of providing affordable, high-quality universal postal services on a self-financing basis. USPS has stated that service is at the heart of its brand and the key to increasing its competitiveness and profitability. Action is needed on various options, as no single action will be sufficient for USPS to remain financially viable in the short and long term. The short- term challenge for USPS is to cut costs quickly enough to offset the unprecedented volume and revenue declines so that it does not run out of cash this fiscal year. The long-term challenge is to restructure USPS’s entire operations and networks to reflect the changes in mail volume, mailer preferences, and USPS’s capacity to cover its costs. Based on USPS’s poor financial condition and outlook, the time to take action is relatively short, and USPS’s business model and its ability to remain self- financing may be in jeopardy. A key factor in determining USPS’s financial viability is whether mail volume will rebound sufficiently once the economy improves, as volume has done in the past, so that USPS revenues will cover costs (see fig. 2). As the Postal Regulatory Commission (PRC) noted in December 2008, current pressures from declining volume and revenue do not appear to be abating, but rather, seem to be increasing. During the economic downturn, there has been accelerated diversion of business and individual mail to electronic alternatives, and some mailers have left the mail entirely. An economic recovery may not stimulate the same rebound in mail volume as in the past, because of changes in how people communicate and use the mail. Specifically: First-Class Mail volume has declined in recent years and is expected to decline for the foreseeable future as businesses, nonprofit organizations, governments, and households continue to move to electronic alternatives, such as Internet bill payment, automatic deduction, and direct deposit. USPS’s analysis has found that electronic diversion is associated with the growing adoption of broadband technology. As PRC reported, the availability of alternatives to mail eventually impacts mail volume. It is unclear whether Standard Mail will grow with an economic recovery. Standard Mail now faces growing competition from electronic alternatives, such as Internet-based search engine marketing, e-mail offers, and advertisements on Web sites. The average rate increase for Standard Mail is limited by the price cap to the increase in the Consumer Price Index, but future rate increases will likely have some impact on volume. Options to assist USPS through its short-term difficulties—some of which would require congressional action—include: Reduce USPS payments for retiree health benefits for 8 years: USPS has proposed that Congress change the statutory obligation to pay retiree health benefits premiums for current retirees from USPS to the Postal Service Retiree Health Benefits Fund (Fund) for the next 8 years. This proposal would also reduce USPS’s expenses through 2016 by an estimated $25 billion—with $2 billion in fiscal year 2009, $2.3 billion in fiscal year 2010, and the remaining annual expenses increasing from $2.6 billion to $4.2 billion over the remaining 6 years. This proposal is poorly matched to alleviate USPS’s immediate projected cash shortfalls. In addition, this proposal would reduce the Fund balance by an estimated $32 billion (including interest charges) by 2016, so that in 2017, the remaining current unfunded obligation would be an estimated $75 billion (rather than $43 billion) to be amortized for future payments. This large obligation would create the risk that USPS would have difficulty making future payments, particularly considering mail volume trends and the impact of payments on postal rates if volume declines continue. USPS’s proposal also would shift responsibility for these benefits from current to future rate payers. Reduce USPS payments for retiree health benefits for 2 years: Another option would be for Congress to revise USPS’s statutory obligation so that the Fund, not USPS, would pay for current retiree health benefits for only 2 years (fiscal years 2009 and 2010), which would provide USPS with $4.3 billion in relief. We support this option because it would have much less impact on the Fund and it would allow Congress to revisit USPS’s financial condition to determine if further relief is needed and review actions USPS has taken in 2009 and 2010 to improve its viability. Relief from retiree health premium costs is no substitute for aggressive USPS action—beyond current efforts— to dramatically reduce costs and improve efficiency. It is not clear that either of these options would be sufficient, because USPS projects it will operate on a thin margin. This means that even if such relief is provided, a cash shortfall could develop in either fiscal year 2009 and/or 2010 if USPS does not meet its ambitious cost-cutting goals, mail volume declines more than projected, or unexpected costs materialize, such as unexpected increases in fuel costs. One option that would not require congressional action would be for USPS and its unions to continue their dialogue and agree on ways to achieve additional short-term savings, such as by modifying rules to facilitate reducing work hours. Such labor-management cooperation is critical to USPS’s ability to make immediate changes in order to achieve cost reductions. Other available options, based on statutory provisions, could include (1) seeking PRC approval for an exigent rate increase and (2) increasing USPS’s annual borrowing limit. First, USPS could request PRC approval for an exigent rate increase that would increase rates for market-dominant classes of mail above the statutory price cap. Mailers have voiced strong concern about the potential impact of such a rate increase on their businesses. In our view, this option should be a last resort. It could be self- defeating for USPS in both the short and long term because it could increase incentives for mailers to further reduce their use of the mail. Second, Congress could temporarily raise the statutory $3 billion annual limit on increases in USPS’s debt, which would provide USPS with funding if needed. This option would be preferable to an exigent rate increase. However, it is unclear when USPS would repay any added debt, which would quicken USPS’s movement toward its $15 billion statutory debt limit. In our view, this option should be regarded only as an emergency stop-gap measure. Although USPS is taking unprecedented actions to cut costs, comprehensive action beyond USPS’s current efforts is urgently needed to maintain financial viability. Given the growing gap between revenues and expenses, USPS’s business model and its ability to remain self-financing may be in jeopardy. Progress in many areas will be needed so that USPS can cover operating expenses and maintain and modernize its infrastructure. I want to emphasize that action is urgently needed to streamline USPS’s costs in two areas where it has been particularly difficult—compensation and benefits and the mail processing and retail networks. We have reported for many years that USPS needs to right size its workforce and realign its network of mail processing and retail facilities. USPS has made some progress, particularly by reducing its workforce by more than 100,000 employees since 2000 with no layoffs and by closing some smaller mail processing facilities. Yet, as USPS recognizes, more needs to be done. USPS no longer has sufficient revenue to cover the cost of maintaining its large network of processing and retail facilities. Closing postal facilities would be controversial, but is necessary to streamline costs. Congress encouraged USPS to expeditiously move forward in its streamlining efforts in PAEA, and its continued support would be helpful to facilitate progress in this area. We recommended that USPS enhance the transparency and strengthen the accountability of its realignment efforts to assure stakeholders that realignment would be implemented fairly, preserve access to postal services, and achieve the desired results. USPS has taken steps to address our recommendations and, thus, should be positioned to take action. In addition, it is imperative for USPS and Congress to take informed action to review mail use, what future postal services will be needed, and what operational and statutory options are available to provide those services. Key areas with options include: Universal Postal Service: A recently completed PRC study identified options for universal service and trade-offs involving quality and costs. When USPS asked Congress in January 2009 to eliminate the long- standing statutory provision mandating 6-day delivery, it provided little information on where it would reduce delivery frequency, and the potential impact on cost, mail volume, revenue, and mail users. Because the number of delivery days is fundamental to universal service, Congress should have more complete information before it considers any statutory changes in this area. A mechanism to obtain such information would be for USPS to request an advisory opinion from PRC, which would lead to a public proceeding that could generate information on USPS’s request and stakeholder input. USPS workforce costs: USPS’s ability to control wage and benefit costs will be critical to cost-saving efforts. One option would be for USPS and its unions to negotiate changes to wages and benefits that apply to employees covered by collective bargaining agreements. USPS will begin negotiating next year with two of its major unions, whose agreements will expire in November 2010, and the following year with its other two major unions, whose agreements expire in November 2011. Retail postal service: USPS has alternatives to provide lower-cost retail services than in traditional post offices, such as contract postal facilities, carrier pick-up of packages, and selling stamps at supermarkets, drug stores, and by telephone, mail, and the Internet. USPS’s retail network has been largely static, despite the expansion of alternatives, population shifts, and changes in mailing behavior. We have reported that USPS could close unnecessary retail facilities and lower its network costs. It is important to note that large retail facilities—generally located in large urban areas where more postal retail alternatives are available—generate much higher costs than the smallest rural facilities and may, therefore, potentially generate more cost savings. Mail processing: USPS has several options for realigning its mail processing operations to eliminate growing excess capacity and associated costs, but has taken only limited action. In 2005, we reported that, according to USPS officials, declining mail volume, worksharing, and the evolution of mail processing operations from manual to automated equipment has led to excess capacity that has impeded efficiency gains. USPS has terminated operations at 58 Airport Mail Centers in recent years, but has closed only 1 of over 400 major mail processing facilities. As USPS consolidates its operations, it needs to consider how it can best use its facilities, if it is cost effective to retain ones that are underutilized, and take the actions necessary to right size its network. Transportation: Various options exist for reducing USPS’s transportation costs beyond its current streamlining efforts. For example, a joint USPS-mailer workgroup has identified a destination entry discount for First-Class Mail as an option that could reduce the need for USPS to provide long-distance transportation and some mail processing. USPS could publicly provide its analysis of the potential savings and the impact of such a discount. Delivery: USPS has various options for reducing delivery costs by continuing to realign delivery routes, implementing efficiency initiatives, and making more fundamental changes to delivery operations, such as delivering mail to more cost-effective receptacles, including cluster boxes. USPS’s business model: We will discuss options to change USPS’s business model in a report that PAEA requires us to issue by December 2011. Given USPS’s projection that it faces record losses and cash shortfalls, it is important for USPS to continue providing Congress and the public with timely and sufficiently detailed information to understand USPS’s current financial situation and outlook. Such information is essential to help congressional policymakers understand USPS actions and plans to maintain its financial viability in both the short and long term, particularly in view of proposals to give USPS financial relief from some retiree health benefit costs. Recently USPS took steps in this direction by providing monthly financial information to the PRC, which then made this information publicly available. We asked USPS to comment on a draft of our testimony. USPS generally agreed with the accuracy of our statement and provided technical comments, which we incorporated where appropriate. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or the Members of the Subcommittee may have. For further information regarding this statement, please contact Phillip Herr at (202) 512-2834 or [email protected]. Individuals who made key contributions to this statement include Shirley Abel, Teresa Anderson, David Hooper, Kenneth John, Emily Larson, Joshua Ormond, Susan Ragland, and Crystal Wesco. (Volume and revenue data in thousands) FY 2008 through Jan. 2008 Market-dominant products primarily include First-Class Mail—domestic and international single-piece mail (e.g., bill payments and letters) and domestic bulk mail (e.g., bills and advertising); Standard Mail (mainly bulk advertising and direct mail solicitations), periodicals (mainly magazines and local newspapers), some types of package services (primarily single-piece Parcel Post, Media Mail, library mail, and bound printed matter). Market-dominant revenues also include revenues from services such as post office boxes and Delivery Confirmation. Competitive products primarily include Express Mail; Priority Mail; bulk Parcel Post, which the Postal Service calls Parcel Select; and bulk international mail. The Postal Service did not report separate data for each competitive product, which the Postal Service considers to be proprietary. 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. | When Congress passed the Postal Accountability and Enhancement Act in December 2006, the U.S. Postal Service (USPS) had just completed fiscal year 2006 with its largest mail volume ever--213 billion pieces of mail and a net income of $900 million. Two years later, USPS's financial condition has deteriorated. Mail volume declined by a record 9.5 billion pieces (4.5 percent) in fiscal year 2008, leading to a loss of $2.8 billion--the second largest since 1971. According to USPS, this was largely due to declines in the economy, especially in the financial and housing sectors, as well as shifts in transactions, messages, and advertising from mail to electronic alternatives. Declining mail volume flattened revenues despite rate increases, while USPS's cost-cutting efforts were insufficient to offset the impact of declining mail volume and rising costs in fuel and cost-of-living allowances for postal employees. USPS's initial fiscal year 2009 budget expected that the turmoil in the economy would result in more mail volume decline and a loss of $3.0 billion. This testimony focuses on (1) USPS's financial condition and outlook and (2) options and actions for USPS to remain financially viable in the short and long term. It is based on GAO's past work and updated postal financial information. We asked USPS for comments on our statement. USPS generally agreed with the accuracy of our statement and provided technical comments, which we incorporated where appropriate. USPS's financial condition has continued to deteriorate in the first 5 months of fiscal year 2009 and USPS expects its financial condition to continue deteriorating for the rest of the fiscal year. Key results include: (1) accelerating declines in mail volume after the first quarter, with a total decline of about 11 billion pieces, and (2) accelerating losses after the first quarter, with a total loss of about $2 billion. USPS's updated fiscal year 2009 projections suggest the magnitude of the challenges it faces: (1) mail volume will decline by a record 22.7 billion pieces (11.2 percent),(2) a record $6.4 billion net loss and an unprecedented cash shortfall of $1.5 billion, assuming that cost-cutting targets of $5.9 billion are achieved, and (3) plans to increase outstanding debt by $3 billion (the annual statutory limit) to $10.2 billion, or two-thirds of the $15 billion statutory limit. In addition, USPS projects its financial difficulties will continue in fiscal year 2010 and result in an even greater cash shortfall. USPS's most immediate challenge is to dramatically reduce costs fast enough to meet its financial obligations. USPS has proposed that Congress give it financial relief of $25 billion over 8 years by changing the statutory mandate for funding its retiree health benefits. GAO recognizes the need for immediate financial relief, but prefers 2-year relief so that Congress can determine what further actions are needed. It is not clear that either option would be sufficient because USPS projects it will operate on a thin margin, risking a larger cash shortfall if it does not meet its ambitious cost-cutting goals, mail volume declines more than projected, or unexpected costs materialize, such as fuel cost increases. Although USPS is taking unprecedented actions to cut costs, comprehensive action beyond USPS's current effort is urgently needed to maintain financial viability. Given the growing gap between revenues and expenses, USPS's business model and its ability to remain self-financing may be in jeopardy. Action is needed to streamline costs in two difficult areas: (1) compensation and benefits, which generate close to 80 percent of costs and (2) mail processing and retail networks, which have growing excess capacity. Closing postal facilities is controversial, but necessary, because the declining mail volume and growing deficits indicate that USPS cannot afford to maintain such an extensive network. Information will be critical to determine what other actions are needed, including options to cut costs as well as their impact on mail volume and mail users. It is also imperative to review mail use, what future postal services will be needed, and what options are available in many areas, including universal service, workforce costs, retail services, mail processing, delivery, transportation, and USPS's business model. |
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Authorized in 1965 under Title XIX of the Social Security Act, Medicaid is a federally aided, state-run medical assistance program. Over 35 million people received an estimated $152 billion in Medicaid services during fiscal year 1995. At the federal level, HCFA is responsible for administering the Medicaid program, establishing policies, developing operating guidelines, and ensuring states’ compliance with Medicaid regulations. Federal regulations require states to provide certain basic medical services, such as inpatient hospital and physician care, under their Medicaid programs. Federal regulations also authorize states to provide optional services, such as optometrist services, eyeglasses, and prescription drugs. During fiscal year 1995, all states provided prescription drugs as part of their Medicaid programs; the reported cost of these drugs during that year was about $8.3 billion. Because of growing concern over the increased use and cost of prescription drugs, in 1990 the Congress amended the Social Security Act to require states to implement DUR programs by January 1, 1993. The legislation mandated that these reviews include prospective screening for potential drug problems due to therapeutic duplication, drug-disease contraindication, drug-drug interaction, incorrect drug dosage, incorrect duration of treatment, drug-allergy interactions, and clinical abuse or misuse. (A glossary of drug utilization review terms appears at the end of this report.) HCFA was instructed to issue guidelines to the states on prospective DUR cost and benefit reporting. While not requiring that states use automated systems for prospective screening, the law encouraged their use, and required HCFA to initiate at least 10 statewide automated PRODUR demonstration projects. HCFA was required to report to the Congress by January 1, 1994. In addition to promoting patient safety, DUR programs must also be designed to educate physicians and pharmacists to better identify patterns of fraud, abuse (including overuse), or other inappropriate or medically unnecessary care. Physicians and pharmacists can also use these systems to increase their knowledge about patterns of use associated with specific drugs or groups of drugs. When a Medicaid patient submits a prescription to be filled, the pharmacist transmits recipient identification and prescription information to a statewide database via the PRODUR system. In an on-line, real-time environment, after verifying the recipient’s eligibility, the system screens the prescription against the recipient’s known Medicaid medical and prescription history. The system then sends the pharmacy a message indicating whether the claim is “payable” (valid), and whether any potential drug therapy problem, such as a drug-drug interaction, exists. If a potential drug therapy problem does exist, the pharmacist consults with the recipient and/or the recipient’s physician, depending upon the seriousness of the problem. After such consultation and according to the pharmacist’s judgment, the pharmacist may fill the prescription, resubmit the claim for a different drug prescribed by the physician, or submit a reversal to cancel the claim. Pharmacies in states that do not use automated, statewide PRODUR systems are generally limited to comparing the prescription presented with the patient’s medical history and prescription data maintained at that specific pharmacy or chain of pharmacies. Such a local system would not have the benefit of the patient’s complete Medicaid history; moreover, a local system would lack on-line eligibility verification. To determine if states’ PRODUR systems have improved patient safety, we obtained contractor-prepared reports and other data for five of the eight states that had been operating automated PRODUR systems for 12 months or longer at the time we began our review in May 1995: Maryland, Missouri, New Mexico, Oregon, and Pennsylvania. These reports showed the number and types of drug therapy “alerts” transmitted by each state’s PRODUR system, along with the number of claims pharmacies reversed as a result of such alerts. We selected these five states because (1) a single contractor serviced three of the states (Maryland, New Mexico, and Oregon) and agreed to perform the needed analyses, and (2) two states (Missouri and Pennsylvania) agreed to provide us with 12 months’ worth of their Medicaid prescription drug data for our own analysis. To determine the extent to which states’ PRODUR systems have provided measurable savings, we and contractors analyzed the five states’ PRODUR data for all conditions screened for. To determine actual savings realized from the denial of overutilization claims (often called “early refills”), we analyzed all such transactions denied between July 1, 1994, and March 31, 1995, identifying whether they were subsequently refilled within 90 days—including the period April 1995 through June 1995. State PRODUR and HCFA officials agreed with our assumption that if the prescriptions were not refilled within 90 days after being initially presented, they probably would not be refilled, and that the value of these prescriptions could reasonably be viewed as measurable savings. To evaluate the extent to which on-line eligibility-verification screening provided tangible savings, we identified the number of prescriptions denied (and the dollar value of the drugs) because recipients were not eligible for Medicaid benefits on the day they submitted their prescriptions. Eligibility screening is performed by a system separate from but often utilized with PRODUR systems. In addition, our estimates of cost savings derived from avoided hospitalization are based on FDA data. To discern the degree to which PRODUR systems can assist in identifying potential fraud, waste, and abuse, we reviewed alerts for overutilization (early refill) and therapeutic duplication; in such cases, individuals may be trying to obtain for resale a greater quantity of medication than that prescribed. We performed our review from May 1995 through April 1996, in accordance with generally accepted government auditing standards except that, as agreed with the requesters, we did not independently verify the accuracy of state- and contractor-provided prescription-transaction data. This was due to the excessive amount of time that would have been required to (1) obtain specific prescription information (such as physician and pharmacy names) and (2) trace these data back to the original prescription documents. Accordingly, we cannot verify the accuracy of the information provided. Our conclusions regarding patient safety and program savings are based on these data. HHS provided written comments on a draft copy of this report; they are reprinted as appendix I. Data from PRODUR systems operated by five geographically diverse states—Maryland, Missouri, New Mexico, Oregon, and Pennsylvania—show inappropriate drug therapy to be an ongoing and serious problem in the Medicaid program. These systems reported screening over 31.7 million prescription drug claims during 12-month periods between January 1994 and June 1995, and sent pharmacists alerts of potentially inappropriate drug therapy for about 6.3 million (20 percent) of these claims. Over 650,000 of these claims (2 percent of the total) were reported canceled because of serious risks posed by such conditions as potential drug-drug interaction, drug-disease conflict, and pregnancy conflict. Table 1 shows the potential for adverse medical reactions, as evidenced by the fact that alerts for drug-drug interaction, overutilization, and therapeutic duplication occur in great numbers. (Appendix II contains detailed data on PRODUR operations for each of the five states reviewed.) Along with increasing patient safety, the PRODUR systems in the states we reviewed reduced Medicaid program costs by millions of dollars annually through the cancellation of potentially wasteful prescriptions and the denial of prescriptions to ineligible recipients. Experiences in the five states reviewed show that program savings can more than offset the cost of these relatively inexpensive systems. Further, however, to the extent that these systems also help prevent unnecessary hospitalization due to adverse medical reactions from prescribed drugs, actual annual cost savings (according to a 1995 FDA review) may be appreciable. The cancellation of prescriptions due to the overutilization (early refill) alert has provided the five states in our review with substantial recurring savings. While a legitimate need for an early refill may exist in some situations, early refills can also indicate drug overutilization, which can threaten patient safety, or increase the potential for fraud or abuse. Our analyses showed that most canceled early refill prescriptions are subsequently filled, but savings from those not filled within 3 months, and thus presumed to represent program savings, have been substantial. As table 2 shows, states realized savings of about $5 million from canceled prescriptions not filled, with individual state savings ranging from about $153,000 to about $2.3 million. The five states also realized substantial savings from PRODUR systems with companion on-line screening capabilities to ensure that recipients are eligible for Medicaid benefits at the time a prescription is presented. Without on-line eligibility verification, Medicaid recipients can continue to obtain benefits for up to a full month, even if they lose eligibility during the middle of the month. The annual savings from this function, reported at over $25 million for the five states, more than offset—by a considerable margin—each state’s one-time system installation costs, which ranged from a reported $165,000 to $675,000. For example, as shown in table 2, Pennsylvania’s PRODUR system denied about $16.6 million in prescriptions because of ineligibility, from July 1994 through June 1995; in contrast, its one-time installation cost was $675,000. On the basis of its review of studies related to drug-induced illnesses, FDA estimates that 6.4 percent of all hospital admissions nationally are caused by inappropriate drug therapy—5 percent due to patient noncompliance with drug regimens, such as overutilization, and an additional 1.4 percent due to adverse drug reactions. Numerous other studies have been conducted worldwide to determine the extent to which inappropriate drug therapy results in hospitalization, with estimates ranging from 3 percent for the general population to as high as 28 percent for the elderly. Considering that Medicaid’s fiscal year 1995 inpatient hospitalizations totaled about $42 billion, even limited implementation of PRODUR systems could have a significant impact on reducing overall Medicaid program costs. As we have pointed out in past reports, potential fraud and abuse in the Medicaid prescription drug program is a serious problem, with dollar losses widely estimated to be as high as 10 percent of total program costs. In 1992 we reported how 10 states had used retrospective drug monitoring programs to detect and deter the theft of controlled substances within the Medicaid program. However, our analysis of the five states’ systems shows that automated PRODUR systems offer a much more cost-effective alternative to a “pay-and-chase” approach—in which only retrospective reviews are undertaken—by detecting potential fraud and abuse at the time a recipient submits a prescription, and by denying a potentially invalid claim before the drugs are dispensed. The PRODUR systems’ alerts for early refills and therapeutic duplication provide states with the tools needed to detect potential fraud and abuse and prevent them before they occur. These alerts can be a clue to detecting potential fraud or abuse because an individual may be obtaining a greater quantity of medication than medically necessary, with intentions of selling the drugs—often at inflated street prices. For example, our analysis of one of the five states’ data identified over 2,200 recipients who, during a 15-month period, each obtained a 20-months’ supply or greater of controlled substances, such as Darvon and Valium, in the same therapeutic drug class. Further analysis of the 2,200 recipients showed that 180 of them went to 10 or more different physicians to obtain their prescriptions; 1 went to 108; 252 of the recipients obtained a 3-years’ supply or greater of controlled substances; 6 of them obtained a 10-years’ supply or greater; and 219 of the recipients obtained controlled drugs costing the Medicaid program $1,500 or more; 8 of the recipients obtained drugs costing $10,000 or more. The states in our review have all implemented their automated PRODUR systems differently, in large part because no overall source of information or guidance for implementing PRODUR systems exists. Some states issue alerts for a greater number and variety of conditions relating to patient age, duration of prescription, and other medical conditions (see appendix III). Each state has its own DUR board, which independently sets screening criteria and policies. Although all of the systems in the states we reviewed screen for drug-drug interaction, overutilization, and therapeutic duplication, we found significant differences in the types of drug therapy problems the states’ PRODUR systems screen for. One state’s system did not screen for pregnancy conflict, and two of the states’ systems did not screen for underutilization (an indication of noncompliance with a prescribed drug regimen)—both problems that could have dramatic effects on patient safety. Underutilization data we obtained from three states show that patient noncompliance with drug-therapy instructions could be a significant problem in the Medicaid program. In Maryland alone, for example, between July 1994 and June 1995, over 300,000 underutilization alerts were sent. State data also indicate that how alerts regarding early refill and therapeutic duplication claims are administered can affect savings, and the identification and prevention of potential fraud, waste, and abuse. As table 3 shows, one state—which does not automatically deny early refill claims but that requires the pharmacist to initiate such denials—had a total 9-month claims volume of about 5.8 million and about 6,100 early refill claims that were not later refilled, resulting in savings of about $153,000. In contrast, another state—which does automatically deny early refill claims—had a lesser total 9-month claims volume (about 3.2 million) but had about 30,000 early refill claims not later refilled, resulting in significantly more savings—about $1.2 million. Thus, it appears that automatic denial can offer a better chance at detecting prescriptions that could be dangerous, potentially fraudulent, or both. Three of the states’ systems automatically deny early refills; none automatically deny claims for therapeutic duplication. A fourth state, Maryland, is, however, considering changing its system to automatically deny claims for therapeutic duplication. As stated earlier, the Social Security Act, as amended by the Omnibus Budget Reconciliation Act of 1990, encourages states to use automated systems for prospective DUR, and requires HCFA to conduct demonstration projects of PRODUR systems and report project results to the Congress. HCFA is currently conducting a PRODUR demonstration project in cooperation with the state of Iowa and has provided project status reports to the Congress. No other demonstration projects are planned at this time. Since the inception of the Iowa demonstration project in 1994, HCFA has provided annual reports for 1994 and 1995 to the Congress presenting the project goals and objectives, evaluation design, plans for collecting and analyzing data and reporting project results, and baseline data on Iowa’s past Medicaid program expenditures and prescription volumes. The 1995 report, transmitted to the Congress on March 1, 1996, stated that data are not yet available with which to evaluate the potential benefits of the Iowa PRODUR system. Reports planned for 1996 and 1997 are to begin to provide analyses of claims and eligibility data from Iowa, and a final evaluation report is to be prepared in 1998 after the project’s scheduled conclusion in March of that year. As a result, the Iowa demonstration project will provide little information to the states and the District of Columbia as they implement their PRODUR systems. Among the 43 states plus the District of Columbia that plan to implement systems, 38 are scheduled to have theirs in place by the end of 1996. In addition to HCFA’s statutory responsibilities, in our 1994 report we urged HCFA to gather information on the costs and benefits of automated review systems, develop guidance on features and capabilities, and make such information available to all states. HCFA has only partially responded to these recommendations. In August 1994 HCFA issued guidelines to assist the states in estimating and reporting the costs and benefits of both retrospective and prospective drug utilization review. However, according to HCFA officials, while they have gathered information on PRODUR programs from required annual reports submitted by the states, they have not developed “best practices” or disseminated what information they do have, due to a lack of resources. Further, HCFA officials state that they have no plans at this time to increase their role, since efforts to reform health care being discussed in the Congress may affect the ways in which the Medicaid program operates. With automated PRODUR systems, most states are recognizing an opportunity to use low-cost technology to help both physicians and pharmacists safeguard Medicaid recipients from inappropriate drug therapy and its potential adverse medical reactions. While the primary emphasis of such systems—appropriately—has been safety, both safety benefits and dollar savings accrue from their use. Since results vary on the basis of how such systems are administered, it is important that states share their experiences. Absent any analysis of data from the Iowa demonstration project or any concerted effort by HCFA to collect and share other states’ experiences, states have had only limited access to both safety and cost data—information that is critical to informed decisionmaking and to maximizing PRODUR system effectiveness and efficiency. Given the substantial safety benefits that can accrue to Medicaid recipients and the strong potential for immediate savings to the Medicaid program through the effective use of automated PRODUR systems, we recommend that the Secretary of Health and Human Services direct the Administrator, Health Care Financing Administration, to actively facilitate state sharing of information on the most efficient use of PRODUR systems. One way would be to quickly help establish a working group or other such forum for coordinating the collecting and sharing of information on best practices for automated prospective drug utilization review programs, on a nationwide basis. In commenting on a draft of our report, the Department of Health and Human Services generally agreed with our recommendation and the facts presented. It stated that automated prospective drug utilization review systems are extremely beneficial in ensuring that prescriptions are medically necessary and unlikely to cause adverse drug reactions, and concurred with our recommendation that HCFA facilitate state information sharing on best practices for automated PRODUR programs. It noted several prior and ongoing initiatives related to this objective, including (1) the Office of Inspector General’s May 1995 report focusing on states’ progress in implementing statutory DUR requirements, (2) participation in a project funded by the American Pharmaceutical Association to analyze PRODUR best practices, (3) continuing participation in the annual American Drug Utilization Review Symposium, and (4) the gathering of information on states’ best practices that HCFA plans to publish in its Drug Utilization Review Newsletter in June 1996. In connection with these activities, the Department noted that while resources are limited, it plans to continue and improve its role as a clearinghouse dedicated to collecting information and promoting the exchange of information among states on the operation of effective automated PRODUR systems. We had reviewed the documents the Department referred to and agree that these efforts have provided some information to the states on the operation of effective automated PRODUR systems. The Department’s future such efforts will need to provide an ongoing and continuous exchange of information as most states move rapidly toward operational PRODUR systems by the end of 1996. Information in the Inspector General’s report and in the report resulting from the project funded by the American Pharmaceutical Association cited by the Department in its response is based on the states’ early experiences with automated PRODUR systems—primarily 1993 data. And HCFA’s stated plans to issue a DUR newsletter in June 1996 will be only the second newsletter since the states were required to implement DUR programs in January 1993. While agreeing that PRODUR systems are often capable of deterring potentially fraudulent activity, the Department said the primary emphasis of these systems is on patient safety and quality of care. It stated that PRODUR systems are not specifically designed to detect Medicaid fraud and abuse and that retrospective DUR systems may be more capable of detecting potentially fraudulent activity and referring this activity to states’ Medicaid Surveillance Utilization Review units for follow-up. While we acknowledge the safety and quality-of-care orientation, it is being clearly established in states with automated PRODUR systems that tremendous benefits accrue for program integrity—detecting and preventing potentially fraudulent or abusive activity before drugs are dispensed. Relying on retrospective systems alone is needlessly restrictive and expensive, resulting in a “pay-and-chase” approach in which recipients have already received the drugs and the states’ Medicaid Surveillance Utilization Review units must use their resources to conduct investigations and seek whatever recovery they can attain—usually minimal. Finally, the Department recommended caution in attributing the $30 million in cost savings cited in our report to denials due to early refills and ineligibility, and noted that additional methodological issues should be considered. We discussed these issues with HCFA program managers responsible for DUR program implementation. They said that our methodology could overstate savings because our early refill analysis searched for 90 days after an initial denial to see whether a prescription was subsequently filled, while states can allow recipients to get up to a 100-days’ supply of drugs. HCFA stated that with 100-day-supply prescriptions, situations could arise in which more than 90 days would elapse between an initial denial and a subsequent refill, thus eroding program savings identified under our methodology. While such situations could occur, they appear unlikely because of the series of events that would be involved, that is, a recipient’s seeking to refill a 100-day-supply prescription several days after initially filling it, being denied, then waiting over 90 days before attempting a refill. Moreover, further analysis of the data obtained for two of the states in our review showed that only about 1 percent of their total prescription drug claims were for prescriptions with over a 90-days’ supply. In reference to cost savings attributed to ineligibility, HCFA described a specific example in which recipients under states’ medically needy programs may not become eligible for Medicaid benefits until certain portions of their incomes are spent on medical expenses. Thus, some ineligible recipients denied prescriptions may subsequently obtain these prescriptions after they become eligible. Our methodology did not consider ineligible recipients’ later becoming eligible and obtaining previously denied prescriptions. However, this possibility assumes that ineligible recipients would postpone filling denied prescriptions until after they become eligible for Medicaid benefits. Further, HCFA’s example involves those receiving benefits under states’ “medically needy” programs—recipients that accounted for only about 11 percent of the total Medicaid population during fiscal year 1994—the latest data available. We are sending copies of this report to the Secretary of Health and Human Services; the Administrator, Health Care Financing Administration; the Director, Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. We plan no further distribution of this report until 15 days after the date of this letter, unless you publicly announce its contents earlier. At that time, we will release copies to interested parties. Please contact me at (202) 512-5539 if you have any questions concerning this report. Major contributors to this report are listed in appendix V. The following tables provide detailed contractor- and state-provided data on the results of automated PRODUR systems during 1994 and 1995. These data, which we did not independently verify, include (1) the number and cost of claims processed, (2) the types and numbers of drug therapy alert messages sent via the states’ PRODUR systems, (3) the number of overutilization/early refill prescriptions denied and not later filled (highlighted in bold in each table), and (4) the number of claims canceled. Tables for Missouri and Pennsylvania also include data on numbers of claims canceled for each drug therapy alert condition; similar data were not available for the other three states. Total number of claims processed Total cost of claims processed Excessive daily dose/over age 65 Insufficient daily dose for age Overutilization (early refill) Total number of claims processed Total cost of claims processed Current R applies to 90-day therapy Current R exceeds 90-day therapy Current R initiates 90-day therapy Drug-disease interaction Indicated for prior drug’s side effect Overutilization (early refill) Total number of claims processed Total cost of claims processed Excessive daily dose/over age 65 Insufficient daily dose for age Overutilization (early refill) Total number of claims processed Total cost of claims processed Excessive daily dose/over age 65 Insufficient daily dose for age Overutilization (early refill) Total number of claims canceled due to alerts Total number of claims processed Total cost of claims processed Overutilization (early refill) Current Rapplies to 90-day therapy Excessive daily dose/over age 65 Indicated for prior drug’s side effect Insufficient daily dose for age (continued) D.C. Systems operating (29 states) Implementation planned (16 states) No planned implementation (6 states) Definitions of the following drug utilization review terms are from 42 CFR 456.702/705 and state PRODUR manuals. The potential for, or the occurrence of, an adverse medical effect as a result of the recipient’s using two or more drugs together. A significant undesirable effect experienced by a patient due to the prescribed course of drug therapy. Use of a drug that is not recommended for use in the age group of the patient. This can occur when the patient is too old or too young for the given medication. The significant potential for, or the occurrence of, an allergic reaction as a result of drug therapy. The potential for, or occurrence of, an undesirable alteration of the therapeutic effect of a given prescription because of the presence of an existing disease condition—such as an ulcer drug exacerbating a patient’s high blood pressure. Repetitive overutilization without therapeutic benefit. A dosage lying outside the standard daily dosage range necessary to achieve therapeutic benefit. The number of days of prescribed therapy exceeding or falling short of the standard recommendation for the condition for which it was prescribed. Use of a drug in quantities or for durations that put the recipient at risk of an adverse medical result. Use of the prescribed drug is not recommended during pregnancy. The prescribing and dispensing of two or more drugs from the same therapeutic class, such as analgesics (pain relievers), resulting in a combined daily dose that puts the recipient at risk of an adverse medical result, or that incurs additional program cost without additional therapeutic benefit. Use of a drug in insufficient quantity to achieve a desired therapeutic goal. 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 states' experiences with automated prospective drug utilization review (PRODUR) systems in their Medicaid programs, focusing on: (1) how these systems can improve patient safety, control program costs, and reduce fraud, waste, and abuse; and (2) impediments to effective implementation of PRODUR systems. GAO found that: (1) between January 1994 and June 1995, PRODUR systems reviewed screened over 31.7 million prescription drug claims, and alerted pharmacists to potentially inappropriate drug treatments; (2) over 650,000 prescriptions were cancelled because of potential risks to patients; (3) PRODUR systems have reduced Medicaid costs by denying prescriptions to ineligible recipients, preventing hospitalizations due to illnesses caused by inappropriately prescribed drugs, and detecting and eliminating fraud and abuse; (4) PRODUR systems are more cost-effective than traditional review systems; (5) states implement their PRODUR systems differently because there is no guidance on PRODUR system implementation; and (6) each state has its own drug utilization review board which independently sets screening criteria and policies, but states have no systematic way to share experiences and best practices. |
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The Safe Drinking Water Act (SDWA) regulates public water systems, which, until 1996, were defined as systems that provide piped water for human consumption and have at least 15 service connections or regularly serve at least 25 individuals. The Environmental Protection Agency (EPA) has interpreted “human consumption” to include drinking, cooking, bathing, showering, dish washing, and maintaining oral hygiene, an interpretation that has been upheld by the courts. In 1996, the Congress changed the definition of public water system after learning that (1) some U.S. households were relying on untreated water from irrigation canals for some or all of their residential water needs and (2) a federal appellate court had held that such canals were not public water systems within the meaning of SDWA because they do not constitute a system of “piped water” for human consumption. Specifically, the Congress expanded the definition of a public water system to include systems that provide water for human consumption through “constructed conveyances” other than pipes. For the most part, this change affects water suppliers, such as irrigation systems, that provide water through constructed conveyances such as man-made ditches and canals. Under the 1996 amendments, a water supplier must still serve at least 25 people or have at least 15 service connections to be considered a public water system. But in some cases, a connection will not be considered as a “service connection” for the purpose of determining how many connections or users are being served. Thus, systems that provide water through constructed conveyances other than pipes may avoid regulation as public water systems if, for some or all of their connections, the water is used exclusively for purposes other than drinking, bathing, and cooking, or other similar uses; the EPA Administrator or state primacy agency has determined that alternative water (e.g., bottled or hauled water) is provided for drinking and cooking and that this water achieves a level of public health protection equivalent to that provided by the applicable national primary drinking water regulations; or the EPA Administrator or state primacy agency has determined that the water provided for drinking, cooking, and bathing is treated centrally or at the point of entry by the provider, a pass-through entity, or the user to achieve a level of public health protection equivalent to that provided by the applicable national primary drinking water regulations. The 1996 amendments also exclude from regulation certain irrigation districts that were in existence prior to May 18, 1994, if (1) the districts provide primarily agricultural water through piped water systems with only incidental residential or similar use and (2) the systems or their users meet the exclusion criteria, described previously, for alternative water or treatment. Although the requirements for irrigation districts that provide piped water took effect immediately, irrigation systems that provide water through constructed conveyances were given 2 years, or until August 6, 1998, to comply. During the 2-year period, EPA developed guidance to assist state primacy agencies and water suppliers in implementing the new requirements. EPA published its guidance in the Federal Register on August 5, 1998. The potential health effects from consuming untreated water from open canals or ditches can be serious because the water frequently is contaminated with bacteria, including fecal and other disease-causing bacteria. In addition, open canals and ditches are subject to runoff of pesticides and fertilizers from agricultural fields, and aquatic herbicides are used in the water to treat for algae and to control vegetation. Gastrointestinal illness, or diarrhea, is the most common illness caused by bacteriological contamination, but certain pathogens cause hepatitis A infections that may lead to jaundice and liver damage. According to EPA officials, California and Texas are likely to contain the largest concentrations of people relying on water from irrigation systems in the United States. Estimates derived from preliminary user surveys and other information indicate that in California, several thousand households obtain water for human consumption from irrigation systems within the four counties we selected for detailed review. In Texas, a state agency has estimated that about 2,600 households in the two counties we selected for detailed review live in areas that either do not have public water systems or have systems characterized as deficient. Given the wide availability of irrigation water within these two counties and the lack of alternative sources, state and local officials believe that a significant number of these households are likely to be using irrigation water for at least some of the purposes defined as human consumption, such as bathing or washing dishes. Several factors, such as better enforcement of the requirements for safe drinking water in residential developments, indicate that households’ reliance on irrigation water may be on the decline in these counties. In California, the residential use of untreated canal water occurs throughout remote areas in the foothills of the Sierra Nevada and also in Imperial County in the arid southeastern corner of the state, where an extensive system of irrigation canals supports what has become one of the most important agricultural counties in the nation. EPA and state officials indicated that of the foothill counties, Nevada, Placer, and Tuolumne counties are likely to have the greatest number of residential users of untreated canal water. In Texas, state officials believe that the residential use of untreated canal water is concentrated in the lower Rio Grande valley, particularly in Cameron and Hidalgo counties. We included these key counties—Imperial, Nevada, Placer, and Tuolumne in California (see fig. 1) and Cameron and Hidalgo in Texas (see fig. 2)—in our review. The irrigation canals found throughout the foothills of the Sierra Nevada were originally hand-dug earthen ditches constructed in the 19th century for use in gold mining, according to irrigation system managers. Later, these canals began to be used for agricultural irrigation or for the logging industry, and more recently, the canals have also served as a source of residential water for pockets of homeowners living in remote areas of the foothills. Until the past few years, according to state, county, and irrigation system officials, some counties permitted homes to be built in areas that lacked public drinking water systems but had access to untreated irrigation water. The counties generally required that a homeowner relying on irrigation water install a point-of-entry system to treat the water. In both Imperial County, California, and the lower Rio Grande valley of Texas, an extensive network of agricultural irrigation canals has existed since the early 20th century, predating much of the current residential development. Imperial County and Cameron and Hidalgo counties in Texas have many hundreds of miles of irrigation canals and ditches and thousands of residents whose homes are not connected to public water systems. Residential use of untreated canal water is found both in isolated rural areas where the nearest public water system may be miles away and in very low-income communities, often called colonias, that were initially constructed without basic water and sewer infrastructure. Although colonias developed all along the U.S.-Mexican border, they are particularly common in Texas, where, until recently, there has been little regulation of residential development in the unincorporated areas outside municipalities. Thus, the development and sale of parcels of land without access to public services such as adequate water and sewage were permitted under state law. This lack of regulation, coupled with the need for affordable housing in the border region, facilitated the growth of colonias over the last 40 to 50 years. All of the organizations we contacted that work with colonia residents were aware of households in these communities that use irrigation water in their homes. Although much progress has been made in bringing water and sewer services to these communities, some still lack basic services, and even after water service has been installed, some residents cannot afford the cost of connecting to the system. Although precise data are not available, our review suggests that in both California and Texas, several thousand households are probably using untreated water from irrigation systems for one or more of the purposes EPA defines as human consumption, including drinking, cooking, bathing, showering, dish washing, and maintaining oral hygiene. Little is known about exactly how untreated water is being used inside the home, but state and local officials believe that few people are directly ingesting such water through drinking and cooking. According to these officials, most households buy bottled or hauled water for the latter purposes and may be using the untreated water for purposes such as bathing and washing dishes. In California, within the counties we selected for detailed review, several major water suppliers have made preliminary efforts to determine how many of their residential customers are using irrigation water for human consumption. For example, a 1993 customer survey conducted by the Imperial Irrigation District in Imperial County identified approximately 2,800 households with piped connections to the irrigation canals. Since that time, several communities have extended their water lines to provide treated water to nearby colonias, and the district now estimates that it has about 2,200 residential connections. Likewise, the Tuolumne Utility District in Tuolumne County conducted a preliminary survey of its customers; on the basis of this effort, the district’s officials believe that at most, 230 of their 625 customers may use the irrigation water for human consumption. Farther north, in Placer and Nevada counties, other water suppliers estimated the number of households that may be consuming untreated water on the basis of whether the households are receiving irrigation water year-round. Since in the Sierra Nevada foothills agricultural customers do not usually need irrigation water during the rainy winter months, EPA and state officials maintain that year-round use of canal water may indicate that the water is used for human consumption. The Placer County Water Agency reported that it has about 3,700 residential accounts, of which one-half to one-third receive water throughout the year. The Nevada Irrigation District, based in Nevada County, has 4,680 residential customers, including 770 that receive water all year, according to a district official. Managers from these districts were quick to mention that the year-round purchase of irrigation water does not necessarily mean that the water is used for human consumption; some customers may be using the water only for fire protection or flushing toilets. While our review showed that thousands of households may have connections to irrigation canals, the irrigation managers in California we interviewed believed that few people are drinking the untreated water. Rather, such customers are, for the most part, believed to be buying bottled or hauled water for drinking and cooking or to be relying on point-of-entry water treatment units to process all of the water entering the home. In Texas, little or no data have been gathered yet by state agencies or irrigation districts on the number of households relying on untreated irrigation water. However, some efforts have been made to identify the number of people who do not have access to safe drinking water, some of whom are likely to be dependent on irrigation water. For example, the Texas Water Development Board (TWDB) estimated that as of December 1996, the most recent date for which data are available, 45,965 people—or roughly 11,000 households—in the state’s border region were without adequate water service. These individuals were in areas not served by public water systems or had systems determined to be deficient. According to TWDB, about 11,250 of these people—or about 2,600 households—were in Cameron and Hidalgo counties, where residential reliance on irrigation water is believed to be most prevalent. In addition, new colonias continue to develop in these counties, some of which may not yet have been counted by TWDB. While it is not known how many of the households identified by TWDB were relying on canal water, state and water agency officials have told us that using canal water is often the most feasible option available for households without treated water, given the lack of suitable groundwater and the lack of state-regulated water haulers. For example, an investigator from the state attorney general’s office who works in Cameron and Hidalgo counties told us that untreated irrigation water is used “quite extensively” there and that its use is “normal practice” in homes without access to drinking water. He estimated that people were using untreated water in 8 of the 10 colonias in which he has conducted investigations during the last 4 years. Several officials familiar with conditions in the lower Rio Grande valley told us that even where centralized treatment systems are available, significant numbers of colonia households may not be able to afford the cost of connecting to the systems and, thus, may be using irrigation water. Connection fees, including the cost of the water lines from the street into the home, the water meter, meter box, and other fees, range from several hundred dollars to several thousand, according to state officials. In addition to the colonia residents who are likely to be using irrigation water, irrigation canals are the only source of water for some households in remote areas, according to officials from the Lower Rio Grande Valley Water District Managers Association. Many of these households contract with the districts to pay for “yard water” for watering yards and livestock, and some may be using the water inside the home. To varying degrees, the irrigation districts also have some unauthorized users who set up a connection from an existing customer’s line or find some other means to obtain water. The managers could not estimate how many households obtain water without authorization nor whether this water is used for human consumption. The officials generally believe that most of their thousands of paying, nonfarm customers have access to treated water from public systems. As in California, Texas officials do not believe that many households routinely use the untreated canal water for drinking or cooking. They indicated that some households purchase water for such purposes from vending machines that have become prevalent in recent years. Others get treated water for drinking and cooking from the home of a friend or relative who has a connection to a public water system. Hence, the officials believe that the household use of irrigation water in the lower Rio Grande valley is generally confined to bathing, showering, and washing dishes. There are indications that the number of households relying on water from irrigation systems has declined in recent years and will continue to decline in California and, to some extent, in Texas as well. In California, several factors have been at work to decrease the reliance on irrigation systems for residential use. Among these have been the increasing suburbanization of areas north and east of Sacramento, such as Placer County. What were once isolated areas with few homes are now more densely populated with middle- and upper-income communities that have begun to demand the same services, such as centralized water treatment, available in the city. As more people move into these areas, the per household cost of installing a central water treatment system declines, which can also make it more feasible to install such a system. Also, both local and state governmental efforts have been helping to decrease the reliance on untreated water from irrigation systems for residential uses. For example, some county departments, such as Placer County’s Division of Environmental Health, no longer allow the construction of homes that are not connected to an approved water system. For several years, the California Department of Health Services has had a program in place to establish public water systems that supply treated water to clusters of homes served by irrigation systems. As a result of this program, some irrigation systems, including the Nevada Irrigation District and the Placer County Water Agency, also operate public water systems that are subject to SDWA requirements. Moreover, irrigation system managers in California cited the unwillingness of financial institutions to loan money to homebuyers for residences not connected to a centralized water treatment system as a factor contributing to the decline in the reliance on irrigation water. The managers believe that the financial institutions’ policies have already forced, and will continue to force, the remaining residential users of untreated irrigation water to pay for connections to the nearest public water system. A manager from the Nevada Irrigation District said that largely because of these policies, his district sees 75 to 80 conversions of residences from irrigation water to public water systems each year. Texas has also been experiencing a decline in the number of households relying on water from irrigation systems, according to several officials who work in the lower Rio Grande valley. These officials attribute the decline to the many governmental and private efforts made to bring drinking water to these areas. Despite such efforts, household consumption of irrigation water may continue to occur in Texas well into the future. For example, TWDB and TNRCC have predicted that the populations of the four most populous counties along the border with Mexico—including Cameron and Hidalgo—will double, on average, their 1990 levels by the year 2020. Officials working in this area confirmed that small clusters of homes in areas not served by public water systems are continuing to be built, even as older colonias are finally receiving such services. If, in addition to the expected population increases, these counties’ high poverty and unemployment rates continue, the issues of water access and affordability could persist. Much will depend on how successful Texas officials are in enforcing new laws intended to prevent substandard developments. As states and irrigation systems begin to implement the new definition of a public water system, residential users of irrigation systems could face significantly higher water costs, depending on the nature of their alternative water source. While several types of financial assistance are available to offset the cost of some alternatives, in most instances these programs serve multiple purposes, and water suppliers will have to compete with other types of projects to obtain the funding needed to meet the new requirements. According to state and irrigation district officials, most of the households that obtain water from irrigation canals also use bottled or hauled water for drinking and cooking. Although, in some districts, residential users have historically had the right to use irrigation water at no cost, we found that most irrigation districts currently charge users from $100 to about $700 per year. Bottled water is sold at a variety of retail outlets, such as supermarkets and gas stations, as well as at stand-alone facilities at a cost of 20 to 25 cents per gallon. The cost of hauled water is 35 to 40 cents per gallon and may include the cost of renting the tank used to store the water. Overall, we found that the cost of buying bottled or hauled water for drinking and cooking ranges from about $120 to $650 per year. Both California and Texas regulate water haulers, and these purveyors are widely used in California. However, Texas officials told us that there are no state-regulated water haulers in the lower Rio Grande valley, so residents do not have access to water from this source. State and local officials in Texas told us that residents not served by public water systems sometimes obtain treated water through informal arrangements such as trucking in barrels of water obtained from relatives or friends with access to a public water supply. In addition to bottled and hauled water, some households in California and Texas obtain water for residential purposes from private wells. However, neither state maintains accurate records on the number and location of such wells or whether they are actively used. Moreover, concerns about the quality and reliability of the groundwater resources in the areas we selected for detailed review also raise questions about the extent to which people are relying on private wells. For example, in both the lower Rio Grande valley and the southeastern desert area of California, the groundwater is not considered drinkable because of the high levels of dissolved solids. Although the groundwater quality is much better in the foothills of the Sierra Nevada, state and local officials told us that drilling a well into bedrock is very costly and that finding a reliable supply is hit or miss. These officials also told us that some people have obtained connections to irrigation canals because their wells have run dry. Under the 1996 amendments to SDWA, irrigation systems may be excluded from coverage under the act and therefore avoid regulation as public water systems if (1) bottled or hauled water is provided for drinking and cooking or (2) water for drinking, cooking, and bathing is treated centrally or at point of entry by the provider, a pass-through entity, or the user. In each case, the alternative water must achieve the equivalent level of protection provided by the applicable national primary drinking water standards. In addition, according to EPA’s guidance, irrigation systems may pass the costs of providing alternative water on to their customers. As noted earlier, we found that households that supplement the water obtained from irrigation systems with bottled or hauled water for drinking and cooking are spending roughly $120 to $650 per year. If an irrigation district assumes responsibility for providing the bottled or hauled water, as contemplated in EPA’s guidance, the cost of administering this effort could increase costs to users. For example, the Tuolumne Utilities District in Tuolumne County, California, estimated that the cost of providing bottled water to about 60 isolated households would be $82,000 per year if the residents were to pick up the water at a central location and $343,000 per year if the water were delivered to individual households by the district. This amounts to $1,367 or $5,717 per household per year depending on whether the water is delivered. In contrast, the Imperial Irrigation District in Imperial County, California, recently estimated that having water delivered by a water hauler would cost each household $50 to $55 per month, or $600 to $660 per year. Point-of-entry treatment units that are capable of treating raw water from irrigation canals so that it meets the applicable quality standards currently cost $4,000 to $5,000 each, according to California officials. Some households are already using point-of-entry treatment, but state officials questioned the effectiveness of some types of devices. For example, we were told that the swimming pool filters used by some households do not provide sufficient treatment. California officials told us that effective units are relatively expensive because they must treat raw water that is of poor quality, removing bacteriological contamination and periodically high levels of turbidity. In addition, regular maintenance and water quality monitoring are required to ensure that the units continue to perform effectively, and the officials have no assurance that this will be done. As a result of these concerns, California has only once approved the use of point-of-entry treatment as part of a public water system and Texas has never done so. Additional costs may be incurred in some situations where point-of-entry treatment is the alternative selected for compliance. According to irrigation district officials, in some instances, the units may have to be installed at the property line—rather than inside the home—to provide maintenance personnel with easy access. This approach would require the construction of a meter box and a shed to protect the unit from the elements, particularly in areas where freezing occurs in the winter months. The cost of installing a central water treatment system can also vary significantly, depending primarily on the distance between residential customers and the proximity of existing water lines or treatment plants. For example, in the case of projects sponsored by TWDB to bring treated water to colonias in Cameron and Hidalgo counties, the cost per connection ranged from about $2,200 to $3,700. The median cost of a connection was about $2,600 in these projects. For isolated households or very small communities located far from existing water lines, the cost per connection can be much higher. For example, according to a TWDB official, in another project at a colonia located outside the lower Rio Grande valley, water lines had to be extended nearly 10 miles to an existing water treatment plant. The cost per connection for each of the 31 households in this small colonia was nearly $17,000 when the funding commitment was made in 1996. The manager of a rural water supply corporation that provides treated water in the lower Rio Grande valley agreed that the cost of connecting isolated households can be substantial. He estimated that in 1998, the cost of installing pipelines from public main water lines to homes ranges from $2.25 to $3.00 per foot. Thus, a customer who lives 3 miles from the nearest public water main would have to pay more than $35,000 for the pipeline alone. The manager told us that he periodically gets inquiries about hooking up to his system, but people often become discouraged after learning how much it would cost. Similarly, in California, an official with the Placer County Water Agency agreed that location can greatly affect the cost of providing treated water. While the cost of connecting a household to one of this agency’s treated water systems is, on average, about $6,000, the cost can be much higher, depending on the location of the household. For example, in 1996, the agency constructed a small water system to serve 97 households at a total cost of $1.5 million. The average cost per household, including the cost of pipelines from the water main to individual homes, the connection fees, and interest, was $15,000 to $18,000. According to the official, the high cost was attributable to the small number of households served by the system, the distance between customers, and the hilly terrain. Considering the relatively low median income in some areas, some alternative water sources may not be feasible without financial assistance. In Cameron and Hidalgo counties in Texas, the median household incomes were $17,336 and $16,703, respectively. Within California, some areas had significantly higher income levels. Median household income ranged from $22,442 in Imperial County to $37,601 in Placer County. Several sources of funding are available to finance drinking water projects in rural or disadvantaged communities, including projects that will provide treated water to households that rely on irrigation systems. For example, financial assistance is available from the U.S. Department of Agriculture’s (USDA) Water and Waste Disposal programs, the Department of Housing and Urban Development’s (HUD) Community Development Block Grant program, the North American Development Bank, and EPA and state funds earmarked for water and wastewater projects in colonias. In some instances, eligibility for financial assistance is determined by the project’s location, the median household income of local residents, or both. More recently, the Congress authorized a new state revolving loan fund for drinking water projects under the 1996 amendments to SDWA. Under this program, local communities can obtain low-interest loans for constructing or upgrading drinking water systems; states must use a minimum of 15 percent of all dollars credited to the revolving loan fund for assistance to small systems that serve fewer than 10,000 people. States also have the option of providing additional loan subsidies, such as principal forgiveness or below market interest rate loans, to disadvantaged communities. In California, several irrigation districts have submitted “preapplications” to get projects on the state’s priority list for funding to provide treated water to households that currently rely on irrigation canals. In Texas, state officials had not identified such households at the time of the state’s needs assessment and, thus, did not include irrigation systems on the state’s priority list. In addition to the programs that provide funding for basic water infrastructure, some programs, including HUD’s Community Development Block Grant program and USDA’s Water and Waste Disposal programs, may be used to pay for residential plumbing connections. In Texas, EPA has also made about $15 million available for this purpose. Such assistance is important because connection fees can be substantial, depending on the nature of the connection and the types of fees charged by the water authority. In addition, many residences in the colonias need to be upgraded; some water authorities will not approve a connection unless a residence has an enclosed bathroom, which some colonia residences lack. State and irrigation system officials identified a number of potential obstacles to the effective implementation of the new definition of a public water system. The issues range from practical problems, such as identifying the customers that are relying on untreated water and finding affordable alternatives, to questions about EPA’s interpretation of the 1996 amendments and the impact of implementing the new SDWA requirements on irrigation systems’ ability to comply with existing state laws. According to EPA’s guidance, the state is responsible for making a determination about whether individual water suppliers, such as irrigation districts, meet the new definition of a public water system, and this determination rests on two key elements: (1) whether the supplier is “providing” water within the meaning of the statute and (2) whether the water is being used for human consumption. EPA’s guidance states that for the supplier to be providing water to users, an explicit or implied arrangement or agreement of some kind must exist between a supplier and individuals using water. In the absence of an explicit arrangement or agreement, the state should decide whether an implicit arrangement or agreement exists on the basis of (1) whether the supplier knows or should know that water is being taken and (2) whether the supplier has consented to its being taken. Similarly, the determination of whether the water is being used for human consumption is to be based on whether the supplier knows or should know that such use is occurring. The guidance suggests that water suppliers undertake “reasonable” actions within their authority, such as conducting user surveys, to determine whether and how water obtained from irrigation systems is being used for human consumption, as defined by EPA. In both California and Texas, circumstances make it difficult to identify households that are relying on irrigation systems for domestic water. For example, state program managers expect that people will be untruthful about the source and uses of their residential water, particularly if they may be required to pay for costly alternatives. Representatives of irrigation districts also expressed concern about whether people will be forthcoming about their water use. District officials believe that they will not be able to determine whether irrigation water is actually being used inside the home without trespassing on private property or digging up residents’ lawns to locate pipes. They note that even when the connections into a home are obvious, some residents are likely to report incorrectly that the irrigation water is only being used to flush toilets or for some other purpose that does not fall within EPA’s definition of human consumption. Identifying residential users will be difficult in Texas because, according to state officials, most users are unauthorized and are taking irrigation water surreptitiously. Some irrigation districts have contracts with residential users for “yard water” to water lawns and livestock and could use these customer lists as a starting point to identify households that could be using the water for bathing or other categories of human consumption. Identifying unauthorized users may be problematic, however. Irrigation district officials told us that patrolling hundreds of ditches and canals to detect unauthorized connections would place a huge burden on the districts, some of which have only one or two employees. However, according to EPA’s guidance, a supplier would not be expected to go beyond its normal inspections or operation of water conveyances to discover unauthorized diversions, and a supplier that takes actions that a property owner would ordinarily take to maintain his or her property rights should be able to demonstrate that there is no implied arrangement to “provide” water. A related issue is whether irrigation systems “should know” that households located in areas that are not served by public water systems—and where the quality or quantity of the groundwater is not suitable for private wells—are likely to be relying on untreated water from irrigation canals for human consumption. EPA officials told us that the determination of which households constitute service connections will have to be made on a case-by-case basis considering all relevant circumstances. In California, state officials say that it will be some time before they are even able to identify the universe of water suppliers that provide water through constructed conveyances and have enough residential users to meet the new definition of a public water system. According to one estimate, California has about 900 governmentally chartered districts that perform some type of water-related function. In addition to irrigation districts, a variety of other entities may provide water for agricultural purposes and, thus, could be subject to the new requirements. These include county and state water districts, water conservation districts, flood control districts, water reclamation districts, and special act districts. Another problem in both California and Texas, according to state and irrigation district officials, is that in an unknown number of cases, more than one household may be obtaining irrigation water from a single authorized connection. Since such accounts are billed to a single household, irrigation district officials cannot readily determine how many households are actually receiving the irrigation water. The cost of alternative water sources can be significant, particularly in the case of centralized or point-of-entry treatment. Although bottled or hauled water can be considerably less expensive than some of the treatment alternatives, Texas officials have reservations about allowing this option because it may not protect public health sufficiently. Allowing the use of bottled or hauled water for drinking and cooking would mean that people could continue to use untreated water for bathing and other domestic purposes. According to Texas officials, this raises concerns about potential health effects from exposure to untreated irrigation water. Texas officials also have reservations about allowing the use of point-of-entry treatment as a compliance option because, as we noted earlier, they are skeptical about finding an effective device, given the likelihood of bacteriological contamination and periodically high levels of turbidity in irrigation water. The officials also have concerns about the amount of maintenance and monitoring required to ensure that these devices are continuously providing safe drinking water. California officials told us that while connecting households to centralized treatment systems is the most protective and desirable alternative, they believe that the costs of implementing this option are formidable. In some areas, the median household income is too high for the residents to be eligible for some types of financial assistance. In addition, they told us that the state’s Proposition 218 will make it difficult to gain the support of existing customers of water districts to help pay the costs of hooking up additional households. Proposition 218 prohibits any local government in California, including special districts, from imposing or increasing any special tax unless at least two-thirds of the voters approve. Thus, according to these officials, Proposition 218 would have the effect of making it more difficult for water districts to issue bonds to finance capital improvements. In commenting on EPA’s draft guidance on implementing the new definition of a public water system, irrigation districts and other water suppliers raised several concerns about the timing and content of the guidance. Among other things, they argued that in its efforts to develop implementing guidance, EPA consumed nearly all of the 2-year grace period that was intended to give water suppliers time to achieve compliance by the August 6, 1998, effective date of the new requirements. In addition, because the guidance is not legally binding and does not impose legal requirements as a regulation would, water suppliers say that they are left with uncertainty about what they need to do to comply with the new provisions of federal law. Furthermore, the guidance recommends, in several instances, that the states establish requirements or make case-by-case determinations. Thus, even though EPA issued its final guidance by the effective date of the requirements, these water suppliers believe that they will not have time to meet the compliance deadline because of the responsibilities that EPA has delegated to the states. According to EPA, the requirements in the law itself constitute the legally binding obligations for water suppliers. EPA officials told us that the guidance is only intended to facilitate implementation and provide clarification on some issues. State officials in both California and Texas told us that they, too, had been awaiting EPA’s final guidance so that it could be used as a basis for their own implementation strategies. However, they said that as a practical matter, implementing the new definition of a public water system will be an iterative process; as they learn of irrigation systems that may be subject to the new requirements, they will work with the systems, make the necessary determinations, and ensure compliance. Some irrigation districts, citing legislative history, commented that EPA went beyond the intent of the Congress when, in its guidance, the agency said that states should determine whether a water supplier qualifies as a public water system on the basis of whether the supplier “knows or should know” that residential connections exist or that the individuals are using the water for human consumption. According to the Association of California Water Agencies, there is no reason that irrigation districts “should know” whether or how people are using irrigation water inside their homes when the supplier (1) is not in the business of selling or distributing treated water and (2) does not issue permits for private wells or permits for home occupancy. In addition, many water suppliers require their residential users to sign some type of waiver stating that they must not use or are not using irrigation water for human consumption. The Imperial Irrigation District commented that such waivers should be considered as evidence of whether or not the supplier knows or consents to such use. In responding to these comments, EPA modified its draft guidance to clarify how the “knows or should know” standard will be applied. For example, instead of expecting water suppliers to take “any necessary actions” to determine whether people are using irrigation water for human consumption, the revised guidance states that water suppliers should make “reasonable” efforts “within their authority” to determine the nature of their customers’ water use. Also, EPA agreed that waivers could be used as evidence of a lack of consent by the supplier, but should not be determinative on this issue. In addition, as noted earlier, EPA officials expect that these determinations will be made on a case-by-case basis considering all relevant circumstances. The Association of California Water Agencies also commented that EPA ventured beyond the intent of the law when the agency decided that alternative water must be “provided” by the irrigation districts. They argued that the law is silent on who is to be responsible for providing the bottled or hauled water. Moreover, they pointed out that it makes no difference who the provider is—as long as the water quality meets the applicable standards. However, EPA officials told us that on the basis of the legislative history, their view is that the Congress clearly intended that alternative water would be provided by the water suppliers. In both California and Texas, implementing the new SDWA requirements could affect irrigation systems’ ability to comply with existing state laws. For example, under the 1996 amendments to SDWA, irrigation districts and other special purpose systems that also have residential users must be regulated as public water systems unless they can meet certain exclusion criteria. However, by state law, irrigation districts in Texas are not authorized to provide drinking water. Texas officials say that amending the state drinking water statute to incorporate the new definition of a public water system does not resolve the problem; additional statutory changes will be required to amend the state law governing irrigation districts. Under the applicable state laws, the California and Texas irrigation districts cannot refuse to supply irrigation water to any taxpaying member of a district who requests a connection. However, if these households use the irrigation water inside their homes, under EPA’s guidance, the district may be subject to liability under SDWA if it knew or should have known that the water was being used for human consumption—even if the district provides the water only on the condition that it will not be used for human consumption. Irrigation district representatives expressed concern that until recently, county planning authorities were approving new development without evidence of a safe drinking water source. Residents who turned to the irrigation canals for domestic water may now be counted as “service connections,” and the irrigation districts could be subject to regulation as public water systems if they cannot use the exclusion provisions within the statute to avoid regulation. Another implementation issue, cited by Texas officials, was the potential infringement by irrigation districts on the designated service areas granted to rural water supply corporations. Regulated under the state’s Public Utilities Regulatory Act, these corporations are nonprofit organizations, run by boards of directors, that receive franchise rights to provide drinking water in a specific geographic area. Within its certified area, a water supply corporation has the responsibility to provide drinking water as well as the exclusive right to do so—that is, no one else is allowed to provide drinking water to residents within that area. Texas officials expressed concern that if irrigation districts are regulated as public water systems and must supply treated water to residential users, the districts would be impinging on the exclusive rights of water supply corporations to supply these users. They estimated that 50 to 80 percent of the people who are currently getting water for residential uses from the irrigation canals are within the service areas of water supply corporations. As a result of the 1996 amendments to SDWA, states gained significant new responsibilities, including the implementation of the new state revolving loan fund for drinking water projects, source water assessment and protection programs, capacity development programs for small water systems, expanded operator certification programs, and several new contaminant regulations that are expected to have a major impact on public water systems. According to state officials in both California and Texas, the bulk of their attention and resources will be devoted to these higher-priority activities rather than implementing the new definition of a public water system. Nevertheless, each state has begun to develop an implementation strategy. EPA officials also acknowledged that implementing these new requirements is a relatively low priority compared with the agency’s other responsibilities under the 1996 amendments. We provided a draft of this report to EPA, the California Department of Health Services, and the Texas Natural Resource Conservation Commission. We obtained comments from EPA officials, including the Director of the Implementation and Assistance Division of the Office of Ground Water and Drinking Water, and state officials responsible for overseeing drinking water quality. EPA agreed with the report, noting that it accurately captures the issues pertaining to the domestic use of untreated irrigation water, and state officials also agreed with the facts in the report. The EPA and state officials also provided updated information and technical comments, which we incorporated throughout the report as appropriate. The scope and methodology we used for our work are discussed in appendix I. We performed our work from September 1997 through September 1998 in accordance with generally accepted government auditing standards. We will send copies of this report to the EPA Administrator and other interested parties. We will also make copies available to others on request. Please call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix II. In conducting our review, we collected data from a wide variety of sources, including the Environmental Protection Agency’s (EPA) Office of Ground Water and Drinking Water and Office of Enforcement and Compliance Assurance, the U.S. Department of Agriculture’s (USDA) Rural Utilities Service, the National Rural Water Association, the National Water Resources Association, the National Mining Association, the Association of State Drinking Water Administrators, and selected states. We chose California and Texas for detailed review because they (1) were identified by EPA officials as the states likely to be the most affected by the new definition of a public water system, (2) are agricultural states with many irrigation districts, and (3) have colonias with inadequate water and wastewater infrastructure along the U.S.-Mexican border. Within these states, we focused on selected counties where reliance on irrigation systems is most common according to federal and state officials. In Texas, residential use of these systems is concentrated in the lower Rio Grande valley in Cameron and Hidalgo counties. In California, residential use is most prevalent in the southern desert area (Imperial County) and the foothill areas of the Sierra Nevada (Nevada, Placer, and Tuolumne counties). To determine the number and location of households that rely on irrigation systems for some or all of their residential water needs, we gathered data using a case study approach in California and Texas. Within each state, we interviewed officials responsible for managing the public drinking water program and financing water infrastructure improvements, including the California Department of Health Services, the California Department of Water Resources, the Texas Natural Resource Conservation Commission, the Texas Water Development Board, the Texas Office of the State Attorney General, and the local offices of USDA’s Rural Utilities Service. In addition, we met with representatives of irrigation districts from each of the selected counties, including the Association of California Water Agencies and the Lower Rio Grande Valley Water District Managers Association, and other knowledgeable officials. To supplement the testimonial evidence, we obtained and analyzed relevant reports and other supporting documentation. The state and local officials we interviewed in California and Texas also provided information on the sources and costs of the water used by households relying on irrigation systems and the cost and feasibility of alternative sources. Where residential customers contracted for irrigation water, we collected data on the average cost per household. In addition, we obtained cost data from purveyors of bottled and hauled water in the selected counties. To the extent possible, we obtained actual cost data on completed projects involving the connection of clusters of households to existing public water systems or the construction of new small systems in previously unserved areas. In addition, within EPA’s Office of Ground Water and Drinking Water, we obtained cost data from the Treatment Technology Team, which is responsible for developing information on affordable and effective compliance technologies for small water systems. Unless otherwise stated, all costs included in our report are stated in current year dollars. To identify implementation issues that are likely to affect the states’ and irrigation systems’ ability to comply with the new definition of a public water system, we interviewed EPA officials responsible for developing guidance on the new requirements as well as state and irrigation district officials responsible for implementing the new requirements. We also reviewed EPA’s draft and final guidance as well as the comments received on the draft guidance. Luther Atkins Charles Bausell Ellen Crocker Steve Elstein Karen Keegan Steve Licari Luann Moy Susan Swearingen 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. | Pursuant to a congressional request, GAO provided information on the: (1) location and number of households that rely on irrigation systems or other special purpose water systems for some or all of their residential water needs; (2) cost of the water used by such households and the cost and feasibility of alternative sources; and (3) implementation issues that are likely to affect the states' and special purpose water systems' ability to meet the new requirements. GAO noted that: (1) according to officials of the Environmental Protection Agency, California and Texas are likely to contain the largest concentrations of people relying on water from irrigation systems in the United States; (2) preliminary estimates by irrigation systems managers indicate that in California, in the counties where residential use of irrigation water is believed to be most prevalent, several thousand households are relying on such water for some or all of their residential water needs; (3) several factors make it difficult to obtain precise data on the extent of usage, particularly the uncertainty about whether and how water from irrigation and other special purpose systems is being used inside the home; (4) given the extensive availability of irrigation water within these Texas counties and the lack of alternative sources, state and local officials believe that a significant number of these households are probably using irrigation water for at least some residential water needs; (5) the vast majority of the households relying on such water in both California and Texas are believed by state, local, and irrigation system officials to be purchasing bottled or hauled water for drinking and cooking and using the water from irrigation and other special purpose systems for other uses; (6) residential users of irrigation systems currently pay from $100 to $700 per year for untreated water that is supposed to be used only for nondomestic purposes; (7) the cost of buying bottled or hauled water currently ranges from $120 to $650 per year; (8) other alternatives can be considerably more expensive and may not be affordable without financial assistance; (9) several factors affect the cost of treatment, including the quality of the source water, the terrain, the distance between residential customers, and the proximity of existing community water systems; (10) most residential users of special purpose water systems are located in areas with relatively low median incomes, but federal and state funding is available to help offset the cost of some alternatives; (11) both the difficulty of identifying residential users and the costs and technical issues associated with finding alternatives to irrigation water are likely to present major challenges to states and special purpose water systems when implementing the new requirements established in the 1996 amendments to the Safe Drinking Water Act; and (12) state officials also indicated that their ability to implement the new requirements would be affected by competing demands for the limited resources of the states' drinking water programs. |
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Federal law enforcement agencies pursue fugitives wanted for crimes that fall within their jurisdictions. Generally, federal fugitives are persons whose whereabouts are unknown and who (1) are being sought because they have been charged with one or more federal crimes; (2) have failed to appear for a required court action or for deportation; or (3) have escaped from federal custody. The agencies we contacted generally required that information on these persons be entered quickly onto the NCIC wanted person file to facilitate location by others and enhance public and law enforcement personnel safety. NCIC has the nation’s most extensive computerized criminal justice information system. Its system consists of a central computer at FBI headquarters in Washington, D.C.; dedicated telecommunications lines; and a coordinated network of federal and state criminal justice information systems. NCIC’s system consists of millions of records in 14 files, including files on wanted persons, stolen vehicles, and missing persons. Over 19,000 federal, state, and local law enforcement and other criminal justice agencies in the United States and Canada have direct access to NCIC. An additional 51,000 agencies can access NCIC indirectly through agreements with agencies that have direct access. An Advisory Policy Board composed of representatives from criminal justice agencies throughout the United States is responsible for establishing and implementing the system’s operational policies. NCIC and the Advisory Policy Board also receive suggestions from a federal working group composed of several representatives from federal law enforcement agencies, which include ATF, the Customs Service, INS, and USMS. The FBI is responsible for the overall management of NCIC. Agencies entering data onto the NCIC files are expected to comply with the specifications and standards set by NCIC and must perform periodic reviews to ensure that the information they entered on NCIC is still valid (e.g., that a valid arrest warrant still exists). NCIC personnel are to also periodically review the agencies’ NCIC records. Despite agencies’ policies calling for entry of fugitives onto the NCIC wanted person file as early as possible after issuance of an arrest warrant, many fugitives’ data, including those fugitives classified as dangerous, were entered long after arrest warrants were issued. NCIC written policy calls for timely entries, which it defines as entry made immediately after a decision is made to (1) arrest or authorize arrest and (2) extradite the located fugitives (extradition generally involves state or local law enforcement agencies). NCIC officials said that when they review an agency’s use of NCIC records they consider entries made after 24 hours (48 hours if a weekend intervenes) as untimely. However, participating agencies are not required to adhere to the suggested NCIC criteria for timeliness. Rather, each agency sets its own criteria on when to enter fugitives onto the wanted person file. FBI, USMS, and ATF policies for entering fugitives onto the wanted person file required entry shortly after the arrest warrant, notice of escape, or other document authorizing detention was issued: the FBI and USMS required immediate entry, meaning within 24 hours; ATF allowed up to 10 days for entry if the delay served a law enforcement purpose. Customs Service policy called for entry after reasonable efforts to locate the fugitive had failed and essentially defined “reasonable” as being after all investigative leads on the fugitive’s location have been exhausted. INS’ policy provided no time frame for making the entry. Figure 1 illustrates the entry times, by time elapsed since arrest warrant issuance, for the 20,968 FBI, USMS, ATF, and Customs Service fugitive records on the wanted person file as of April 6, 1994, and for the 3,794 of those records that were entered after September 30, 1993. As figure 1 shows, only 34 percent of all fugitives were entered onto the file within 2 days and slightly more than half (54 percent) were entered within 1 week. These entry times were better for the records entered after September 30, 1993. For example, 41 percent were entered within 2 days and 61 percent within 1 week. These entry times and others are shown in appendix II (table II.1). Agencies are to enter a caution notation on the wanted person file records of fugitives who are considered dangerous or suicidal or who have a serious medical condition. According to FBI and USMS officials, most fugitives with a caution notation on their file should be considered dangerous. Figure 2 illustrates the entry times for the 7,864 FBI, USMS, ATF, and Customs Service fugitive records with a caution notation on the wanted person file as of April 6, 1994, and the entry times for the 1,838 of these caution-noted records that were entered after September 30, 1993. Despite the caution notation, as figure 2 shows, only 36 percent of all caution fugitives were entered onto the file within 2 days and slightly more than half (52 percent) were entered within 1 week. Entry times were better for the records entered after September 30, 1993. For example, 42 percent were entered within 2 days and 59 percent within 1 week. These entry times and others are shown in appendix II (table II.2). As noted earlier, except for the Customs Service, the agencies whose records we analyzed generally required that their fugitives be entered onto the wanted person file soon after the arrest warrant was issued. However, the agencies did not always comply with their own policies. For example, the FBI’s policy is to enter fugitives onto the file as soon as the decision to make an arrest is made or immediately after the arrest warrant is issued. The FBI has defined “immediately” to mean not more than 24 hours after the arrest warrant is issued because it believes that failure to promptly enter fugitive records onto the file places every member of the criminal justice system, as well as the general public, at risk. However, our comparison of NCIC entries with arrest warrant dates revealed that only 31 percent of the FBI’s entries overall and 34 percent of caution fugitive entries were made on the same day of the arrest warrant, and 48 percent and 50 percent, respectively, were made by the end of the next day. Table 1 shows the agencies’ reported policies for entering fugitives onto the NCIC wanted person file and entry times for their fugitives on the file as of April 6, 1994. Except for the Customs Service, the agencies’ entry times for the April 6, 1994, records that were entered onto the wanted person file after September 30, 1993, were somewhat shorter than the times for all of the April 6 fugitive records. For example, 79 percent of all FBI records on the file as of April 6, 1994, were entered within 4 weeks versus 84 percent of the records entered after September 30, 1993. The Customs Service entered 42 percent of its April 6 records within 4 weeks versus 31 percent of those entered after September 30, 1993. More statistics on entry times for records on the April 6 wanted person file are included in appendix II (tables II.3 through II.6). All of the agencies we contacted believed that unwarranted delays in entering fugitives onto the wanted person file could adversely affect timely apprehensions and endanger lives. Many fugitives are apprehended by an agency other than the one responsible for entering them onto the file. Therefore, timely entries onto the file allow law enforcement agencies that come into contact with the fugitives for other reasons, such as minor traffic violations, to check the file and detain these fugitives immediately. NCIC officials told us they developed a procedure to compensate, in part, for delayed entries. Under this procedure, NCIC is to compare a new wanted person file entry with all file queries made 72 hours prior to the entry. When there is a match, NCIC officials are to notify the involved agencies. While the fugitive, for example, may not have been detained after a traffic stop because he or she was not on the file when the query was made, the subsequent matching could provide leads to the person’s location. NCIC officials told us that in June 1995, for example, this procedure provided 369 leads from the wanted or missing person files that resulted in 9 persons being arrested or located. However, the officials did not know how many of the 369 leads involved fugitives who were not apprehended because they had fled before the delayed match occurred. Except for the FBI internal inspection program and USMS’ program reviews, the agencies we contacted did not systematically monitor or have information on the time taken to enter fugitives on the wanted person file. Nor did they have information on the reasons for delays in entering fugitives. Moreover, NCIC had done limited reviews of ATF’s, the Customs Service’s, and USMS’ entry times on the wanted person file. The FBI’s internal inspections are to include a review of entry times for a sample of wanted person file records. According to the FBI, 24 (or 65 percent) of the 37 FBI field office inspections completed between October 1993 and July 1995 had findings regarding the failure to make timely entries. For 21 of the 24 field office inspections, officials reported that over 10 percent of the entries they reviewed were not in compliance with entry time requirements. Of the 21 inspections, officials reported that 12 showed delays in over 30 percent of the entries reviewed and that 4 showed delays in over 50 percent of the entries reviewed. Furthermore, 7 of the 24 inspections reported a median delay of 1 week or more, 10 were less than a week, and 7 did not identify the number of days the entries had been delayed. The reports generally did not identify reasons for delayed entries, but officials recommended that the office heads strengthen administrative controls to prevent future delays. Also, 3 of the 24 reports noted that entry delays were found during the preceding review of the involved offices. The remaining 21 reports, based on data the FBI provided us, made no mention of prior inspections. Of the 21 reports, 7 were done during fiscal year 1995. On the basis of information provided by the FBI during our previous fugitive work, we determined that at least three of the seven reports involved offices that were found to have entry time problems during their prior inspections. According to a USMS program review official, its internal program reviews involved looking at some fugitive cases, and these reviews generally found that entries were made within 1 or 2 days after the arrest warrant date. NCIC officials told us that they had reviewed wanted person file use by ATF, the Customs Service, and USMS at least once since 1992. The officials do not review FBI use, relying instead on the FBI’s inspection program. An NCIC 1995 report covering various federal agencies, including ATF and the Customs Service, reported problems with one of the Customs Service communications centers that entered records onto the wanted person file.The report stated that there was a significant delay in entering records and that the average delay ranged from 1 week to 1 month. It did not identify the number of records with problems or the reasons for delays. But, it noted that a Customs Service headquarters official contacted the communications center about taking corrective action. Another NCIC 1995 report involving a review of selected USMS offices and other agencies reported that all records reviewed had been entered in a timely manner. FBI, USMS, ATF, and Customs Service officials we briefed on the results of our analyses of the wanted person file generally expressed concern about our findings. None could explain specifically why entries were delayed. They believed that some were the result of employees becoming involved with higher priority matters (e.g., responding to another more immediate case) or delaying entry for a valid law enforcement purpose (e.g., the opportunity to simultaneously arrest several suspects). However, all agreed that some delays were due to the lack of oversight or various other problems that could be addressed. For example, USMS officials said there might have been some delays in their being notified by (1) the courts of persons who failed to make a required court appearance or (2) the Drug Enforcement Administration regarding drug case fugitives that the USMS is responsible for pursuing. As a result of our work, FBI, USMS, ATF, and Customs Service officials committed to examining their more recent entry times and identifying actions they would take, if necessary, to address any problems. Because of our findings regarding these agencies’ entry times, INS officials also said they would take action to help ensure that INS field offices submit their fugitive cases for entry onto the wanted person file in a timely manner. A Supervisory Special Agent representing the FBI Violent Crime and Fugitive unit in headquarters said his unit reviewed the entry times for all entries to the wanted person file from January 1994 through June 1995. He said they found that 58 percent of their fugitives had been entered within 1 day after the date of the arrest warrant and 78 percent within 10 days. These times were better than the overall rates (48 percent by the next day and 79 percent within 4 weeks) we found for all FBI fugitives on the April 6, 1994, wanted person file. The FBI official further stated that the entry times for the persons wanted for the federal crime of unlawful flight to avoid prosecution were much better (80 percent entered in 1 day) than the entry times (40 percent entered in 1 day) for those wanted for other federal crimes, such as bank robbery. In commenting on a draft of this report, FBI officials noted that it was imperative that delays be kept to an absolute minimum and that they would continue efforts to minimize entry delays. They said that the FBI inspection program would continue to audit the field offices’ entries to help ensure the timely entry of fugitives without unmitigated delay. USMS officials said they would review their entry times and, if necessary, send out reminders to their field offices about prompt entries. Entry within 24 hours is one of the new performance measures they plan to use for field offices. The officials believe that this, along with their internal reviews and the periodic NCIC audits, should minimize any future problems with entry times. ATF officials said they reviewed some of their recent entries and the fugitive cases from our work involving entry times over 3 months, which we provided at their request. They said that their review validated our findings and that they advised the agents in charge of the involved ATF field offices of the problems and the need for corrective action. Overall, ATF officials said they would enhance their capacity to monitor entry times and identify problems. Specifically, they said their communications center will obtain more information when making entries onto the wanted person file as requested by ATF’s field offices. The field offices are to be contacted about entries made after 15 days (ATF’s 10-day period when entry may be delayed for a valid reason plus a 5-day grace period). The officials also noted that ATF’s communications center staff will review entry times during the periodic validation checks they make of the agency’s wanted person file records. They also stated that ATF’s internal inspections staff will consider looking at entry times when they conduct inspections of ATF’s field offices. ATF officials said they expected a marked improvement in their entry times within a year. “Effective immediately, whenever an arrest warrant is issued pursuant to a Customs investigation and the arrest of the subject is not anticipated within a reasonable amount of time, a Customs Fugitive Report will be faxed to the Communications Center (for entry into NCIC) within 24 hours. A reasonable amount of time should be that operationally necessary to effect the arrest of the subject, but should not exceed 10 days.” Furthermore, the Customs Service’s coordinator said the criteria will note that there can be exceptions, such as the need to avoid interference with an ongoing investigation. When the delay is no longer needed, the reason for the delay is to be identified on the submitted fugitive report. Customs Service officials also told us that their agency’s office that oversees periodic validation checks of Customs Service wanted person file records will now also look at entry times and will use “within 24 hours” as the criterion for timely entry. As a result of our findings involving other law enforcement agencies and their desire to address problems that may exist or occur, INS officials told us they will add a reminder about the need for timely entries on the form that their field offices complete and that INS headquarters officials then use to make entries to the wanted person file. Noting that INS had only been using the file since 1991, the officials said they expect, as their use of NCIC grows, to develop improved ways for promoting timely use of the wanted person file as well as other NCIC files. USMS, ATF, Customs Service, and INS officials noted that the periodic audits of the wanted person file by NCIC officials would help agencies identify problem areas. However, NCIC officials told us that they are now doing less checking of entry times because of increased workload and staff downsizing. The FBI, USMS, ATF, and the Customs Service entered many fugitives onto the wanted person file long after their arrest had been authorized. This occurred despite policies generally calling for quick entry and the view that use of the wanted person file aids apprehension and public and law enforcement personnel safety. In response to our findings, the FBI, ATF, and the Customs Service did their own reviews and noted similar entry time problems. USMS officials said they would review their entry times. Given the concern about public and law enforcement personnel safety and fugitive apprehension, we believe it is important that NCIC and its participating agencies have clear, written policies calling for and defining immediate entry and setting forth any exceptions. While there seems to be agreement on the need for prompt entry, there is no generally accepted definition of immediate entry. However, a consensus seems to be evolving, at least among the agencies we reviewed. NCIC officials consider entry after 24 hours to be untimely, although NCIC has not made this a part of its written policies. FBI and USMS officials told us that although a definition does not appear in written form, immediate entry meant within 24 hours. The Customs Service plans to adopt and put the 24-hour criterion in writing. Exceptions to immediate entry could be allowed for those cases where an arrest is expected to occur quickly or for other established operational reasons. Furthermore, adherence to the policies could be better ensured if the agencies periodically monitored and reviewed entry times and reasons for delays and communicated problems and suggested actions to their field offices. Finally, although we did not examine the entry times for all law enforcement agencies in the Departments of Justice and the Treasury, we believe that the same reasons for timely entry generally would apply to these other agencies. Moreover, it seems reasonable that timely entries would be of concern to law enforcement organizations in other federal agencies. We recommend that the Attorney General require the Directors of the FBI and USMS and the Commissioner of INS and that the Secretary of the Treasury require the Director of ATF and the Commissioner of the Customs Service to ensure that they have written policies that require immediate entry of fugitives onto the NCIC wanted person file, unless imminent arrest is expected or other mitigating reasons exist. In this regard, we also recommend that the Attorney General, as the official ultimately responsible for NCIC and the wanted person file, seek consensus among federal law enforcement agencies on a definition of immediate entry and include this definition as guidance in the NCIC operating policies on the use of the wanted person file. To ensure that timely entries are made, we recommend that the Attorney General and the Secretary of the Treasury require the agency heads to establish and implement measures for ensuring compliance with the policy for immediate entry of fugitives’ data onto the NCIC wanted person file, including periodically reviewing entry times and identifying and evaluating reasons for delays. Also, we recommend that the Attorney General and the Secretary of the Treasury require the heads of other agencies within their respective Departments that use the wanted person file to determine whether they have adequate entry time policies and monitoring mechanisms and, if not, to establish such policies and mechanisms. Furthermore, we recommend that the Attorney General require the FBI Director, working with the NCIC Advisory Policy Board, to (1) advise law enforcement organizations in federal departments and agencies outside of the Departments of Justice and the Treasury of the importance of timely entry and (2) encourage them to determine whether they have adequate entry time policies and monitoring mechanisms. We requested comments on a draft of this report from the Attorney General and the Secretary of the Treasury. Responsible Department of Justice officials from the Office of the Assistant Attorney General for Administration, the FBI, INS, and USMS provided Justice’s comments in a meeting on December 11, 1995. Responsible Department of the Treasury officials from the Office of the Under Secretary for Enforcement, ATF, and the Customs Service provided Treasury’s comments in a meeting on December 5, 1995. Justice officials said that the Department generally agreed with our findings and recommendations and that the Department’s component agencies recognize the need for timely wanted person entries to protect law enforcement officers and the general public and to assist in the location of criminal and alien absconders. They said, however, that setting a single policy for timeliness and measuring timeliness is not a simple matter. They specifically noted the following. A myriad of reasons may preclude the entry of a wanted person within 24 hours of the date of the warrant. For example, entry might be delayed because of (1) insufficient data (e.g., date of birth) to properly identify the fugitive; (2) circumstances germane to a particular case (e.g., where the subject is given opportunity to surrender in exchange for the subject’s cooperation); or (3) the involvement of sealed indictments, particularly in multiple subject cases where the government does not want to disclose ongoing investigations not ready for indictment. When modifying records, it is sometimes easier to delete the entry and reenter it. This would result in an entry date on the wanted person file that appears to be late, but does not reflect the earlier data entry. Compelling the entry of all INS fugitive alien cases within a specific time frame will not meet the criteria required for successful conclusion of the cases in many instances. For example, in INS’ failure to surrender cases, entry is dependent on meeting certain criteria (e.g., has failed to appear for deportation upon demand by INS) rather than a specific time. When measuring timeliness, it would be more useful to evaluate the reasons for delayed entry rather than reviewing the entry’s date against that of the warrant. We recognize that not all fugitives can or should be entered onto the wanted person file within a short time frame and that some entry dates on the file may be incorrect. How much of the delay we found is due to valid reasons or incorrect dates is unknown. We noted earlier in this report that the agencies could not explain specifically why entries were delayed but did identify both valid and invalid reasons why delays might occur (see pp. 11-12). Our recommendations recognize that entry policies need to allow for delays for valid reasons and that monitoring mechanisms need to identify and evaluate reasons why specific entries were delayed. Furthermore, we believe that the findings of the FBI’s inspection program, the checks made by ATF and Customs Service officials after we brought our findings to their attention, and the agencies’ overall agreement with our findings and recommendations make it clear that substantial delays have occurred for invalid reasons and that the agencies can improve upon the entry times we found. Also, the Justice officials said that despite the many reasons for delaying entry and INS’ particular situation, actions have been taken or are being taken to better define and ensure timely entry of fugitives onto the wanted person file. Concerning changes to overall NCIC policy guidance, they said that any changes must be made pursuant to established procedures and that the FBI would formally submit our recommendations for review by the NCIC’s Advisory Policy Board during meetings to be held in the spring of 1996. The Justice officials also noted that the FBI, INS, and USMS are initiating or have been using systems for ensuring timeliness of fugitive entries. They cited the FBI inspection program, which they said recently identified a 22-percent unmitigated delay in fugitive entries in one field office and led to the office taking corrective action. Referring to plans for the USMS to take over responsibility for INS’ criminal fugitives, they noted that INS plans to meet the USMS entry criteria (i.e., immediate entry, which USMS officials earlier told us meant within 24 hours). They also noted that USMS plans to evaluate entry times as part of a system to assess the performance of its field offices on fugitive cases. Treasury officials generally agreed with the recommendations we made to their Department. Furthermore, given that Treasury works closely with Justice to address federal law enforcement issues, the Under Secretary’s representative expressed Treasury’s interest in working with Justice to address our recommendations to seek a consensus on a definition of immediate entry and to bring the need for adequate entry time policies and monitoring mechanisms to the attention of other federal law enforcement organizations. Concerning specific agency actions, the ATF officials noted that ATF (1) issued a memorandum to its field offices in 1995 reiterating its entry time policy and outlining steps taken or planned to enforce it, including establishing audit and follow-up procedures, and (2) will further revise its policy guidance to call for entry within 24 hours. The Customs’ official noted that the Customs Service has issued revised policy guidance to require entry within 24 hours and will follow through on measures to ensure compliance as discussed on page 13 of this report. We are sending copies of this report to interested congressional committees and members. We are also sending copies to the heads of various other federal agencies that had records on the April 6, 1994, wanted person file for their information. These agencies include the Department of Defense, Department of State, and the U.S. Postal Service. We will also make copies available to others upon request. The major contributors to this report are listed in appendix III. If you have any questions concerning this report, please call me on (202) 512-8777. Our overall objective was to follow up on information from earlier work that seemed to show that federal law enforcement agencies were not timely entering in their fugitives onto the NCIC wanted person file. Specifically, we sought to identify (1) how long federal agencies took to enter fugitives onto the wanted person file; (2) what information the agencies had on entry times and the means used to monitor entry times; and (3) what actions agencies took, considered, or could take to reduce any entry delays. We focused on the FBI, INS, USMS, ATF, and the Customs Service. These agencies accounted for 78 percent of the records on the April 1994 wanted person file that we acquired during our earlier work. They were also the principal fugitive-hunting agencies within the Justice and Treasury Departments, the two departments mainly addressed in our earlier fugitive work. To accomplish our objectives, we analyzed principally the wanted person file data obtained on a prior review of interagency cooperation of federal fugitive activities. We also interviewed officials and reviewed various documents obtained at the headquarters offices of the FBI, INS, USMS, ATF, and the Customs Service. The wanted person data involved federal fugitive records on the wanted person file as of April 6, 1994. We did not update these data by obtaining and analyzing more recent files since the agencies expressed the willingness to look into or otherwise act to address actual or potential problems with entry time. Sufficient data were available on the wanted person file we earlier obtained to identify the elapsed time between the date of the arrest warrant, or other document authorizing apprehension, and the date of record entry for at least 99 percent of the April 6, 1994, individual records of the FBI, USMS, ATF, and the Customs Service. INS’ wanted person file records did not have this information and thus were excluded from our analysis. Table I.1 shows by agency the number of records we analyzed. We briefed FBI, INS, USMS, ATF, and Customs Service officials responsible for fugitive policies on the results of our analyses. We also interviewed them as to any (1) current information they might have on entry policies and times; (2) means their agencies had for staying abreast of entry times and for ensuring timely entries; (3) known or possible causes and effects of delayed entries; and (4) actions that had been taken to address entry time problems or actions that would be or could be taken as a result of our findings. We also interviewed NCIC officials and FBI and USMS officials responsible for conducting reviews of field office operations (called “inspections” in FBI and “program reviews” in USMS) about their findings regarding entry times. We reviewed sections of inspection reports that represented, according to FBI officials, all findings on entry time problems from inspections conducted from October 1993 to July 1995. We did not review any USMS reports since officials told us they generally did not find problems with entry times. Officials at the other agencies we contacted said they did not have such reviews (INS) or that their reviews did not look at entry times (ATF and the Customs Service). We also interviewed a representative of the International Association of Chiefs of Police about the importance of the wanted person file in fugitive apprehension and public and law enforcement personnel safety. Average (days) Median (days) Average (days) Median (days) Average (days) Median (days) Average (days) Median (days) Daniel C. Harris, Assistant Director, Administration of Justice Issues Carl Trisler, Evaluator-in-Charge Andrew Goldberg, Intern Pamela V. Williams, Communications Analyst David Alexander, Senior Social Science Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. 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 reviewed the Federal Bureau of Investigation's (FBI) National Crime Information Center (NCIC) wanted person file, focusing on the: (1) length of time it takes federal law enforcement agencies to enter fugitives onto the file; (2) information that agencies have on data entry times and the means used to monitor entry times; and (3) agencies' plans to reduce entry delays. GAO found that: (1) FBI and the U.S. Marshals Service (USMS) require that fugitives be entered onto the wanted persons file within one day after an arrest warrant is issued; (2) the Bureau of Alcohol, Tobacco, and Firearms (ATF) allows up to ten days for data entry if the delay serves a valid law enforcement purpose; (3) the Customs Service requires data entry after reasonable efforts to locate a fugitive have failed; (4) the Immigration and Naturalization Service (INS) has no policy regarding the timeliness of data entry; (5) 28 percent of FBI, USMS, ATF, and Customs' entries are made one day after issuance of the arrest warrant, 54 percent within one week, and 70 percent within four weeks; (6) data entry times for dangerous fugitives do not differ substantially from overall data entry times; (7) ATF and Customs do not monitor their data entry times or know the reasons for delays in entering fugitives on the wanted persons file; (8) FBI found that there are delays in between 30 and 50 percent of its data entries, with a median delay of about one week; and (9) all the federal law enforcement agencies plan to take action to minimize data entry delays. |
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The Office of Personnel Management (OPM) is tasked with providing human resources, leadership, and support to federal agencies to manage their human capital functions. For OPM to effectively perform this role, executive branch agencies are required to report information on their civilian employees to OPM and ensure that workforce data meet certain standards developed by OPM. OPM has developed these data to carry out its strategic goal of serving as a thought leader in data-driven human resource management and policy decision-making. The Enterprise Human Resources Integration (EHRI) system is OPM’s primary repository for human capital data to support these efforts. OPM developed EHRI to (1) provide for comprehensive knowledge management and workforce analysis, forecasting, and reporting to further strategic management of human capital across the executive branch; (2) facilitate the electronic exchange of standardized human resources data within and across agencies and systems and the associated benefits and cost savings; and (3) provide unification and consistency in human capital data across the executive branch. In addition, OPM’s updated system and integrated data were expected to accrue savings to the federal government, reduce redundancy among agency systems, streamline the various processes involved in tracking and managing federal employment, and facilitate human capital management activities by providing storage, access, and exchange of standard electronic information through a data repository of standardized core human capital data for most executive branch employees. While the personnel database predated the EHRI Data Warehouse, the payroll database was newly developed for OPM’s e-payroll initiative to consolidate agency payroll processes. The payroll database contains individual payroll records for approximately 2.0 million federal employees and is the primary governmentwide source for payroll information on federal employees. The records consist of data elements such as an EHRI ID for linking files, agency time charge categories, and pay rates. The consolidation of agency payroll processes—known as the e-payroll project—provided the opportunity for OPM to begin collecting standardized governmentwide payroll data. As part of the e-payroll initiative, OPM consolidated the operations of 22 federal payroll system providers for the 116 executive branch agencies into four primary providers—General Services Administration’s (GSA) National Payroll Center (NPC), the Department of Defense’s Defense Finance and Accounting Service (DFAS), Department of Interior’s Interior Business Center (IBC), and Department of Agriculture’s National Finance Center (NFC). Consolidation was undertaken to simplify and standardize federal payroll policies and procedures, and better integrate payroll with other human capital and finance functions. Most federal agencies rely on one of the four payroll service centers, DFAS, IBC, NPC, or NFC, to process employee pay. Payroll service centers receive employees’ bi-weekly time sheets which come from a variety of time and attendance (TA) systems from the agencies they service. Generally, TA systems allow employees to specify time spent on different work and leave categories, such as the number of regular or overtime hours worked or the number of annual leave or sick leave hours taken in a given pay period (PP). However, the level of detail regarding the exact nature of the work or leave time varies depending on agency policies and systems for recording employee work time. While the service centers have consolidated payroll reporting, there are still variations among the centers and the TA systems agencies use to submit employee time sheets. Some systems are maintained by the service center and employees from various agencies access those systems to record their hours. For example, GSA has only one TA system that agencies use to record work and leave hours. Other systems are maintained by the agency and may reflect specific TA accounting needs of the agency. For example, NFC processes time sheets from several different TA systems, some of which are agency specific, and DFAS processes payroll for the Department of Defense, Veterans Affairs, and others through systems including the Business Management Redesign (e-Biz) TA system and the Automated Time, Attendance, and Production System (ATAAPS) (see figure 1). In light of the significant variation in TA systems and service centers involved in processing TA information into payroll records, OPM established core standards for consistency in reporting and recording certain types of work and leave hours. These standards apply at the agency level as well as the service center level. Some of these standards are based on official leave authorized in statute. For example, federal employees are authorized to be absent from duty without a loss in pay or charge to leave for legal holidays and for activities such as jury duty, attendance at a military funeral, bone-marrow or organ donation, and certain union activities. Other standards are based on OPM guidance for excused absences due to inclement weather or blood donation, among others, charged as administrative leave. Agencies follow common recording practices for annual leave and sick leave. These core standards at the agency level are an important part of the process for reporting to OPM because they allow the service centers to collapse certain fields in a consistent way. While agencies may have specific time codes and time keeping practices to meet their needs, core standards for service center reporting dictate how these codes should be collapsed for reporting to OPM. For example, agencies may have detailed categories for various types of administrative leave, but segments of those charge codes apply generally to the category of administrative leave, enabling service centers to aggregate these data from TA systems. OPM relies on agencies and service centers to ensure that the data they submit are timely, accurate, complete, and compiled in accordance with OPM standards. However, federal internal control standards specify that even when external parties, such as service centers in this case, perform operational processes for an agency, management—in this case OPM— retains responsibility for the performance of responsibilities assigned to those organizations. Consequently, OPM management is responsible for understanding the controls each service center has designed, implemented, and operates for payroll processing and how the service centers’ internal control systems impact OPM’s internal controls for the payroll data. Underlying requirements for data standards and data quality efforts are the standards for internal control which apply to all executive branch government functions. According to Standards for Internal Control in the Federal Government , effective internal control systems have certain attributes, including reliable internal and external sources that provide data that are reasonably free from error and bias and faithfully represent what they purport to represent. Another attribute involves management evaluating both internal and external sources of data for reliability, and obtaining data on a timely basis so that they can be used for effective monitoring. Use of the EHRI payroll database has been limited because OPM has not made it widely available. This is in contrast to other, related OPM datasets, such as the EHRI personnel database, which OPM has prepared for use and made publicly available through multiple mechanisms including FedScope, an online tool for data analytics. Because the EHRI payroll database has potential to be used for accountability, research, and data-driven human resource management and policy decision making, making it available would support OPM’s strategic and open data goals. The EHRI payroll data have rarely been used since the database became operational in 2009. We identified four instances where the data have been used, primarily by OPM or by GAO to respond to Congressional requests for information. Specifically, (1) OPM used EHRI payroll data to calculate rough estimates of official time—paid time that employees spend on union-related activities—for its 2009 to 2012 reports to Congress; (2) we made similar use of EHRI payroll data to estimate use of official time in selected federal agencies in a 2014 report, which revealed limitations in OPM’s method of estimating the governmentwide costs of official time; (3) we used EHRI payroll data in a 2014 review that found inconsistencies in how agencies recorded and reported the use of administrative leave; and (4) we used EHRI payroll data in 2016 to report on the use of administrative leave at the Department of Homeland Security (DHS). In this final case, our use of EHRI data enabled a more detailed examination of DHS’s use of administrative leave and helped verify the reliability of the information obtained from DHS. Aside from these four instances, the data remain largely unused because OPM does not make the data available to the larger research community or to federal agencies. This is in contrast to other OPM data, such as the EHRI personnel data, which has been widely used since OPM made it available. OPM has taken specific steps to make these other human resources-related data available, but has not taken any of these steps for the EHRI payroll database. For example, OPM has made the EHRI personnel database available by (1) cleaning it and preparing it for statistical analysis; (2) integrating it with other data in a repository known as the EHRI Statistical Data Mart; (3) making deidentified data—that is, data without personally identifiable information—accessible through FedScope, an online data analytics tool that draws on data in the Statistical Data Mart; (4) listing data that are available (either by download or by request) on the OPM website and on Data.gov; and (5) sharing requested data with other parties, such as think tanks and academic researchers. Data in the EHRI Statistical Data Mart are also processed and repackaged to make them more available and usable. Specifically, data received by OPM from agencies and stored in the EHRI Data Warehouse are further processed and cleaned and placed into a format better suited for analysis. This process involves additional corrections and generates additional data elements likely to be useful for statistical analysis. These processed and prepared data are then submitted to the EHRI Statistical Data Mart, which forms the basis for FedScope. Both the FedScope analytics tool and the downloadable datasets are accompanied by documentation that clarifies the meanings of the data elements and limitations associated with the data. OPM also makes other EHRI data available through its website and Data.gov. Established in 2009, Data.gov is administered by the General Services Administration (GSA) as a public portal for government data in accordance with the government-wide open data policy. It includes information about and links to datasets from executive branch agencies. As of September 2016, users are able to find references to the EHRI personnel and retirement data on Data.gov. From Data.gov, users can follow links to the personnel data in FedScope and request access to the retirement data. OPM also offers a suite of analytic tools for agencies to perform workforce analyses and forecasting on the data in the EHRI Data Warehouse. Unlike the EHRI personnel and retirement data, the EHRI payroll data have not been made available in any of these ways. The documentation that accompanies the EHRI Statistical Data Mart specifically notes the absence of payroll data as a limitation, warning users that the data elements related to pay reflect only annualized rates of pay, and that employees’ actual pay may be lower or higher due to such factors as overtime or leave without pay, which would be addressed if the payroll data were integrated into the Statistical Data Mart. The four databases within the EHRI Data Warehouse were designed with linking identifiers to enable such integration. Even though this capability exists, for the past seven years, the payroll database has not been linked with other EHRI databases, is not incorporated into the Statistical Data Mart, and has been left largely unchecked and unused. Until the payroll data are made available, such as by incorporating them into the Statistical Data Mart and linking them to the other EHRI databases as designed, OPM will not be able to crosscheck data across the databases for accuracy, and the data will not benefit from the processing and preparation for statistical analysis that is performed for data in the Statistical Data Mart. Because reliability issues are often identified during use of the data, greater use of the EHRI payroll data by other parties would also have the benefit of helping to improve and establish the data’s reliability. As noted in GAO’s Assessing the Reliability of Computer-Processed Data, past users can be valuable sources of information about the completeness, accuracy, limitations, and usability of a dataset. For example, our prior reports that utilized the EHRI payroll data uncovered reliability issues, and OPM itself discovered a reliability issue when it attempted to use the data to analyze the use of sick leave (an issue we describe later in this report). The EHRI payroll data have potential to be used for research and analysis on topics related to OPM’s strategic and open data goals. In particular, EHRI payroll data include detailed information on pay, incentives, leave, work activities, telework, and other aspects of the federal workforce that could support OPM’s strategic and open data goals for data-driven research in areas such as audits and human resource analytics and decision making, according to our review of literature and interviews with OPM officials. OPM’s strategic goals call for the agency to develop and provide access to data systems that support human resources–related research and analytics both within and outside of OPM. As part of its strategic goal to serve as the thought leader in research and data-driven human resource management and policy decision making, OPM’s strategies include (1) developing data systems to support such analysis and (2) fostering partnerships with work groups, agencies, universities, and industry to access and analyze data. As part of its strategic goal to manage information technology systems efficiently and effectively, OPM’s strategies include providing greater access to human resources data and enabling data analytics to inform policy and decisions. In addition, OPM has open data goals that involve making data available and usable, in part to help ensure governmentwide accountability. In particular, OPM’s flagship enterprise information management initiative, a part of its most recent Open Government Plan, includes (1) ensuring that data are easily retrievable and highly usable for analytics and decision making, (2) promoting a culture of collaboration and partnerships with external stakeholders, and (3) releasing data to foster a broader conversation with the public by allowing third parties to conduct their own analyses and even create their own applications using OPM data. The utility of the EHRI payroll data for governmentwide accountability is demonstrated in audits that have been conducted using agency-specific data. For example, the Department of Defense Inspector General (DOD IG) used agency payroll data to conduct an audit of the Defense Finance and Accounting Service (DFAS), DOD’s payroll provider. Specifically, by using agency payroll data, the DOD IG was able to identify improper payments to federal civilian employees. Improper payments occur when funds go to the wrong recipient, the recipient receives an incorrect amount of funds, or the recipient uses the funds in an improper manner. DFAS determined that payments were being made to accounts with invalid social security numbers, to employees under the legal employment age, and to multiple employees into the same bank account. These improper payments amounted to more than $15 million over a six-year period. We identified similar audits for improper payments conducted by the Small Business Administration (SBA) and the Social Security Administration Office of Inspector General (SSA IG). Agency-specific payroll data have also supported audits of the use of retention incentives. For example, in 2011, the Department of Veterans Affairs (VA) Office of Inspector General examined retention incentives paid to VA employees in fiscal year 2010. Using agency payroll data, it found that officials responsible for reviewing and approving retention incentives did not adequately justify and document awards in accordance with VA policy. Also, VA officials did not always terminate retention incentives at the end of set payment periods. As a result of their review, the VA Inspector General questioned the appropriateness of nearly 80 percent of incentives it reviewed. These incentives totaled about $1.06 million in FY 2010. Agency-specific payroll data have also been used to audit agencies’ reports on the amounts they have withheld or deducted from employees’ pay for retirement, health benefits, and life insurance. For example, the DOD IG, in collaboration with OPM, has checked payroll data against Official Personnel Files to assess whether withholdings from pay appear reasonable for employees in multiple departments whose pay is processed through DFAS. The Department of Agriculture IG has done a similar audit for employees in multiple departments whose pay is processed through the National Finance Center (NFC). Identifying payroll fraud, monitoring retention incentives, and assuring accuracy of withholdings are issues that can affect all agencies. The EHRI payroll database contains data elements necessary for conducting such audits, with the advantage that it includes data for all executive branch agencies, thus enabling governmentwide reviews. Our review of the literature and interviews with OPM officials suggest that key elements in the EHRI payroll data have the potential to be used to understand a variety of human capital outcomes in the federal government. We identified studies that could have benefitted from the availability of the EHRI payroll data to examine (1) the relationship between demographic characteristics and pay disparities and costs of compensation; (2) the use of flexibilities, such as telework, on employee retention and motivation; and (3) the use of various types of leave. Because the EHRI payroll data were unavailable, the studies we identified tended to make use of data that were less precise, less directly relevant, or less comprehensive than the EHRI payroll data. These studies illustrate some of types of research that could be done more precisely or more comprehensively if EHRI payroll data were made available. According to our review of the literature, EHRI payroll data could also inform studies of disparities in pay among demographic groups in the federal workforce and enable more precise analysis of the costs of federal compensation. For example, a 2015 article in the Journal of Public Administration Research and Theory compared long-term professional mobility between federal employees who received veterans’ preferences and those who did not. To measure mobility, the study relied on employees’ General Schedule (GS) grade levels from OPM’s Personnel data system. A 2012 study in the Internal Review on Public and Non- Profit Marketing examined the relationship between performance-based pay initiatives and discrimination complaints in selected federal agencies using agency data related to equal employment opportunity records. A 2009 study in the American Review of Public Administration examined potential drivers of the narrowing pay gap between men and women in the federal government, including changes in seniority, differences in fields of study, and women’s migration into traditionally male fields. To measure the pay gap, these researchers relied on data on employees’ self-reported annual salary. Although these studies of disparities provide insight into the impact of human capital decisions concerning hiring and pay, they had to rely upon GS grade levels, administrative data, or average annual salary levels to assess outcomes. Each of these measures has limitations that could have been addressed if EHRI payroll data had been available. This is because the EHRI payroll data were designed to provide standardized, governmentwide information by pay period regarding actual pay, incentive pay, telework and leave hours, and numerous other data elements related to federal work activities and compensation. The data used in the three studies, however, did not provide precise measures of compensation because pay ranges overlap grade levels in the GS system and individuals with different grades can receive similar pay rates. In addition, approximately 30 percent of federal employees are not covered by the GS system and would be excluded from such assessments by default. Available measures of annualized salary used in these studies are also imprecise. An employee’s actual earnings may include other forms of pay (for example, overtime or shift differentials) not included in adjusted basic pay, or may be less than the annualized rate because of the employee’s work schedule (for example, less than full time non-seasonal) or individual circumstances (for example, leave without pay). Also, incorporating administrative records of pay into analyses can be challenging because methods of collecting and reporting otherwise similar payroll information varies significantly across federal agencies. In contrast, if EHRI payroll data had been available for these studies, they could have addressed some of these limitations because the data are designed to reflect actual pay, including any special pay, overtime pay, or other incentives and awards an individual might receive each pay period. They are also centralized and designed to be consistent across agencies. Studies of the impact of workforce flexibilities, such as telework, on employee retention and motivation also demonstrate potential uses of the EHRI payroll database. A 2010 article in Public Manager described how agencies, such as the U.S. Nuclear Regulatory Commission, have used telework to improve retention of employees with critical skills. Similarly, a 2013 study published in the American Review of Public Administration found that federal employees who engaged in frequent or infrequent telework were no more likely than their counterparts who do not telework to express an intention to leave, while a 2012 study in the same journal concluded that employees at the Department of Health and Human Services who telework were not significantly more motivated than those who choose not to telework. Instead of using time spent teleworking drawn from time and attendance records, both of these studies relied on data from the Federal Employee Viewpoint Survey, in which federal employees self-report whether they engage in telework “frequently” or “infrequently.” These studies would have benefitted from EHRI payroll data, which include telework fields that, if reliable, could yield more precise findings by allowing researchers to use the actual number of hours or days employees teleworked per pay period, rather than employees’ generalized descriptions of their telework frequency. The telework fields in the EHRI payroll data could also help OPM to meet statutory requirements to monitor and report on governmentwide use of telework, and OPM has recently issued a memo to agencies indicating that it will start using the payroll data to do so. In our 2012 report on OPM’s ability to meet this requirement, we found that estimates of telework among federal employees were limited to data calls to agencies because some agencies did not track telework in their time and attendance systems. In that report, we concluded that the accuracy of telework participation and frequency data for some agencies was questionable. The EHRI payroll reporting requirements now include data elements for continuous and episodic telework. The availability and use of these data elements for analysis would allow for more accurate and efficient assessments to meet statutory reporting requirements, and would be of use to policymakers. Our review of literature also indicates that the EHRI payroll data are potentially useful for analyzing the use of leave. OPM officials told us that they would use the data to analyze use of sick leave and annual leave across the federal government if they had sufficient resources. In the past, officials conducted such analyses by requesting data on an ad hoc basis from agencies, but, according to OPM officials, that process was too resource-intensive to continue. Our review of recent studies suggests that researchers share OPM’s interest in these topics. For example, a 2015 study in the Journal of Occupational and Environmental Medicine used time and attendance records from an unidentified federal agency to examine sick leave use among different demographic groups. Using survey data, another study examined the impact of different office designs on sick leave use among Swedish workers, finding that open office plans were associated with significantly higher reported rates of sick leave use. However, research on trends in leave use and impacts of certain policies on leave use across the federal government has been limited in the past by a lack of comprehensive and standardized leave use data, which could be addressed if EHRI payroll data were made available to agencies and researchers. Collectively, these studies demonstrate the value of fields within the EHRI payroll database—such as pay, telework, leave, and other compensation data—in assessing human capital outcomes. However, in all of the studies we identified, researchers relied on proxy, annualized, or self- reported measures, as opposed to actual measures of pay, telework, leave, and other key variables. Further, researchers typically relied upon data covering a limited number of federal agencies or employees. Compared to the EHRI payroll data, these sources do not provide governmentwide data or the same level of precision or detail for assessing policy outcomes among federal employees, which can affect the results of analysis. Studies relying on annualized salary may over or understate actual compensation given the timing of personnel actions, such as hires, separations, promotions, and leave, which can affect the actual amount of pay employees receive in a year. Studies relying on information about a small subset of the federal workforce may not provide reliable insights about overall federal human capital trends or policy effects. We and others have noted the importance of appropriate methods and data in comparing benefits and wages among federal employees and their private-sector counterparts. Other data sources that have been used instead of the EHRI payroll data—such as OPM’s EHRI personnel database and the Federal Employee Viewpoint Survey (FEVS)—also have limitations that could be addressed if the payroll data were made available. For example, the EHRI personnel database does not contain information on the amounts of time spent on sick leave, annual leave, administrative leave, official time activities, and telework, among other variables relevant to compensation and time use studies. OPM’s FEVS—a governmentwide database of federal employee perceptions on their agency’s policies and practices— contains data elements related to pay, but limitations on the reliability of these data elements have been identified. In addition to the specific studies we reviewed in detail, we identified hundreds of articles on topics that correspond to EHRI payroll data fields. For example, we identified 276 articles with the phrases “administrative leave,” “annual leave,” “court leave,” “family leave,” “medical leave,” “military leave,” or “unpaid leave” in their titles that have been published in peer-reviewed journals since 2009, when OPM launched EHRI. In addition, we identified 37 peer-reviewed studies with the term “telework” in their titles and six with the phrase “performance- based pay” in their titles. Although an in-depth assessment would be necessary to determine the reliability of individual fields for any of the specific purposes noted above, our basic reliability testing suggests that several key fields in the EHRI payroll data are reasonably complete and contain data within expected ranges—and therefore would have potential to support research on these topics if the EHRI payroll data were made available. (See appendix I for more detailed results of our electronic tests of EHRI payroll data reliability.) As long as the EHRI payroll data remain unavailable, federal pay and work-related research will be limited and OPM will continue to miss opportunities to support its strategic and open data goals. OPM has designed and implemented some control activities to ensure the reliability of EHRI payroll data, but weaknesses in these controls limit OPM’s ability to fully leverage these data in support of its mission. As described earlier, we assessed OPM’s internal controls on the payroll data against two of the five elements of the Standards for Internal Control in the Federal Government: control activities and monitoring. Control activities are the actions management establishes through policies and procedures to achieve its objectives, including appropriate documentation of internal controls. Control activities help agencies ensure the reliability of data within information systems, such as the EHRI payroll system. Monitoring is necessary to promptly resolve the findings of audits and other reviews so that corrective actions necessary to achieve objectives are taken in a timely manner. A deficiency exists when the design, implementation, or operation of a control does not allow management or personnel to achieve control objectives or address related risks. While OPM internal controls provide some assurance of the reliability of EHRI payroll data, weaknesses in the design or implementation of certain control activities and monitoring controls for the EHRI payroll database increase the risk of reliability issues that may limit OPM’s ability to fully leverage the data in support of its mission. Specifically, (1) weaknesses in control activities have resulted in limited quality checks and acceptance of unreliable data into the EHRI payroll database; and (2) weaknesses in monitoring activities have resulted in failure to address these reliability issues and increased risk that these issues may compound over time. Table 1 lists these control components and related activities, along with an assessment of whether they provide reasonable assurance of OPM’s ability to achieve its objectives in these areas. OPM guidance includes requirements for automated controls in support of data quality, such as defining data parameters and tolerances, identifying data errors, checking for completeness, and taking corrective actions when necessary. According to EHRI documentation and OPM officials, automated edit checks are performed by the data system software to check the validity of individual data elements, the proper relationship of values among associated data elements, and data format specifications. The rules check the value and format of fields, including record identifying fields, such as birthdate and agency, as well as non-record identifying fields, such as hours of leave. Specifically, they check to make sure that fields are formatted as numbers, dates, or text, depending on the designed content of the field, and that all values in a field fall within a defined range of possible values. Further, OPM applies three relational edits to ensure (1) that actions taken to add an employee to the system are not associated with an employee already in the system, (2) that actions taken to correct a record are associated with an existing record, and (3) that actions taken to delete a record are associated with an existing record. See table 2 for a description of the fields that are checked, the rule that is applied, and the action taken if the rule identifies an error. Data that fail OPM’s automated checks are considered errors, and the edit rules for the EHRI payroll system specify that data with error rates greater than 3 percent will not be accepted. However, according to OPM officials, the payroll data enters the EHRI Data Warehouse with very few other edits. OPM officials noted that they intend to define additional edits that could be applied to the payroll data during the data loading process. Federal standards for internal control state that management should design control activities to achieve objectives and respond to risks. However, due to the limited nature of these edits EHRI payroll data have a higher risk of data reliability issues that may limit OPM’s ability to fully leverage the data in support of its mission. For example, the results of our electronic testing of data from 2010-2015 found fields with missing data, logical errors, and out-of-range values. (For selected results of electronic testing of the data, see appendix I.) OPM’s automated rules also require the system to check the number of records for each agency every pay period, and are designed to reject submissions and generate an automated report for the service centers when the number of records has changed by more than 5 percent. While the reports are generated, OPM officials told us that resource constraints preclude them from having the same level of controls in place for the payroll data as they do for other EHRI data, including lack of capacity to follow up on missing payroll submissions. Federal standards for internal control state that management should evaluate information processing objectives to meet the defined information requirements, such as for completeness and accuracy. However, the EHRI payroll system accepted multiple submissions of data that should have been rejected by this rule. Specifically, our testing of the data found that, for nine separate pay periods in fiscal year 2014, payroll data records for agencies contained less than 1 percent of the affected agency’s total civilian workforce. In all, 17 of the 24 CFO Act agencies were affected by this problem at least once in fiscal year 2014 (see table 3). Without these data, government- wide analytics that cover any of these impacted dates will be similarly limited and incomplete. Although these submissions should have been flagged and rejected by OPM’s edit check for having a greater than 5 percent change in the number of records from one pay period to the next, OPM was unaware of the missing data until we identified the problem. This was due, in part, to inadequate monitoring controls, which are described in more detail below. In addition, while OPM designed these control activities to meet requirements for completeness and accuracy, the controls have not always met their objective and therefore do not provide sufficient assurance that completeness requirements will be achieved. Failing to evaluate information processing objectives to see if they meet the defined information requirements for completeness increases the risk that some EHRI payroll data will be unreliable. OPM has established roles and responsibilities for users and other controls safeguarding accountability for data quality and security, and maintains information on data access and use activity. As designed, these user controls are intended to provide reasonable assurance that control objectives will be achieved if OPM monitors them. According to OPM officials, EHRI payroll database users must complete an application to gain access and service provider points of contact are given access credentials once access forms are submitted and approved. Applications of users requiring administrative privileges on information system accounts receive additional scrutiny. In addition, OPM documentation establishes processes for updating the list of authorized users when accounts are created, deactivated, or deleted—for example, specifying that account passwords are to expire after 60 days and that accounts that are inactive for 60 days are to be deactivated. OPM has also designed controls to capture and save some metadata tied to data loading and data provider submissions and user access. Automated processes capture metadata on user access and those logs are stored in system audit tables which are archived on a monthly basis and retained indefinitely, according to OPM officials. Logs detailing access for the three most recent months are available online. Within the data warehouse program where payroll data reside, applications have auditing functionality for user activity which captures what the user did as well as what was accessed. Web application activity is also tracked, and logs are retained indefinitely. Reports issued to providers can be reconstituted in real time and this information can be used for investigation. However, OPM officials told us they have not used this information for such investigations or reviews. As a result of this incomplete implementation of access controls, OPM does not know whether these controls are working appropriately. The two primary sources of documentation that guide submissions of EHRI payroll data into the system—the Guide to Human Resources Reporting (GHRR), and the Guide to Data Standards Part B (GDS)—are not up-to-date and do not provide sufficient assurance that control objectives will be achieved. OPM relies on the service centers and agencies to assure the accuracy of payroll data submissions, as outlined in these documents. For example, the GHRR outlines each data element, its required format, and whether it must be included in the database. The GDS outlines the required format for submissions to EHRI, including the file content, notification of transmission to OPM, file naming conventions, and transmission frequency. The GDS also acknowledges that the edits outlined for service centers and agencies in that document constitute the minimum required level of quality control and encourages agencies to supplement them based on the specifics of their internal programs and operations. The GHRR was last updated July 2013 to reflect the inclusion of telework variables, but the GDS has not been updated since March 2012. Given the changes to the system and the control weaknesses noted above, OPM officials noted that all payroll data standards will have to be reworked to ensure they are robust for data collection and programming by the payroll providers. OPM officials did note their intention to update these guides to align with system, regulatory, and other changes, but did not have a detailed plan or timeframe for doing so. Federal standards for internal control state that management should document internal controls to ensure that all transactions, documentation, and records are properly managed and maintained. OPM cannot ensure that the data quality control changes made to the system are fully implemented without updating its guidance documents. Out-of-date documentation does not provide sufficient assurance that control objectives will be achieved. Until OPM updates this documentation, it faces increased risk that data submissions will not be consistent with current requirements and recent changes to the system, which could affect the reliability of data submissions. As described above, the EHRI payroll system is designed to reject data and produce data quality reports when data error rates exceed 3 percent or when the number of records at an agency changes by more than 5 percent from one pay period to the next. According to OPM officials, biweekly EHRI data quality control reports and error files are made available to payroll providers on the EHRI portal. This quality control reporting is kept in the EHRI Data Warehouse indefinitely and the quality control reports issued to providers can be reconstructed. The GHRR directs payroll providers to monitor these reports for deviations from previous norms and analyze them to identify potential issues in systems that gather and send EHRI data from the agency to OPM. OPM officials told us that they do not monitor these reports to identify and resolve problems, and resource constraints prevent the agency from following up with the payroll providers. While inconsistent implementation of control activities allowed incomplete data to be accepted by the EHRI system, this limitation in monitoring controls led these incomplete submissions to remain undetected and unaddressed by OPM. In addition, without timely review and correction of problems identified in these reports, OPM risks errors compounding with each biweekly data submission, as the error tolerance checks involve comparison of each new submission to the most recent submission, which itself may have been incomplete. Further, without timely identification and correction of such problems, missing data may not be recoverable. For example, in response to the missing data issue noted above, OPM contacted the relevant service centers to locate the missing files. However, service centers only retain data for 18 months from the original date of submission. If the controls were working as designed, the service center would have been required to provide a corrected submission before the end of this retention period, and OPM would have reasonable assurance that the data for these pay periods were complete. Because of the delay in identifying this error, when OPM finally did request the data from the service centers, corrected data submissions were expected to require a significant amount of work because the retention period had passed. OPM was unable to provide the data within the time frames of this engagement and it is unclear whether OPM will be able to retrieve the missing data from the relevant service centers. Federal standards for internal control state that management should establish monitoring activities for the internal control system and evaluate the results, and should remediate identified internal control deficiencies on a timely basis. Without appropriate efforts to review and respond to system generated reports, OPM does not have sufficient assurance that the control objective will be achieved and the risk of submissions of inaccurate or incomplete data is increased. While OPM’s internal controls provide some assurance of the reliability of some of the EHRI payroll data, the weaknesses in control activities (controls for completeness, accuracy, and validity of information processing and appropriate documentation) and monitoring controls (ongoing during normal operations) may increase the risk for data reliability issues to arise and persist in the EHRI payroll data. We have also identified several data reliability issues through electronic testing of EHRI payroll data, in past GAO work, and through interviews with OPM officials. Collectively, these issues present challenges for fully leveraging the EHRI data, and may limit OPM’s ability to utilize the data for some analyses in support of its mission and strategic goals. We found a variety of potential data reliability issues from our electronic testing of EHRI payroll data, as illustrated in appendix I. In some cases, these issues indicate the potential for reliability issues that may limit OPM’s ability to fully leverage the data in support of its mission. For example, we found that the EHRI payroll data includes records for six entities that should not be in the system due to exemptions from OPM reporting requirements, as shown in table 4. When using EHRI payroll data, the unintentional inclusion of these entities could impact some analyses and limit OPM’s ability to draw valid conclusions from the data. We also found a small number of instances of social security numbers being assigned to multiple EHRI records, as shown in table 5 below. When using EHRI Payroll data, this could indicate that some individuals appear in the data more than once, potentially impacting some analyses and limiting OPM’s ability to draw valid conclusions from the data. In a 2014 report, we found that weakness in OPM’s documentation for transactions and internal controls led to inconsistent reporting of administrative leave data and inclusion of some excepted agencies’ data in payroll feeds. Specifically, in our report of agencies’ use of administrative leave we found differences between agencies’ leave recording practices and what OPM officials consider paid administrative leave. In response, OPM issued guidance to agencies to review how they record administrative leave and clarify that administrative leave should not be routinely used for an extended time. This guidance can help agencies and payroll providers to provide more consistent data on administrative leave, and improve the usefulness of EHRI payroll data for related analyses. OPM officials also told us about data reliability issues beyond those identified in this review. For example, OPM officials told us that, in 2015, they discovered a problem related to data on sick leave. Specifically, due to a programming error, the data received from payroll providers that sum the number of sick leave hours an employee used in a year was populating an unrelated field in the EHRI payroll database. As a result, according to OPM officials, the amount of sick leave an employee used in any given year was not accurate. One of these officials told us that this problem may also apply to other variables. This suggests that OPM’s edit checks, which were designed to maintain a minimum level of quality control, may not sufficiently reduce the risk of these types of errors. OPM officials told us they had plans to update EHRI security protocols, payroll documentation, testing for reliability issues, and data standards, but OPM has not documented these plans or created a schedule to implement them. For example, OPM officials told us that they planned to update their documentation beginning in FY 2016, working collaboratively with OPM’s program policy office, federal agencies, and shared service centers, and other stakeholders. Although the EHRI payroll data was not a part of the 2015 OPM data breach, agency officials told us that the agency is evaluating its current security posture and making necessary changes to protect the privacy and integrity of all the data they manage. According to OPM officials, these plans include preparing to deploy a new secure portal to applications and tools; improving use of encryption; masking and redaction when appropriate and prudent; consolidating data from multiple data sets into more secure databases; utilizing better and more secure user management tools and audit trail logging; and providing new forms of user authentication, among other potential security and access measures. OPM officials also said they are planning to correct the issue they had identified with the sick leave variable and that they were in the process of testing other variables to see if they had the same problem. However, OPM officials told us that these actions would require resources and reprioritization of the existing workload, and that a project plan and timeframes had not yet been developed. Further, OPM officials noted that the agency has a critical leadership role in addressing the complete data life cycle, and that agencies and service centers also play a critical role in assuring data quality. Accordingly, OPM officials said they were seeking a comprehensive solution that includes agency and service center actions to ensure accurate data are submitted to EHRI. As yet, OPM has not linked EHRI payroll correction activities back to specific agency objectives or created a schedule for implementing these changes. GAO’s schedule assessment guide notes that a well-planned schedule is a fundamental management tool that can help government agencies gauge progress, identify and resolve potential problems, and determine the amount and timing of resource needs. Without a well- planned schedule—developed in consideration of how it will contribute to OPM’s objectives and risks—OPM may not be able to appropriately prioritize and execute the necessary changes. Although use of EHRI payroll data has been limited to date, it carries significant potential to support governmentwide accountability and human resource analytics and decision making. In our review of peer-reviewed journals we identified hundreds of articles on topics that correspond to EHRI payroll data fields. Unfortunately, however, EHRI payroll data will continue to be underutilized until—consistent with its own strategic and open data goals—OPM makes the data available to potential users, as it does other databases within the EHRI system. While data collection and storage is not without cost, EHRI’s centralized, standardized, and comprehensive features offer the promise of efficient, cost effective, and more precise analytics. In preparing the data to make them available, OPM will need to take steps to process and clean them as it does for the EHRI personnel data. This is the first step toward improved reliability. Our basic reliability testing suggests that several key fields in the EHRI payroll data are reasonably complete and contain data within expected ranges— and therefore could have potential to support research on these topics. However, while some fields in the current EHRI payroll data may be sufficiently reliable for certain types of audits and workforce analytics, other fields suffer from reliability issues that limit the range of purposes for which the data can be used. This is because OPM has not designed sufficient control activities to assure data quality, has not evaluated or consistently implemented the control activities it has designed, and has not updated key documentation to support quality submissions of data. Compounding these problems is OPM’s failure to monitor ongoing operations, for example, by reviewing system generated reports. Without timely identification and correction, data quality problems will continue undetected and remain uncorrected. While OPM officials noted their intention to address these shortcomings, they do not have plans with specific actions and time frames for doing so. Without a schedule specifying when these planned changes will be made, OPM officials will be unable to gauge progress, identify and resolve potential problems, or determine the amount and timing of resource needs related to the desired changes. As a result, OPM faces an increased risk of implementing ineffective or contradictory changes, and of facing delays in completing these activities. Until relevant changes are made, existing problems can continue to compound as data for 2 million federal civilian employees are received biweekly. Without available and reliable payroll data, OPM and others must continue to rely on data that are more costly, imprecise, or limited in scope—missing opportunities to leverage centralized, standardized data that is essential for accountability and well-informed management and policy decisions. GAO is making five recommendations to the Director of OPM. GAO recommends that the Director of OPM take the following action to support its strategic and open data goals: Improve the availability of the EHRI payroll data—for example, by preparing the data for analytics, making them available through online tools such as FedScope, and including them among the EHRI data sources on the OPM website and Data.gov. GAO recommends that the Director of OPM take the following two actions to improve internal controls for data quality: Update EHRI payroll database documentation to be consistent with current field definitions and requirements, including the Guide to Human Resources Reporting and the Guide to Data Standards, Part B; and Consistently monitor system-generated error and edit check reports and ensure that timely action is taken to address identified issues. GAO recommends that the Director of OPM take the following two actions to integrate the payroll data into the larger suite of EHRI databases: Develop a schedule for executing these plans; and Evaluate existing internal control activities and develop new control activities for EHRI payroll data, such as implementing transactional edit checks that leverage the information in the other EHRI datasets. We provided a draft of this report for review and comment to the Director of OPM. OPM agreed with our recommendations. In its comments (reproduced in appendix III), OPM noted that a lasting and effective solution for enhancing the quality of payroll data requires consistent data quality not just in the “last mile” after delivery to the EHRI system, but also at the origination of the data. OPM also noted that implementation of these recommendations will require collaboration between various stakeholders and appropriate resources. We agree. As we note in the report, while payroll processing is more consolidated than in the past, agencies still use a variety of time and attendance (TA) systems, which can vary in the level of detail with which work or leave time is recorded depending on agency policies and systems. In addition, there are variations in the systems and processes of the payroll providers. These variations across agencies and across payroll providers underscore the importance of updated documentation for reporting and consistent monitoring of error reports. In addition, through its leadership role in the OPM-managed Human Resources Line of Business, OPM can consider action for ensuring data quality—for example, by including data quality indicators among its performance measures for the payroll providers. OPM also provided technical comments which we incorporated, as appropriate. We will send copies to the appropriate congressional addressees and the Director of the U.S. Office of Personnel Management, as well as to other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2700 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. The names of GAO staff who made key contributions to this report are listed in appendix IV. This Appendix presents selected results from our electronic testing of the EHRI payroll data. The results are grouped into three categories: (1) tests for missing data, (2) tests for logical errors, and (3) tests for potentially invalid values. 1. Missing Data Tests Incomplete data can limit both the ability to conduct desired analyses and the usefulness of any analysis conducted. For example, if a large amount of data is missing, as was the case with data missing for entire agencies for some pay periods, it may not be possible to complete analysis of that agency for the missing periods. If a smaller proportion of data is missing, analysis may still be possible. However, any analysis completed using these data will be limited in its accuracy and validity, which may increase the risk of drawing inappropriate or invalid conclusions. Because the EHRI payroll data have been identified as potentially useful for government-wide studies of telework behavior, we tested for missing data in telework-related fields. As shown in table 6, we found data in these fields to be missing entirely in 2011 and largely incomplete in 2012, years for which reporting on this variable was not required by OPM. The percentage missing is based on the number of records without values out of all records within a fiscal year. As a result, estimates of governmentwide telework participation, as shown in table 7, are likely to be inaccurate for these years. 2. Logical Error Tests Logical testing can reveal data reliability issues among and within individual records. For example, logical testing can assess whether there are duplicates among records in the data system. Our electronic testing assessed whether there were duplicate records in the EHRI payroll data. We also looked for records with multiple payments, either from the same agency or from different agencies, in a single pay period—a form of duplication that could also indicate problems with data reliability. As shown in tables 8, 9, 10, and 11, we found no instances of a complete duplicate records, few instances of EHRI IDs associated with more than one social security number, and that generally less than 1 percent of records were associated with multiple payments in a single pay period. Logical testing can also uncover data reliability issues within individual records. As shown in table 12, we found a number of variables with questionable values, given the values of other variables for the same record. For example, we found instances where the amount of annual leave used was greater than the amount available, and other instances where the data indicate an agency contribution to Federal Employee Group Life Insurance (FEGLI) for an employee who has not made a contribution. In both cases, this should not be possible under typical circumstances, and may indicate a data reliability issue. 3. Outlier and Out of Range Tests Tests for invalid formats and values can reveal obvious errors about data. For example, as shown in table 13, we tested the format of the social security numbers (SSN) in EHRI, which should all be nine digit numbers, and found some cases where these numbers were not properly formatted, indicating a potential data reliability issue that could prevent analysis of individuals when attempting to match SSNs. We also tested the values of fields in the EHRI payroll data to determine whether any records were outside of the expected ranges. As shown in table 14, we found several variables where the minimum value was below the expected possible floor or the maximum value was above the expected ceiling. For example we found a maximum value for Student Loan Repayments of $100,000, which is well above the expected ceiling for such payments. We also found that the lowest minimum value for total salary in a pay period was negative $99,140, while all salary values should generally be positive for normal records (non “correction” records). Data reliability assessments—a process consistent with internal control standards—gather and evaluate the information needed to determine whether data can be used to answer specific research questions. In this context, reliability means that data are reasonably complete and accurate to answer the intended questions that OPM, agencies, policy organizations, and academics might have about the federal workforce. Reliability assessments are specific to the context of the particular characteristics of the research project and the risk associated with the possibility of using insufficiently reliable data. Errors are considered acceptable if the associated risk has been assessed and a conclusion reached that the errors are not substantial enough to cause a reasonable person, aware of the errors, to doubt a finding, conclusion, or recommendation based on the data. To determine whether data are sufficiently reliable for a specific research purpose, one must consider the expected importance of the data in the final report; corroborating evidence; level of risk of using the data; and the results of assessment work conducted to date. Completeness, accuracy, and validity are all components of reliability. Completeness refers to the extent to which relevant records are present and the fields in each record are populated appropriately. For example, are the payroll records for all on-board employees at an agency recorded for every pay period within the calendar year? Accuracy refers to the extent to which recorded data reflect the actual underlying information. For example, do the recorded hours of annual leave in an employee’s payroll record accurately reflect the number of annual leave hours they reported in their time and attendance form? Validity, for the purposes of this report, refers to whether the data actually represent what is being measured. For example, if we are measuring the extent of overtime in the federal government and we use a field that records a certain type of administratively uncontrollable overtime, does that represent the extent of overtime use or might there be other ways overtime is recorded? Data reliability assessments as a process include (1) reviewing existing information about the data and conducting interviews with officials from the entity or entities that collect the data, (2) reviewing selected system controls, and (3) performing tests on the data, such as advanced electronic analysis and tracing to and from source documents. In addition to the contact named above, the following individuals made important contributions to this report: Sidney Schwartz, Director; Rebecca Shea, Assistant Director; Russ Burnett; Steven Putansu; David Blanding, Hiwotte Amare; Joanna Berry; Amy Bowser; Tim Carr; Melinda Cordero; Sara Daleski; Lorraine Ettaro; Dani Greene; Donna Miller; Laura Pacheco; and Jeffrey Schmerling. | OPM is tasked with supporting federal agencies' human capital management activities, which includes ensuring that agencies have the data needed to make staffing and resource decisions to support their missions. The EHRI system is OPM's primary data warehouse to support these efforts. The payroll database—one of the four databases in the EHRI system—became operational in 2009. Payroll data provide information on federal employees' pay and benefits and how they allocate their time, as reflected in hours charged to work activities and use of leave. EHRI data are essential to governmentwide human resource management and evaluation of federal employment policies, practices, and costs. The ability to capitalize on this information is dependent, in part, on the reliability of the collected data. GAO undertook this review to examine the extent to which (1) EHRI payroll data have supported OPM's strategic and open data goals and (2) internal controls are in place to assure the reliability of the data. GAO reviewed literature, interviewed officials and reviewed documents from OPM and the payroll Service Centers, compared OPM's data quality processes to GAO's Standards for Internal Control , and performed electronic tests of the payroll data. The Enterprise Human Resources Integration (EHRI) payroll data are not fully supporting the Office of Personnel Management's (OPM) strategic and open data goals. This is because OPM has not taken the steps necessary to make the data widely available for use by other agencies and researchers. EHRI payroll data are intended to provide a centralized, standardized, and comprehensive source of pay and leave related data across the federal government. In this capacity, these data have the potential to provide a more efficient, cost effective, and precise data source for federal agencies and researchers who wish to assess human resources and policy decision making across the federal government. Because these data are not widely available, federal agencies and researchers must rely on other proxy sources for payroll data, which are more limited in the scope of analysis they can provide or the level of detail needed for data-driven human capital studies. Although some elements of the data are sufficiently reliable for general use, weaknesses in OPM's internal controls for the EHRI payroll data will need to be addressed to enhance the reliability of other data elements. As shown in the table below, GAO's assessment of key internal control activities that are critical to ensuring the reliability of the EHRI payroll data found a number of areas where there is insufficient assurance that the control objective will be achieved. These weaknesses increase the risk of data errors, incomplete data fields, and ineffective monitoring of the EHRI payroll data. Unless OPM takes steps to correct these internal control weaknesses, it will be unable to fully leverage these data to meet its mission and allow others to make full use of these data for their research needs. GAO is making five recommendations, including that OPM improve the availability of its payroll data and implement additional internal control activities to better ensure data reliability. OPM agreed with all of GAO's recommendations. |
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The Aviation and Transportation Security Act established TSA as the federal agency with primary responsibility for securing the nation’s civil aviation system, which includes the screening of all passenger and property transported by commercial passenger aircraft. At the more than 450 TSA-regulated airports in the United States, prior to boarding an aircraft, all passengers, their accessible property, and their checked baggage are screened pursuant to TSA-established procedures. TSA relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers include behavior detection officers (BDOs), who examine passenger behaviors and appearances to identify passengers who might pose a potential security risk at TSA-regulated airports; travel document checkers, who examine tickets, passports, and other forms of identification; transportation security officers (TSO), who are responsible for screening passengers and their carry-on baggage at passenger checkpoints using x-ray equipment, magnetometers, Advanced Imaging Technology, and other devices, as well as for screening checked baggage; random employee screening; and checked baggage screening systems. The Implementing Recommendations of 9/11 Commission Act of 2007 further mandates that the Secretary of Homeland Security establish a system to screen 100 percent of cargo transported on passenger aircraft, and defines screening for purposes of meeting this mandate, in general, as a physical examination or the use of nonintrusive methods to assess whether cargo poses a threat to transportation security. Such cargo ranges in size from 1 pound to several tons and ranges in type from perishable commodities to machinery. In 2011, all-cargo carriers transported approximately 66 percent (6.9 billion pounds) of the total cargo (10.4 billion pounds) transported to the United States. Additionally, TSA has responsibilities for general aviation security, and developed the Alien Flight Student Program (AFSP) to help determine whether foreign students enrolling at flight schools pose a security threat. U.S. government threat assessments have discussed plans by terrorists to use general aviation aircraft to conduct attacks. Further, analysis conducted on behalf of TSA has indicated that larger general aviation aircraft may be able to cause significant damage to buildings and other structures. We reported in May 2010 that TSA deployed SPOT nationwide before first determining whether there was a scientifically valid basis for using behavior and appearance indicators as a means for reliably identifying passengers who may pose a risk to the U.S. aviation system. According to TSA, SPOT was deployed before a scientific validation of the program was completed to help address potential threats to the aviation system, such as those posed by suicide bombers. TSA also stated that the program was based upon scientific research available at the time regarding human behaviors. We reported in May 2010 that approximately 14,000 passengers were referred to law enforcement officers under SPOT from May 2004 through August 2008. Of these passengers, 1,083 were arrested for various reasons, including being illegal aliens (39 percent), having outstanding warrants (19 percent), and possessing fraudulent documents (15 percent). The remaining 27 percent were arrested for other reasons such as intoxication, unruly behavior, theft, domestic violence, and possession of prohibited items. As noted in our May 2010 report, SPOT officials told us that it is not known if the SPOT program has ever resulted in the arrest of anyone who is a terrorist, or who was planning to engage in terrorist-related activity. More recent TSA data covering the period from November 1, 2010, to April 18, 2012, indicates that SPOT referred 60,717 passengers for additional screening, which resulted in 3,803 referrals to law enforcement officers and 353 arrests. Of these 353 arrests, 23 percent were related to immigration status, 23 percent were drug-related, 9 percent were related to fraudulent documents, 22 percent were related to outstanding warrants, and 28 percent were for other offenses. A 2008 report issued by the National Research Council of the National Academy of Sciences stated that the scientific evidence for behavioral monitoring is preliminary in nature. The report also noted that an information-based program, such as a behavior detection program, should first determine if a scientific foundation exists and use scientifically valid criteria to evaluate its effectiveness before deployment. The report added that such programs should have a sound experimental basis and that the documentation on the program’s effectiveness should be reviewed by an independent entity capable of evaluating the supporting scientific evidence. As we reported in May 2010, an independent panel of experts could help DHS determine if the SPOT program is based on valid scientific principles that can be effectively applied in an airport environment for counterterrorism purposes. Thus, we recommended that the Secretary of Homeland Security convene an independent panel of experts to review the methodology of DHS’s Science and Technology Directorate’s ongoing validation study on the SPOT program being conducted to determine whether the study’s methodology is sufficiently comprehensive to validate the SPOT program. We also recommended that this assessment include appropriate input from other federal agencies with expertise in behavior detection and relevant subject matter experts. stated that its validation study, completed in April 2011, included input from a broad range of federal agencies and relevant experts, including those from academia. DHS’s validation study found that SPOT was more effective than random screening to varying degrees. For example, the study found that SPOT was more effective than random screening at identifying individuals who possessed fraudulent documents and identifying individuals who law enforcement officers ultimately arrested. See GAO-10-763. According to DHS’s study, no other counterterrorism or screening program incorporating behavior and appearance-based indicators is known to have been subjected to such a rigorous, systematic evaluation of its screening accuracy. However, DHS noted that the identification of high-risk passengers was rare in both the SPOT and random tests. DHS’s study also noted that the assessment was an initial validation step, and was not designed to fully validate whether behavior detection can be used to reliably identify individuals in an airport environment who pose a security risk. According to DHS, further research will be needed to comprehensively validate the program. In addition, DHS determined that the base rate, or frequency, of SPOT behavioral indicators observed by TSA to detect suspicious passengers was very low and that these observed indicators were highly varied across the traveling public. Although details about DHS’s findings related to these indicators are sensitive security information, the low base rate and high variability of traveler behaviors highlights the challenge that TSA faces in effectively implementing a standardized list of SPOT behavioral indicators. In addition, DHS outlined several limitations to the study. For example, the study noted that BDOs were aware of whether individuals they were screening were selected as the result of identified SPOT indicators or random selection. DHS stated that this had the potential to introduce bias into the assessment. DHS also noted that SPOT data from January 2006 through October 2010 were used in its analysis of behavioral indicators even though questions about the reliability of the data exist. The study made recommendations related to SPOT in three areas: (1) future validation efforts, (2) comparing SPOT with other screening programs, and (3) broader program evaluation issues. TSA designated the specific details of these recommendations sensitive security information. program evaluation including a cost-benefit analysis, reiterate recommendations made in our prior work. In March 2011, we reported that Congress may wish to consider the study’s results in making future funding decisions regarding the program. TSA is reviewing the study’s findings and assessing the steps needed to address DHS’s recommendations. If TSA decides to implement the recommendations in the April 2011 DHS validation study, it may be years away from knowing whether there is a scientifically valid basis for using behavior detection techniques to help secure the aviation system against terrorist threats given that the initial study took about 4 years to complete. We are conducting a follow-on review of TSA’s behavior detection program, and its related variant, the so-called “Assessor Program”, which incorporates more extensive verbal interactions (“chat downs”) with the traveling public. The Assessor program is currently being test piloted in Boston and Detroit. Our follow-on report on this program will be issued early next year. DHS and TSA have taken four primary actions to enhance the security of inbound cargo on passenger and all-cargo aircraft following the October 2010 bomb attempt originating in Yemen. TSA issued new screening requirements aimed at enhancing the security of cargo on passenger and all-cargo aircraft. Beginning in October 2010, TSA imposed new risk-based security procedures on passenger and all-cargo aircraft aimed at focusing more detailed screening measures on high risk shipments and, among other things, prohibited the transport of cargo on passenger aircraft from Yemen and Somalia due to threats stemming from those areas. DHS instituted working groups with air cargo industry stakeholders to identify ways to enhance air cargo security. In January 2011, the Secretary of Homeland Security established an Air Cargo Security Working Group to obtain advice and consultations from air cargo security stakeholders on ways to enhance the security of the air cargo system.The Air Cargo Security Working Group briefed the Secretary of Homeland Security, the Commissioner of U.S. Customs and Border Protection (CBP), and the TSA Administrator in April 2011 on proposed solutions, and recommended that TSA reevaluate the agency’s implementation plan, timeline, and resources related to TSA’s program to recognize the security programs of foreign countries, known as the National Cargo Security Program (NCSP). According to TSA officials, participants of this working group have reconvened as part of the Aviation Security Advisory Committee, which held its first meeting in May 2012, and the committee will meet again in mid-September 2012 to discuss the implementation of the recommendations. All-cargo express carriers and companies focus on transporting cargo under quick time frames. up” and en route directly to the United States) from locations in North America. Under the pilot program, however, participants provide manifest data prior to loading cargo aboard aircraft. TSA developed a program to recognize foreign air cargo security programs. TSA has developed the NCSP recognition program to review and recognize the air cargo security programs of foreign countries if TSA deems those programs as providing a level of security commensurate with TSA’s air cargo security standards. In May 2012, TSA recognized Canada as providing a level of security commensurate with U.S. air cargo security standards, and in June 2012, the agency recognized the European Union and Switzerland as also providing this same level of TSA officials security based on the principle of “mutual recognition.” stated that the NCSP recognition program is a key effort in meeting the 100 percent screening mandate because it will eliminate the need for air carriers to comply with two countries’ security programs. Despite these actions, air carriers and TSA face three key challenges that, among other things, could limit TSA’s ability to meet the 9/11 Commission Act mandate to screen 100 percent of cargo transported on passenger aircraft as it applies to inbound air cargo and to provide reasonable assurance that screening is being conducted at reported levels. All-cargo carriers subject to TSA regulation also reported facing challenges in implementing new TSA screening requirements established after the October 2010 Yemen incident. TSA had previously recognized France and the United Kingdom as providing a level of security commensurate with U.S. air cargo security standards. screen a certain percentage of all cargo. TSA proposed changes that would require passenger air carriers to screen 100 percent of cargo as part of its efforts to meet the 9/11 Commission Act mandate. Passenger air carriers expressed concerns about being able to meet the 100 percent screening mandate as it applies to inbound cargo stating that it would cause significant disruptions in the air cargo supply chain, among other issues. In response to these concerns, TSA officials stated that they revised the proposed requirements and issued new passenger security requirements in June 2012. Agency officials said they plan to require air carriers to screen 100 percent of inbound air cargo transported on passenger aircraft by December 3, 2012. GAO-10-446. data reported by air carriers, the agency has not yet fully met the intent of the recommendation. It will be important for TSA to continue to work towards ensuring verification of inbound air cargo screening data submitted by air carriers and that inbound air cargo is screened in accordance with the mandate. Reporting screening data could facilitate oversight of all-cargo carrier compliance requirements. TSA relies on data submitted by passenger carriers to determine the amount of air cargo screened on inbound passenger aircraft but there is no requirement for all-cargo carriers to report comparable screening data to TSA, even though most of the cargo shipped from abroad into the United States is shipped on all- cargo carriers. Thus, TSA does not know the extent to which all-cargo carriers are screening cargo or meeting the enhanced screening requirements introduced after the October 2010 incident in Yemen. Officials from two global all-cargo carriers said that submitting such information to TSA would be feasible because they are already collecting this data internally, but officials from two other all-cargo carriers stated that reporting screening data to TSA would be challenging because of staffing limitations or because such data may not be available. TSA officials said that TSA does not require that all-cargo carriers submit screening data because it has focused its efforts on collecting data from passenger air carriers in support of meeting the 100 percent mandate. TSA officials stated that TSA may consider opportunities to capture additional inbound air cargo information, but has not yet weighed the costs and benefits of doing so because it has focused its efforts on establishing the ACAS pilot program, which DHS established to more readily indentify high-risk cargo. The pilot program is a key effort to identify high-risk cargo prior to aircraft departing from foreign airports, but is not intended to provide TSA with screening data, which if collected and verified, could provide additional assurance that all-cargo carriers are complying with TSA’s enhanced screening requirements. To help TSA better determine what actions are needed, if any, to ensure that all-cargo carriers are complying with the agency’s enhanced screening requirements, we recommended in May 2012 that DHS assess the costs and benefits of requiring all-cargo carriers to report data on screening conducted.actions to address it. TSA’s Electronic Baggage Screening Program (EBSP) reports that 76 percent of the airports (337 of 446) the agency regulates for security have a mix of in-line and stand-alone baggage screening configurations that best meet airport needs (i.e., optimal systems). Our prior work on TSA’s checked baggage screening program—EBSP—identified a number of shortcomings in DHS and TSA’s process for establishing program baselines, program schedules, and cost estimates. Acquisition program baselines. We found that realistic acquisition program baselines with stable requirements for cost, schedule, and performance are among the factors that are important to successful acquisitions delivering capabilities within cost and schedule. Further, we reported in April 2009 that program performance metrics for cost and schedule can provide useful indicators of the health of acquisition programs and, when assessed regularly for changes and the reasons that cause changes, such indicators can be valuable tools for improving insight and oversight of individual programs as well as the total portfolio of major acquisitions.program baseline is the contract between the program and departmental oversight officials and must be established at program start to document the program’s expected cost, deployment schedule, and technical performance. By tracking and measuring actual program performance against this baseline, management can be alerted to potential problems, such as cost growth or changing requirements, and has the ability to take corrective action. According to DHS’s acquisition guidance, the We reported in April 2012 that TSA has not had a DHS-approved acquisition program baseline for EBSP since the program’s inception more than 8 years ago. Further, DHS did not require TSA to complete an acquisition program baseline until November 2008. TSA officials said they have twice submitted an acquisition program baseline to DHS for approval—first in November 2009 and again February 2011. However, according to DHS officials TSA did not have a fully developed life cycle cost estimate. In November 2011, DHS told TSA that it needed to revise the life cycle cost estimates as well as its procurement and deployment schedules to reflect budget constraints. DHS officials told us that they could not approve the acquisition program baseline as written because TSA’s estimates were significantly over budget. An approved baseline will provide DHS with additional assurances that TSA’s approach is appropriate and that the capabilities being pursued are worth the expected costs. TSA officials stated that TSA is working with DHS to amend the draft program baseline and plans to resubmit a revised life cycle cost estimates with a revised acquisition program baseline by December 31, 2012. As we reported, establishing and approving a program baseline, as DHS and TSA plan to do for the EBSP, could help DHS assess the program’s progress in meeting its goals and achieve better program outcomes. Schedules. In July 2011, we reported that TSA had established a schedule for the acquisition of the explosives detection systems (EDS) TSA deploys to screen checked baggage, but it did not fully comply with leading practices, and TSA had not developed a plan to upgrade its EDS fleet to meet the 2010 explosives detection requirements. We noted that some of TSA’s approximately 2,200 deployed systems met 2005 explosive requirements while the remainder met 1998 explosive detection requirements.system acquisition, such as TSA’s EDS acquisition, depends in part on having a reliable schedule that identifies when the program’s set of work activities and milestone events will occur, amongst other things. We reported that the schedule for the EDS acquisition is not reliable because it does not include a timeline to deploy EDS or plans to procure EDS to meet subsequent phases of explosive detection requirements. We stated that developing a reliable schedule would help TSA better monitor and oversee the progress of the EDS acquisition. DHS concurred with the recommendation to develop and maintain a schedule for the entire EBSP in accordance with the leading practices we identified for preparing a schedule. DHS commented that TSA had already begun working with key stakeholders to develop and define requirements for a schedule and to ensure that the schedule aligns with the leading practices. In April 2012, Leading practices state that the success of a large-scale TSA stated that it had secured contractor resources to support development of an integrated master schedule in accordance with our and industry best practices, and that it anticipated completion of this schedule by September 2013. Cost estimates. In April 2012, we reported that TSA’s methods for developing life cycle cost estimates for the EBSP did not fully adhere to best practices for developing these estimates. We reported in March 2009 that a high-quality, reliable cost estimation process provides a sound basis for making accurate and well-informed decisions about resource investments, budgets, assessments of progress, and accountability for results and thus is critical to the success of a program. We reported that TSA’s estimates partially met three characteristics and minimally met one characteristic of a reliable cost estimate. DHS concurred with the recommendation that TSA ensure that its life cycle cost estimates conform to cost estimating best practices, and identified efforts underway to address it. As we reported in July 2012, TSA has worked with industry and other stakeholders to enhance general aviation security, such as issuing regulations and enhancing outreach and awareness, but there are weaknesses in the agency’s process for vetting foreign flight student applicants and in DHS’s process for identifying flight students who may be in the country illegally. We recommended two actions that DHS and TSA could take to address these concerns, with which DHS concurred. Vetting foreign flight student applicants. Under AFSP, foreign nationals seeking flight training in the United States undergo a TSA security threat assessment before receiving flight training to determine whether each applicant is a security threat to the United States. According to TSA officials, when a foreign national applies to AFSP to obtain flight training, TSA uses information submitted by the foreign national—such as name, date of birth, and passport information—to conduct a criminal history records check, a review of the Terrorist Screening Database, and a review of the Department of Homeland Security’s TECS system. According to TSA officials, most foreign nationals taking training from a U.S. flight training provider will apply for a Federal Aviation Administration (FAA) airman certificate (pilot’s license) once their flight training is completed. Information obtained by FAA as part of this application for certification is placed in the airmen registry. From January 2006 through September 2011, 25,599 foreign nationals had applied for FAA airman certificates, indicating they had completed flight training. However, TSA computerized matching of FAA data determined that some known number of foreign nationals did not match with those in TSA’s database, raising questions as to whether they had been vetted. Since 2009, TSA has vetted all new and existing FAA airman certificate holders against the Terrorist Screening Database on an ongoing basis, which would include the foreign nationals identified through TSA’s analysis. However, this vetting does not occur until after the foreign national has obtained flight training. Thus, foreign nationals obtaining flight training with the intent to do harm—such as three of the pilots and leaders of the September 11, 2001, terrorist attacks—could have already obtained the training needed to operate an aircraft before they received any type of vetting. We recommended that TSA take steps to identify any instances where foreign nationals receive FAA airman certificates without first undergoing a TSA security threat assessment and examine those instances so that TSA can identify the reasons for these occurrences and strengthen controls to prevent future occurrences. DHS concurred with this recommendation and stated that TSA signed a memorandum of understanding with FAA in February 2012 to help address this issue. The memorandum outlines a process for FAA to provide certain data from its airmen registry on a monthly basis and authorizes TSA to use the data to ensure flight training providers are providing TSA with information to conduct background checks prior to flight instruction. This is an important step toward addressing the first part of our recommendation, provided that TSA uses the data to identify instances where foreign nationals receive FAA airman certificates without first undergoing a TSA security threat assessment, identifies reasons for these occurrences, and strengthens controls to prevent future occurrences, as we recommended. Identifying flight students entering the country illegally. We also reported that AFSP is not designed to determine whether a foreign flight student entered the country legally; thus, a foreign national can be approved for training through AFSP after entering the country illegally. A March 2010 U.S. Immigration and Customs Enforcement (ICE) investigation of a flight school led to the arrest of six such foreign nationals, including one who had a commercial pilot’s license. As a result, TSA and ICE jointly worked on vetting names of foreign students against immigration databases, but had not specified desired outcomes and time frames, or assigned individuals with responsibility for fully instituting the program as of July 2012. Thus, this weakness still exists today. Having a road map, with steps and time frames, and assigning individuals the responsibility for fully instituting a pilot program could help TSA and ICE better identify and prevent potential risk. We recommended that TSA and ICE develop a plan, with time frames, and assign individuals with responsibility and accountability for assessing the results of their pilot program to check TSA AFSP data against information DHS has on applicants’ admissibility status to help detect and identify violations by foreign flight students, and institute that pilot program if it is found to be effective. DHS concurred and stated that TSA will prepare a plan by December 2012 to assess the results of the pilot program with ICE to determine the lawful status of the active AFSP population. We believe that these are positive actions that could help TSA address the weaknesses identified in our report. We will continue to monitor TSA’s progress on the proposed solutions as the agency proceeds. Chairman Rogers, Ranking Member Jackson-Lee, and Members of the Subcommittee, this concludes my prepared statement. I look forward to responding to any questions that you may have. 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 are Steve Morris, Assistant Director, and Michelle Woods, Analyst in Charge. Additional contributors include David M. Bruno, Glenn Davis, Jessica Lucas Judy; Assistant Directors; Joel Aldape; Adam Hoffman; Susanna Kuebler; Thomas Lombardi; Lara Miklozek; Linda Miller; Daniel Rodriguez; and Douglas Sloane. 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. | Securing commercial aviation operations remains a daunting task, with hundreds of airports, thousands of aircraft, and thousands of flights daily carrying millions of passengers and pieces of carry-on and checked baggage. The attempted terrorist bombing of Northwest flight 253 on December 25, 2009, and the October 2010 discovery of explosive devices in air cargo packages on an all-cargo aircraft bound for the United States from Yemen highlight the continuing need for effective passenger, cargo, and baggage screening. This statement discusses actions TSA has taken to (1) validate the scientific basis of its behavior-based passenger screening program (the Screening of Passengers by Observation Techniques, or SPOT); (2) strengthen the security of inbound air cargo (3) acquire checked baggage screening technology in accordance with established guidance; and (4) vet foreign nationals training at U.S. flight schools. This statement is based on GAO's work issued from September 2009 through July 2012, and includes selected updates on air cargo screening conducted from July through September 2012. For the selected updates, GAO interviewed TSA officials. The Transportation Security Administration (TSA) has taken actions to validate the science underlying its behavior-based passenger screening program, the Screening of Passengers by Observation Techniques, or SPOT, program, but more work remains. GAO reported in May 2010 that (1) TSA deployed SPOT before first determining whether there was a scientifically valid basis for using behavior and appearance indicators to reliably identify passengers who may pose a risk; and (2) it is unknown if the SPOT program has ever resulted in the arrest of anyone who is a terrorist, or who was planning to engage in terrorist related activity, although there is other evidence that terrorists have transited through SPOT airports. GAO recommended in May 2010 that the Department of Homeland Security (DHS) convene an independent panel of experts to review the methodology of the ongoing validation study on the SPOT program to determine whether it is sufficiently comprehensive to validate the program. DHS concurred and subsequently revised its validation study to include an independent expert review. DHS's study, completed in April 2011, found that SPOT was more effective than random screening to varying degrees; however, DHS noted limitations to the study, such as that it was not designed to comprehensively validate whether SPOT can be used to reliably identify individuals who pose a security risk. GAO is currently reviewing the program and will issue our report next year. TSA has taken actions to enhance the security of cargo on inbound aircraft, but challenges remain. For example, TSA issued new screening requirements aimed at enhancing the security of cargo on aircraft, such as prohibiting the transport of air cargo on passenger aircraft from Yemen. In June 2010, GAO recommended that TSA develop a mechanism to verify the accuracy of all screening data. TSA concurred in part and required air carriers to report inbound cargo screening data, but has not yet fully addressed the recommendation. In June 2012, TSA required air carriers to screen 100 percent of inbound air cargo transported on passenger aircraft by December 3, 2012. However, air carriers and TSA face challenges in implementing this requirement and in providing reasonable assurance that screening is being conducted at reported levels. DHS and TSA have experienced difficulties establishing acquisition program baselines, schedules, and cost estimates for the Electronic Baggage Screening Program (EBSP). For example, GAO reported in July 2011 that TSA had established a schedule for the acquisition of the explosives detection systems (EDS) TSA deploys to screen checked baggage, but it did not fully comply with leading practices. GAO recommended that DHS develop and maintain a schedule for the EBSP in accordance with leading practices. DHS concurred. GAO reported in July 2012 that TSA has worked to enhance general aviation security, such as though issuing regulations, but there are weaknesses in its process for vetting foreign flight school student applicants, and in DHS's process for identifying flight school students who may be in the country illegally. For example, TSA's program to help determine whether flight school students pose a security threat does not determine whether they entered the country legally. GAO recommended actions that DHS and TSA could take to address these concerns, with which DHS and TSA have concurred, and are starting to take actions. GAO is not making any new recommendations. GAO has previously recommended that TSA take actions to improve aviation security. In general, TSA concurred with the recommendations, and is taking actions to address them. |
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Medicare Part D coverage is provided through private sponsors that offer a choice of PDPs with different costs and coverage. The largest sponsors offer PDPs to beneficiaries throughout the United States and generally have experience in providing Medicare coverage and with call center operations. Under Part D, each PDP may offer the standard prescription drug benefit or coverage that is different, but at least actuarially equivalent, to the standard benefit. According to the Medicare Payment Advisory Commission, for 2006, 9 percent of PDPs offer the standard benefit, 48 percent offer a basic plan that has the same actuarial value as the standard benefit but with a different design, and 43 percent offer enhanced coverage that exceeds the standard benefit. Therefore, the specific premium, deductible, and copayment or coinsurance amounts, as well as the coverage gap—the period during which beneficiaries must pay 100 percent of their drug costs—of each PDP may vary. In addition, MMA and CMS regulations require plan formularies—the list of drugs a PDP covers—to meet certain standards, but within these standards, the drugs that are covered and the utilization management tools that are used to control costs may vary. If beneficiaries’ drugs are not on their PDP’s formulary, rather than paying full (retail) price for them, beneficiaries may switch to a similar drug that is on the formulary. Beneficiaries may also request that the plan make an exception to the formulary and cover their drugs. If the PDP denies that request, CMS regulations require that beneficiaries generally be able to appeal the decision to the sponsor. Although certain drugs may be on a PDP’s formulary, they may be subject to one or more of several utilization management tools—the most common of which are prior authorization, quantity limits, step therapy, and generic substitution. For drugs subject to prior authorization, beneficiaries need approval from their PDP before they can fill their prescription and for drugs subject to quantity limits, the plan limits the amount of the drug it covers over a certain period of time. For drugs subject to step therapy, the PDP requires that the beneficiary first try a less expensive drug for their condition before it will cover the beneficiary’s prescribed drug. Finally, generic substitution means that when there is a generic substitute available, the PDP will automatically provide the generic, unless the beneficiary’s doctor specifically orders the brand-name drug. To help cover costs under Part D, Medicare provides subsidies to certain low-income beneficiaries. For example, Medicare beneficiaries for whom Medicaid pays their Medicare Part B premium automatically receive the full low-income subsidy. This subsidy provides the beneficiary with reduced copayment amounts, covers any deductible, provides drug coverage during the coverage gap, and helps pay their PDP premium, up to a certain amount. Other Medicare beneficiaries, however, must apply for the low-income subsidy through the Social Security Administration, and may receive only a partial subsidy. For 2006, 79 sponsors are offering over 1,400 PDPs, each of which has been approved by CMS to ensure that it meets established standards. Ten of these sponsors are offering PDPs in all 34 PDP regions, and they account for nearly 62 percent of PDPs nationwide. The largest PDP sponsors are either in the commercial insurance or pharmacy benefit management and services sectors and generally have prior experience with call center operations. In addition, the largest PDP sponsors all have some prior experience with Medicare. Most offered a Medicare prescription drug discount card or partnered with a company and most offer Medicare Advantage plans. Almost all of the calls we placed were answered by a CSR with minimal delay. A limited number of calls were not answered by CSRs, mainly due to disconnections. Further, we found that most CSRs with whom we spoke were easy to understand, polite, and professional, and many provided helpful suggestions and information. Call centers generally provided prompt service in answering our calls. The wait time to reach a CSR was generally short—46 percent of the 864 calls CSRs fielded were answered in less than 1 minute and 96 percent of the calls were answered in less than 5 minutes (see fig. 1). Only 9 calls (1 percent) were answered in 10 minutes or more, with the longest wait time being 25 minutes (1 call). For a small number of calls—36 of the 900 calls we placed (4 percent)—we did not receive an answer to our questions because we did not reach a CSR. For almost all of these calls (33), this occurred because we were disconnected. CSRs generally provided courteous service. Our callers noted that many were helpful and friendly, and we found that CSRs were easy to understand, polite, and professional in 98 percent of the calls. In addition, if a CSR did not know or could not answer a question, many provided additional resources for obtaining the answer, most commonly during calls on the low-income subsidy (question 3). While CSRs did not provide an answer for over one-third of the calls for this question, in over 80 percent of these cases, CSRs suggested another source the caller could contact to obtain the answer—most commonly Medicare or the Social Security Administration. Many CSRs also provided callers with helpful suggestions that related to our questions. For example, during question 1 calls on the PDP comparison for a low-utilization beneficiary, CSRs provided information about a mail-order option to obtain drugs in 22 percent of the calls. For question 2 on the PDP comparison for a high-utilization beneficiary, CSRs provided the caller with information about lower-cost drugs in 41 percent of the calls and inquired as to whether the beneficiary was eligible for the low-income subsidy in 24 percent of the calls. CSRs at the 10 PDP sponsor call centers we contacted provided accurate and complete responses to about one-third of the calls they fielded, although the accuracy and completeness rates for each of the 10 sponsor call centers and for each of the five questions varied. CSRs were unable to provide an answer for 15 percent of the questions posed, primarily those related to plan costs. In addition, we found that CSRs within the same call centers sometimes provided inconsistent responses to our questions. Excluding the 4 percent of calls for which we did not reach a CSR, we obtained accurate and complete responses to 34 percent of the calls—294 of 864—and obtained incomplete responses to another 29 percent of the calls (see fig. 2). The overall accuracy and completeness rates for each of the 10 PDP sponsor call centers varied widely, ranging from 20 to 60 percent (see fig. 3). Only 1 sponsor call center had an overall accuracy and completeness rate of greater than 50 percent and 2 sponsor call centers had rates of 25 percent or less. No sponsor’s call center consistently had the highest or lowest accuracy and completeness rate for all questions. For example, although 1 call center had the highest accuracy and completeness rate for both question 1 (the PDP comparison for a low- utilization beneficiary) and question 2 (the PDP comparison for a high- utilization beneficiary), it had the second-lowest accuracy and completeness rate for question 4 (nonformulary drugs). Variation across call centers was due, in part, to differences in the resources that CSRs said were available to them. For example: In response to questions 1 and 2, CSRs at two call centers indicated that they were able to compute the annual cost of the least expensive plan because they had access to a computerized “cost calculator.” However, CSRs at other call centers stated that they could not compute an annual cost because they did not have access to such a resource. We located cost calculators on the Web sites of seven sponsors, each of which had call center CSRs who stated that they did not know or could not calculate an annual cost. CSRs at six different sponsor call centers stated that they could not calculate the annual cost of the least expensive plan because they did not have access to the retail prices of the beneficiary’s drugs. In contrast, CSRs at two other call centers stated that they did have access to these prices, and were able to use them in calculations. For each of the five questions, accuracy and completeness rates varied, but were generally low. They ranged from 14 to 60 percent (see fig. 4). Relatively few CSRs were able to accurately identify the least costly plan and calculate its annual cost. In addition, the annual cost estimates that CSRs provided were often substantially different from the plans’ actual costs. For example: For the low-utilization beneficiary (question 1), about 1 in 3 responses were incomplete; that is, CSRs identified the least costly plan, but either inaccurately calculated its annual cost or stated that they could not provide any annual cost. Over half of the CSRs that provided an inaccurate response quoted a cost that was greater than the actual cost. For the high-utilization beneficiary (question 2), about 3 in 10 responses were incomplete. Among the 23 CSRs that correctly identified the least costly plan, but gave an inaccurate annual cost, almost all provided a quote that was less than the actual cost, and in 11 cases over $1,000 less. About two-thirds of the CSRs were unable to accurately report whether the sponsor offered a PDP for which a Medicare beneficiary that received help from Medicaid would not have to pay a premium (question 3). Specifically, CSRs fielding this call answered inaccurately 31 percent of the time and did not provide an answer 35 percent of the time. For most of the inaccurate answers, CSRs stated that a certain PDP would not require a premium from the beneficiary, but, in fact, it would. Other inaccurate responses showed a poor understanding of the low-income subsidy benefit; for example, two CSRs incorrectly stated that the low-income subsidy did not help offset the premium at all. Half of the CSRs responding to question 4 incompletely described the options available to a beneficiary taking a nonformulary drug. Of the incomplete responses, about 4 in 5 CSRs mentioned that the beneficiary could request an exception to have the plan cover the nonformulary drug, but not that the beneficiary could switch to a drug that the plan covers. In addition, 15 percent of CSR responses included neither possibility, with many CSRs stating that the beneficiary’s only option would be to pay full price for nonformulary drugs. Finally, CSRs accurately described at least two utilization management tools in 60 percent of our calls for question 5—the highest accuracy and completeness rate of our five questions. Other CSRs identified, but could not accurately describe, specific tools. For example, one CSR incorrectly stated that quantity limits—a limit on the amount of a drug that the plan will cover over a certain period of time—means that a pharmacy may not have enough of a drug to fill the beneficiary’s prescription. Overall, CSRs stated that they did not know or could not answer our question for 15 percent of the calls. This was most common for the questions related to PDP costs (the PDP comparison for a low-utilization beneficiary, the PDP comparison for a high-utilization beneficiary, and the low-income subsidy). For question 2 calls regarding the PDP comparison for a high-utilization beneficiary, 30 percent of the CSRs stated that they were unable to tell the caller which PDP would cost the beneficiary the least annually. In contrast, only 8 percent of CSRs provided this response for question 1 on the low-utilization beneficiary. This difference in the percentage of calls for which an answer was provided is likely due to the added complexity of comparing PDPs and calculating the annual cost for a beneficiary using eight drugs versus a beneficiary using three drugs. However, reliance on at least five drugs is common in the Medicare population. Question 3 regarding the low-income subsidy had the highest “no answer provided” rate—35 percent. Of the CSRs that did not provide an answer to this question, almost all stated that they did not know the subsidy amount the beneficiary would receive. Because they did not recognize that beneficiaries with both Medicare and Medicaid automatically receive the full low-income subsidy, they could not effectively determine whether that subsidy would cover the sponsor’s PDP premiums. CSRs within the same call center sometimes provided inconsistent responses to our five questions. For example, within each of six different call centers, among CSRs who accurately identified the least costly plan for the low-utilization beneficiary (question 1), some CSRs calculated an accurate annual cost, some calculated an inaccurate annual cost, and others stated that they could not calculate an annual cost. In response to question 2 regarding the high-utilization beneficiary, different CSRs within five call centers identified each of their sponsor’s PDPs as the least costly. In addition, in response to questions 1 and 2, CSRs at three call centers told us that it was against the sponsor’s policies to identify any of their plans as having the lowest annual cost. However, other CSRs at each of these call centers did not cite this policy and did identify a plan as having the lowest annual cost. In part, these inconsistencies were due to differences in CSRs’ knowledge about their sponsor’s plans. For example, CSRs’ varying knowledge related to the low-income subsidy question (question 3) produced contradictory responses. Within each of the 10 sponsor call centers, different CSRs answered accurately, inaccurately, or stated that they did not know or could not answer the question. When asked about the options for a beneficiary using nonformulary drugs (question 4), different CSRs within each of 6 sponsor call centers stated that a beneficiary could either switch to a covered drug or apply for an exception, stated only that the beneficiary could switch to a covered drug, stated only that the beneficiary could apply for an exception, or stated neither possibility. Among CSRs that stated neither possibility, the specific responses differed. For example, at 1 of the above call centers, although five CSRs answered the question accurately, one erroneously stated that the beneficiary’s only option was to pay full price for nonformulary drugs, and another erroneously stated that any drugs not covered by the PDP would be covered under Medicare Part B. In answering question 5 on utilization management tools, different CSRs within the same call center provided varying descriptions of the utilization management tools PDPs use. For example, although four CSRs within one call center provided accurate descriptions of at least two tools, three other CSRs within this call center each provided a different, and inaccurate, description of utilization management tools. At another call center, two CSRs stated that they could not describe any tools without knowing the specific drugs the beneficiary was taking—even though eight other CSRs at that call center were able to accurately describe at least one tool without knowing the beneficiary’s drugs. Our calls to 10 of the largest PDP sponsors’ call centers show that Medicare beneficiaries face challenges in obtaining the information needed to make informed choices about the PDP that best meets their needs. Call center CSRs are expected to provide answers to drug benefit questions and comparative information about their sponsors’ PDP offerings. Yet we received accurate and complete responses to only about one-third of our calls. In addition, responses to the same question varied widely, both across and within call centers. Sponsor call centers’ poor performance on our five questions raises questions about whether the information they provide will lead beneficiaries to choose a PDP that costs them more than expected or has coverage that is different than expected. Rather than consider PDP options solely on the basis of the call centers’ information, callers may benefit from consulting other information sources available on Medicare Part D when seeking to understand and compare PDP options. CMS reviewed a draft of this report and provided written comments, which appear in appendix I. In its comments, CMS characterized our analysis as based on inaccurate, incomplete, and subjective methods that limit the report’s relevance and validity. However, CMS went on to say that despite its view on the study’s limitations, GAO is right to be concerned about whether beneficiaries are getting effective service from plan call centers. CMS asserted that our questions did not reflect the usual questions received by PDP sponsor call centers. As noted in the draft report, we selected topics that were addressed in the Frequently Asked Questions section of the Medicare.gov Web site and regarded by policy experts and beneficiary advocates as important to making an informed plan choice. Furthermore, at a May 2006 meeting with CMS officials, the agency’s Deputy Administrator stated that CSRs should be able to accurately answer all of the specific questions we posed during the study. CMS also stated that we asked for information that CSRs are not required to provide. Specifically, for questions 1 and 2 on PDP comparisons for low and high-utilization beneficiaries, CMS stated that it does not require sponsor call centers to provide information on the annual costs of their PDPs. However, while not necessarily required, agency officials had indicated that the information we sought from CSRs was within the scope of plan sponsor customer service efforts. In a discussion held before we conducted our March calls, CMS officials told us that the agency had not established any requirements regarding the specific types of information plan CSRs must be able to provide, but that it was reasonable to expect CSRs to give callers accurate information on the topics we included in our review. In addition, as noted in the draft report, some call centers were relatively successful in providing accurate and complete answers to questions 1 and 2, indicating that call center CSRs can handle such questions appropriately. One call center’s CSRs answered the question accurately and completely in 88 percent of the calls for the low-utilization beneficiary, and one call center’s CSRs responded correctly in 81 percent of the calls for the high-utilization beneficiary. In addition, we found that 7 of the 10 PDP sponsors had cost calculators on their Web sites that could have been used to answer these questions. CMS commented that, to be counted as providing a complete response to questions 1 and 2 on PDP comparisons, we expected CSRs to recommend a specific plan to the caller, a practice that often constitutes “steering,” which is prohibited under Medicare marketing guidance. As noted in the draft report, our callers identified themselves as family members wishing to assist beneficiaries in choosing a drug plan. Providing assistance to beneficiaries—which is encouraged by CMS—generally consists of learning the characteristics of various PDPs and assessing their relative merits given the potential enrollee’s needs. This is clearly allowed in CMS’s Marketing Guidelines, which distinguish between assistance based on objective information and steering to a drug plan for financial gain. CMS also took issue with how we counted a specific CSR response to questions 1 and 2. The agency incorrectly claimed that a CSR’s referral to 1-800-MEDICARE was categorized as an incomplete response. As noted in the draft report, we categorized responses as incomplete if the CSR accurately named the lowest annual cost plan, but either inaccurately calculated or could not provide the annual cost. If the CSR did not answer the question and instead referred the caller to 1-800-MEDICARE for information on PDPs, we classified the response as “no answer provided.” CMS stated that the wording of question 3 on the low-income subsidy was inaccurate and therefore misleading. This question specifies that the beneficiary automatically qualifies for extra help because Medicaid pays part of her Medicare premiums. According to CMS, the wording of question 3 is incorrect because only Medicare pays the drug premium for low-income beneficiaries and Medicaid would fully (not partly) pay the Part B premium. However, CMS’s comment conflicts with the information we obtained from its Medicare.gov Web site in developing the wording and answer for this question. Using the Web-based PDP finder tool on this Web site, the user can select one of several options specifying why the beneficiary qualified for extra help. We selected the option specifying that the beneficiary automatically qualified for extra help because they receive “help from State paying Medicare premiums.” We agree that only Medicare, and not Medicaid, pays the Medicare Part D premium for low- income beneficiaries and Medicaid would fully (not partly) pay the Part B premium. Therefore, for such a beneficiary, Medicaid would pay part of the beneficiary’s Medicare premiums. CMS also stated that, for certain questions, many reasonable answers were not counted as correct. The agency cited our question regarding a beneficiary’s options should he or she be prescribed a nonformulary drug, and asserted that our criteria for a correct response—switching to a covered drug or asking for an exception—was too limited. The agency stated that other reasonable answers should have been counted as correct because we conducted our calls at a time when all plans covered all Part D drugs. We obtained the answer to this question from a script that CMS approved for use by CSRs operating its 1-800-MEDICARE help line. In addition to the two options we used as criteria for an accurate and complete answer, the script mentioned that PDPs are required to provide beneficiaries with temporary transitional coverage (generally for 30 days after enrollment) of drugs not on the PDP’s formulary. However, according to CMS, the purpose of this temporary coverage is to provide beneficiaries with sufficient time to switch to another drug or to request an exception to the formulary. Therefore, in specifying our criteria for an accurate and complete answer, we chose to include only the two options that CMS sees as longer-term solutions for the beneficiary. CMS stated that we did not examine certain features of the support services that plan sponsors’ call centers are required to provide, such as hours of operation, wait times, disconnection rates, and language services. It also noted requirements that plans report a range of performance measures, such as beneficiary complaint rates and timeliness of exceptions and appeals decisions. As noted in the draft report, the scope of our review was limited to the accuracy and completeness of information disseminated to the public by PDP sponsors’ call centers—a feature of plan customer service for which CMS has established no performance requirements. Finally, CMS believes that, as written, our study provides little practical guidance of value in improving the drug benefit and that our conclusion— that callers may benefit from consulting other information sources available on Medicare Part D when seeking to understand and compare PDP options—is obvious. In quoting our conclusion, CMS omitted the key part of the paragraph preceding the quoted phrase where we state that “sponsor call centers’ poor performance on our five questions raises questions about whether the information they provide will lead beneficiaries to choose a PDP that costs them more than expected or has coverage that is different than expected. . . .” We continue to believe that plan sponsors should be accountable for the accuracy of their information and make maintaining effective call centers a priority. CMS also provided us with detailed, technical comments, which we 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 the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions 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 contributions to this report are listed in appendix II. In addition to the contact named above, Rosamond Katz, Assistant Director; Manuel Buentello; Jennifer DeYoung; and Joanna L. Hiatt made major contributions to this report. Other contributors include Lori D. Achman, Diana B. Blumenfeld, Gerardine Brennan, Laura Brogan, Lisa L. Fisher, M. Peter Juang, Martha R.W. Kelly, Ba Lin, and Michaela M. Monaghan. | The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established a voluntary outpatient prescription drug benefit, known as Medicare Part D. Private sponsors have contracted with the Centers for Medicare & Medicaid Services (CMS) to provide this benefit and are offering over 1,400 stand-alone prescription drug plans (PDP). Depending on where they live, beneficiaries typically have a choice of 40 to 50 PDPs, which vary in cost and coverage. MMA required each PDP sponsor to staff a toll-free call center, which serves as a key source of the information that beneficiaries need to make informed choices among PDPs. GAO examined (1) whether PDP sponsors provide prompt, courteous, and helpful service to Medicare beneficiaries and others and (2) the extent to which PDP sponsor call centers provide accurate and complete information to Medicare beneficiaries and other callers. To address these objectives, we made 900 calls to 10 of the largest PDP sponsor call centers during March 2006, posing one of five questions about their Part D plans during each call. We tracked the amount of time it took to reach a customer service representative (CSR), the number of calls that did not reach a CSR, and the appropriateness and clarity of CSRs' language. We developed criteria for determining accurate and complete responses based on CMS information. Call center service was generally prompt and courteous, and many CSRs offered helpful suggestions and information. GAO reached a representative in less than 1 minute for 46 percent of the calls CSRs fielded and in less than 5 minutes for 96 percent of the calls fielded. While GAO did not reach CSRs for 4 percent of the calls it placed, mainly because of disconnections, GAO found that 98 percent of CSRs with whom GAO spoke were easy to understand, polite, and professional. In addition, many CSRs provided helpful suggestions related to GAO's questions, such as details about a mail-order option to obtain drugs or lower-cost drugs. However, CSRs at 10 of the largest PDP sponsor call centers did not consistently provide accurate and complete responses to GAO's five questions, which GAO developed using information from CMS and other sources. GAO obtained accurate and complete responses to about one-third of the 864 calls for which GAO reached a CSR. The overall accuracy and completeness rate for each call center ranged from 20 to 60 percent. CSRs were unable to answer 15 percent of the questions posed, primarily those related to plan costs. Furthermore, CSRs within the same call center sometimes provided inconsistent answers. For example, in response to questions about PDP cost comparisons for specified sets of drugs, CSRs at 3 call centers told GAO that it was against the sponsors' policies to identify any of their plans as lowest cost. However, other CSRs at each of these call centers did not cite this policy and did identify a plan as lowest cost. In commenting on a draft of this report, CMS criticized the analysis as based on inaccurate, incomplete, and subjective methods that limit the report's relevance and validity. GAO maintains that its methods are sound and its findings are accurate. CMS officials told GAO at a May 2006 meeting that CSRs should have been able to accurately answer the questions GAO posed. |
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Before 1996, Medicare program integrity activities were subsumed under Medicare’s general administrative budget and performed, along with general claims processing functions, by insurance companies under contract with CMS, which led to certain problems. The level of funding available for program integrity activities was constrained, not only by the need to fund ongoing Medicare program operations—such as the costs for processing medical claims, but also by budget procedures imposed under the Budget Enforcement Act of 1990. In the early and mid-1990s, we reported that such funding constraints had reduced Medicare contractors’ ability to conduct audits and review medical claims. HHS advocated for a dedicated and stable amount of program integrity funding outside of the annual appropriations process, so that CMS and its contractors could plan and manage the function on a multiyear basis. HHS also asserted that past fluctuations in funding had made it difficult for contractors to retain experienced staff who understood the complexities of, and could protect, the financial integrity of Medicare program spending. Beginning in fiscal year 1997, HIPAA established MIP and provided CMS with dedicated funding to conduct program integrity activities. HIPAA stipulated a range of funds available for these activities from the Medicare trust funds each year. For example, for fiscal year 1997, the law stipulated that at least $430 million and not more than $440 million should be used. The maximum amount of MIP funds rose from $440 million in fiscal year 1997 to $720 million in fiscal year 2003. For fiscal year 2003, and every year thereafter, the maximum amount that HIPAA stipulated for MIP was $720 million. (See app. II, table 2, for additional information on the MIP funding ranges.) As a result of the increases stipulated in HIPAA, from fiscal years 1997 through 2005, total MIP expenditures increased about 63 percent—from about $438 million to $714 million, as figure 1 shows. HIPAA authorized MIP funds to be used to enter into contracts to “promote the integrity of the Medicare program.” The statute also listed the various program integrity activities to be conducted by contractors. CMS allocates MIP funds primarily to support its contractors’ program integrity efforts for the traditional Medicare program, known as fee-for- service Medicare. Among these contractors are fiscal intermediaries (intermediaries), carriers, PSCs, and Medicare administrative contractors (MAC). MACs are a new type of contractor that will replace all intermediaries and carriers by October 2011, as required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). MMA required CMS to conduct full and open competition to select MACs. CMS refers to this change as contracting reform. CMS has contracted with intermediaries, carriers, and MACs to perform two types of activities—claims processing and program integrity. Their claims processing activities include receiving and paying claims. These activities are classified as program management and are funded through a program management budget. In addition, intermediaries and carriers have been charged with conducting some program integrity activities under MIP, including performing medical review of claims. The four MACs selected in January 2006 will not conduct medical review activities. CMS plans to assign responsibility for medical review of claims to the MAC selected in July 2006 and to the other MAC contracts to be awarded in the future. MIP provides funds to support these program safeguard efforts. In addition, CMS uses MIP funds to support the activities of PSCs, which perform medical review of claims and identify and investigate potential fraud cases; a coordination of benefits (COB) contractor, which determines whether Medicare or other insurance has primary responsibility for paying a beneficiary’s health care costs; the National Supplier Clearinghouse (NSC), which screens and enrolls suppliers in the Medicare program; and the data analysis and coding (DAC) contractor, which maintains and analyzes Medicare claims data for durable medical equipment (DME), prosthetics, orthotics, and supplies. Contractors receive MIP funds to perform one or more of the following five program integrity activities: Audits involve the review of cost reports from institutions, such as hospitals, nursing homes, and home health agencies. Cost reports play a role in determining the amount of providers’ Medicare reimbursement. Medical review includes both automated and manual prepayment and postpayment reviews of Medicare claims and is intended to identify claims for noncovered or medically unnecessary services. The secondary payer activity seeks to identify primary sources of payment--such as employer-sponsored health insurance, automobile liability insurance, and workers’ compensation insurance--that should be paying claims mistakenly billed to Medicare. Secondary payer activities also include recouping Medicare payments made for claims not first identified as the responsibility of other insurers. Benefit integrity involves efforts to identify, investigate, and refer potential cases of fraud or abuse to law enforcement agencies that prosecute fraud cases. Provider education communicates information related to Medicare coverage policies, billing practices, and issues related to fraud and abuse both to providers identified as having submitted claims that were improper, and to the general provider population. CMS also uses MIP to fund support for the five activities, such as certain information technology systems, fees for consultants, storage of CMS records, and postage and printing. The agency allocates the cost of this support to the five activities, depending on which of the activities is receiving support. Table 1 provides information on specific MIP activities performed by the contractors. Appendix III provides examples of key tasks performed by each of these contractors. For fiscal years 1997 through 2005, CMS generally increased the amount of funding for each of its five program integrity activities, but the amount of the funding provided and the percentage increase have varied among the activities. Provider education received the largest percentage increase in funds, while audit and medical review received the largest amount of funds overall. (See fig. 2.) CMS increased its allocation for provider education by about 590 percent from fiscal year 1997 through fiscal year 2005. This increase was due, in part, to CMS’s decision in fiscal year 2002 to use MIP funds for outreach activities to groups of like providers, which had not previously been funded through MIP. CMS will be able to further increase expenditures for program integrity in fiscal year 2006. In addition to the maximum of $720 million originally appropriated under HIPAA for fiscal year 2006, DRA increased the maximum by an additional $112 million, for a total of $832 million. CMS plans to use some of the $112 million to address potential fraud, waste, and abuse in the new Medicare prescription drug benefit. In each year from fiscal year 1997 through fiscal year 2005, CMS generally increased the amount of MIP funds spent for each of its five program integrity activities, as figure 2 shows. In addition to the increase in the amount of funding for provider education, the expenditures for audit increased 45 percent during the same period. As figure 3 shows, expenditures for medical review increased from fiscal year 1997 to fiscal year 2001 to almost $215 million—about 81 percent—and, since fiscal year 2001, decreased to about $166 million, or about 23 percent. Overall, expenditures for medical review increased 40 percent from fiscal year 1997 to fiscal year 2005. During this period, expenditures for secondary payer increased 49 percent, and for benefit integrity, expenditures increased 89 percent. (See fig. 3 for the amount of expenditures by activity in fiscal years 1997, 2001, and 2005 and app. II, table 3, for more detailed information on the amount of expenditures for each activity in each year.) Increased spending for provider education stemmed, in part, from provider concerns about an increased burden on them in the medical review process. In 2001, we reported that as CMS increasingly focused on ensuring program integrity, providers were concerned about what they considered to be inappropriate targeting of their claims for review. Further, providers asserted that they may have billed incorrectly because of their confusion about Medicare’s program rules. To address these concerns, CMS developed a more data-driven approach for conducting medical review and also increased its emphasis on provider education. CMS officials explained that medical review would help identify providers that were billing inappropriately, and provider education would focus on individuals’ specific billing errors to eliminate or prevent recurrence of the problems. In addition, beginning in fiscal year 2002, spending for the provider education activity increased significantly because CMS began to use MIP funds for what the agency called provider outreach. Provider outreach focuses on communicating with groups of providers about Medicare policies, initiatives, and significant programmatic changes that could affect their billing. This information is conveyed through seminars, workshops, articles, and Web site publications. Previously, provider outreach had been funded outside of MIP, as part of CMS’s program management budget. Provider education spending increased from $17 million in fiscal year 2001—before provider outreach was added to the provider education activity—to $53.5 million in fiscal year 2002. In fiscal year 2005, funding for the provider education activity reached $70 million. In comparing the share of funds spent on each program integrity activity, from fiscal year 1997 through fiscal year 2005, we found that CMS generally spent the largest share on audit, averaging about 31 percent, and on medical review, averaging about 27 percent. CMS spent less on secondary payer, averaging 21 percent, and benefit integrity, averaging 15 percent. In contrast, during this period, CMS spent the smallest percentage on provider education, which averaged about 6 percent of MIP expenditures. See figure 4 for information on the percentage of funds allocated to each activity. (For more detail, see table 4 in app. II.) CMS officials told us that they generally had allocated MIP funds to the five activities based predominantly on historical funding, but sometimes considered high-level priorities. However, this approach does not take into account data or information on the effectiveness of one activity over the other in ensuring the integrity of Medicare or allow CMS to determine if activities are yielding benefits that are commensurate with the amounts spent. For example, while CMS has noted that benefit integrity and provider education activities have intangible value, the agency has not routinely collected information to evaluate their comparative effectiveness. Furthermore, CMS has not fully assessed whether MIP funds are appropriately allocated within the audit, medical review, benefit integrity, and provider education activities. For example, audit’s role has changed as Medicare’s payment methods have changed in the last decade, but it continues to have the largest share of MIP funding. According to agency officials, CMS allocates funds for the five activities based primarily on an analysis of previous years’ spending and may also consider other information when developing the MIP budget, such as current expenditures by individual contractors. CMS officials told us that they may also consider the agency’s high-level priorities. For example, in fiscal year 2004, CMS began to increase funds to expand the scope of its annual study to estimate Medicare improper payment rates, and in fiscal year 2002, it increased its MIP allocation for provider education. CMS does not have a means to compare quantitative data or qualitative information on the relative effectiveness of MIP activities that it could use in allocating funds. Instead, it calculates the quantitative benefits for two, and assesses the qualitative benefits—which are not objectively measured—for the other three. In fiscal year 2005, for its medical review and secondary payer activities, CMS tracked dollars saved in relation to dollars spent—a quantitative measure that the agency calls a return on investment (ROI). Having an ROI figure is useful because it measures the effectiveness of an individual activity so that its value can be compared with that of another activity. As of fiscal year 2005, secondary payer had an ROI of $37 for every dollar spent on the activity, and medical review had an ROI of $21 for every dollar spent. CMS tracked the ROI for audit, but by fiscal year 2002, audit’s reported contribution to ROI fell to almost zero. (See fig. 5 and app. II, table 5, for additional ROI details.) CMS officials told us that the decrease in the ROI for audit was due to the implementation of prospective payment systems (PPS), under which Medicare pays institutional providers fixed, predetermined amounts that vary according to patients’ need for care. Until fiscal year 2001, audits had achieved an ROI that was generally $9 or more for every dollar spent conducting them, by disallowing payment for individual costs that should not have been paid by Medicare under the previous payment method. Under PPS, CMS’s methods for paying providers changed. However, the information system that had been used to track ROI began to incorrectly calculate the savings from audit because it had not been adjusted for the new payment method. According to agency officials, CMS is implementing a different way to track audit savings, and an overall ROI. It will focus on the savings from disallowing items that directly affect an individual provider’s payment under a PPS, such as bad debts and the number of low- income patients hospitals serve. It will track the amounts related to these add-on payments actually paid by Medicare to, or recouped from, the provider after an audit. The difference between the amount paid prior to the audit and the amount paid after the audit (assuming there has been an adjustment) would be the savings. However, all audit functions do not result in measurable savings. For example, in its written comments on a draft of this report, CMS noted that many audit functions funded by MIP do not have an ROI. CMS stated that these include processing cost reports for data collection purposes, correcting omissions on providers’ cost reports, implementing court decisions, and issuing notifications concerning Medicare payments. In addition, CMS stated that some of these activities are mandated by law, while others have significant value to the Medicare Payment Advisory Commission (MedPAC), which is an independent federal commission; providers; provider associations; and actuaries. From fiscal year 1997 through fiscal year 2005, CMS developed qualitative assessments of the impact of benefit integrity and provider education. According to CMS, the agency develops such assessments when the savings generated by MIP activities are impossible or difficult to identify. Nevertheless, CMS officials told us that these activities provide value to the program in helping to ensure proper Medicare payments. For example, CMS officials said that benefit integrity contributes to the work of federal law enforcement agencies, which investigate and prosecute Medicare fraud and abuse. CMS officials also noted that they consider benefit integrity to have a sentinel effect in discouraging entities that may be considering defrauding the Medicare program, but this effect is impossible to measure. CMS indicated that trying to measure the results of the contractors’ benefit integrity activities could create incentives that undermine the value of their work. For example, counting the number of cases referred to law enforcement for further investigation could lead the contractors to refer more cases that were less fully developed. However, other agencies that investigate or prosecute fraud, such as HHS and the Department of Justice, keep track of their successful cases, recoveries, and fines to demonstrate their results. Similarly, CMS could assess the degree to which each of its contractors had contributed to HHS and the Department of Justice’s successful investigations and prosecutions. In regard to educating providers on appropriate billing practices, CMS may be missing opportunities to evaluate its contractors’ performance. Provider education can help reduce billing errors, according to CMS. However, according to an OIG report, CMS has not evaluated the strategies used to modify the behavior of providers through education to determine if these strategies are achieving desired results. CMS has noted the intangible value inherent in benefit integrity and provider education activities, but the agency has not routinely collected information to evaluate their comparative effectiveness in ensuring program integrity. Further, as discussed earlier, correct information on audit’s effectiveness, based on an ROI, has not been available for the last several years. Consequently, CMS is not able to determine if some of the funds spent for benefit integrity, provider education, and audit—about $396 million, or 56 percent of MIP funds in fiscal year 2005—could be better directed to secondary payer or medical review. Nevertheless, CMS officials told us that they plan to decrease the allocation to medical review and increase the allocation to provider education. CMS officials stated that they are developing two initiatives that will give the agency objective measures of the results of the audit and provider education activities. As discussed earlier, CMS is implementing a revised methodology for calculating the ROI for audit. In addition, it is trying to develop information on the effectiveness of provider education. A CMS official explained that the agency is adding a provider education component to its program integrity management reporting system. This component will potentially allow CMS to develop an ROI figure for provider education by correlating educational efforts to a decrease in claim denials and provide a measure of the quantitative benefits of this activity. This component is scheduled to begin operating in the summer of 2006. After CMS has allocated funds to each of the five MIP activities, it must decide how to further distribute those funds to pay contractors that carry out each one. For example, in fiscal year 2004, after CMS allocated about $135 million for medical review to be conducted by intermediaries and carriers, it then distributed those funds to pay 28 intermediaries and 24 carriers that were conducting medical review at that time. However, given vulnerabilities for improper payment, contractor workload, and the relative effectiveness of activities performed, CMS has not always taken steps to ensure that it has allocated funds in an optimal way within its activities. Nevertheless, CMS has used information on relative savings to decide on funding allocations within the secondary payer activity. Medical review, provider education, and benefit integrity are activities for which allocation of MIP funds may not be optimal, because our analysis suggests that CMS has not allocated funds within these activities based on information concerning contractor vulnerabilities. Such vulnerabilities include the potential for fraudulent billing in different locations and the amount of potential benefit payments at risk in the contractor’s jurisdiction. For example, CMS estimated that the contractor that handled claims for DME, orthotics, prosthetics, and supplies in a jurisdiction that included Texas and Florida—two states experiencing high levels of fraudulent Medicare billing—improperly paid 11.5 percent of its 2004 claims—or $474.9 million—which was a higher improper payment rate than that of other contractors paying these types of claims. As we previously reported, our analysis indicated this contractor received almost a third less funds for medical review per $100 in submitted claims in fiscal year 2003 than the amount given to contractors in other regions with less risk of fraudulent billing. Our most recent analysis indicated that the imbalance in fund allocation did not change in fiscal years 2004 and 2005. We could not determine the rationale for this allocation beyond what was historically budgeted for this contractor. The amount of medical review funds allocated to individual contractors is not directly tied to the amount of benefits that they pay, which is a key measure of potential risk. For example, in fiscal year 2004, one contractor paid out $66 million in benefits and received about 28 cents in medical review funds for each $100 in benefits paid. In contrast, another contractor paid out considerably more in benefits—about $5 billion in fiscal year 2004—and received about 7 cents in medical review funds for each $100 in benefits paid. Further, CMS has not adjusted the amount of funding for individual contractors to educate providers based on their relative risks. A CMS official told us that the amount of provider education funding is generally aligned with the amount allocated for medical review, regardless of the value of the benefits that the contractor pays. Similarly, the amount of MIP funds provided to PSCs is not directly tied to the amount of benefits paid in jurisdictions for which they have responsibility for benefit integrity. For example, CMS spent about $75 million for work performed by PSCs under 13 benefit integrity task orders. The PSCs averaged about 3 cents for each $100 in paid claims in the jurisdictions for which they conducted benefit integrity tasks. However, the amount of MIP funding paid to the PSCs to conduct benefit integrity activities varied from about 1 cent to about 7 cents for each $100 in claims paid. Further, our analysis showed no clear relationship between funds provided to PSCs and their responsibilities for conducting benefit integrity activities in jurisdictions with high incidences of fraudulent Medicare billing. For example, one PSC received about 4 cents for conducting benefit integrity work for each $100 in paid claims for benefit integrity work in a jurisdiction that included Florida, which is at high risk for fraudulent billing. In contrast, PSCs received the same level of funding to conduct benefit integrity work in states at lower risk for fraudulent billing, including Iowa, Montana, Pennsylvania, and Wyoming. During the last decade, Medicare has significantly changed how it pays institutional providers—such as hospitals and nursing homes—that it audits. To align with the payment method changes, CMS has modified its audit focus to items in the cost report that can affect payments under a PPS. However, these audits can affect a much smaller proportion of Medicare’s payments under a PPS than audits of costs under the previous payment method. Given the magnitude of the payment method change, CMS has not evaluated whether funds within the audit activity should be further reallocated to potentially generate greater savings to the Medicare program by addressing the accuracy of reported costs that may be used to determine payment increases. CMS distributes funds to its contractors to conduct certain tasks, such as inputting data from; reviewing; and, if needed, auditing cost reports submitted by its institutional providers in order to settle, or agree upon, the reported costs. CMS’s audit contractors are also required to conduct wage index reviews and assist with intermediary hearings and appeals of settled cost reports. For several years, CMS has had a backlog of cost reports to settle, and the agency has made a priority of reducing the backlog. Other priorities include more closely scrutinizing those providers that are still paid based on their costs—such as critical access hospitals— and conducting required audits. For providers paid under a PPS, CMS has shifted its audit focus to the few items that could affect a provider’s payments if disallowed. These include bad debt, payments for graduate medical training, and the number of low- income patients that hospitals serve. CMS has also shifted more audit resources to hospitals because more items on their cost reports can affect calculations of a provider’s add-on payments. CMS does not know the amount of MIP funds that are associated with audits of different types of providers or specific issues, such as bad debt. However, in fiscal year 2004, CMS began to separately track some audit costs, such as those for desk reviews, audits, and wage index reviews. This provided some information on how audit funds were being spent. According to CMS officials, tracking the costs of individual audits at a provider or issue level would be difficult and costly because multiple issues are audited at the same time and the complexity of individual audits varies for the same provider type. Nevertheless, more detailed information on audit costs—such as at the provider level—than CMS currently tracks could provide it with a better understanding of the value of its current mix of tasks, particularly if it could associate the costs with the savings from the audits. This could provide CMS with information on whether it needs to change the balance of funding for those tasks—for example, whether it should focus more attention on bad debt or other areas of the cost report for specific types of providers. Further, CMS’s audit function continues to focus on verifying specific aspects of the provider’s cost report that affect its individual payment. This type of audit generally addresses a small portion of providers’ Medicare payments, while under a PPS, a much greater portion of the payments are based on overall industry costs. Each year, MedPAC advises the Congress on whether the Medicare PPS rates for institutional providers should increase, decrease, or remain constant. However, MedPAC generally does not have a set of audited cost reports that validate the information it uses in its assessments of providers, such as hospitals’ allocations of their costs. According to MedPAC, the current audit process reveals little about the accuracy of the Medicare cost information. For example, while CMS audits individual providers through full or partial audits, it does not allocate funds to audit a panel of providers, such as hospitals, which could provide a means to highlight areas where cost reporting accuracy is problematic. Without accurate information, CMS cannot ensure that payments to hospitals properly reflect their costs and provide reliable information that can be a factor in determining whether rates should change or remain constant. CMS might find it cost-effective to gather additional information because audits have the potential to give the Congress better information on hospitals’ costs. For example, by law, CMS is required to periodically conduct audits of end-stage renal disease (ESRD) facilities, which care for patients who must rely on dialysis treatments to compensate for kidney failure. CMS broadened its audit plan for these facilities to include a review not only of bad debts, but also to validate the costs of a selected number of items that are paid through PPS. CMS officials indicated that their audits of these facilities generated only limited savings, usually related to bad debts, so they did not consider these audits very valuable. However, as a result of these audits, MedPAC officials stated in 2005 that these facilities had a greater margin—or ratio of Medicare payments to costs—than their cost reports suggested. This information was factored into MedPAC’s recommendation about the amount of payment increase needed in calendar year 2007. Setting appropriate payment increases for hospitals is potentially more important to Medicare than for ESRD facilities because payments to participating inpatient hospitals represented about $116 billion, or about 40 percent of Medicare’s benefit payments in fiscal year 2004. CMS officials agreed that gathering this information might be valuable, but indicated that they did not currently have sufficient funding to conduct this data validation in addition to their current efforts funded as part of audit. In contrast to provider education and audit, CMS collects information on the relative savings from specific secondary payer functions and has used this information to decide on funding allocations within the secondary payer activity. CMS allocates funds to, and calculates savings for, about 16 secondary payer functions. Among these functions are (1) a data match that helps identify instances when a Medicare beneficiary was covered by other insurance and (2) the initial enrollment questionnaire, which gathers insurance information on beneficiaries before they become eligible for Medicare. Within secondary payer, for fiscal year 2005, savings for the 16 functions ranged from less than 1 percent to 49 percent of savings of over $5 billion for all of the functions. CMS officials told us that they have used relative savings information for secondary payer functions as one factor in determining whether to increase, decrease, or terminate funding for the functions within this activity. For example, according to CMS officials, in fiscal year 2005, savings for one secondary payer function—voluntary reporting of primary payer information to CMS by health insurance companies—increased by about 65 percent over fiscal year 2004. Further, savings from this effort continue to increase. CMS is planning to maintain or expand funding to it. However, CMS officials said that after confirming their relatively low savings, they had terminated certain other efforts to identify secondary payer claims. The terminated efforts included (1) a second questionnaire sent as follow-up to determine whether a beneficiary who is claiming Medicare benefits for the first time has other health insurance that would be responsible for paying the claim and (2) an effort to determine whether certain trauma codes contained in a claim could indicate that another insurer, such as worker’s compensation, could be the primary payer. The Medicare program is undergoing significant changes for which there is little precedent. These include the addition of the new Part D prescription drug benefit and the reform of Medicare contracting. Both will require CMS to make new choices in how it should allocate its MIP funds to best address its program integrity challenges. CMS’s current allocation approach—which agency officials characterized as primarily relying on previous fiscal year funding allocations for each activity, and to each contractor, to determine current allocations—will not be adequate to address emerging program integrity risks and ongoing programmatic changes. In addition, as contracting reform proceeds, CMS intends to increase its use of MIP funds to reward contractors to encourage superior performance. However, the usefulness of award payments as a tool to encourage contractors to perform MIP tasks effectively depends on how well CMS can develop, and consistently apply, performance measures to gauge differences in the quality of performance. CMS’s current allocation approach will not be adequate to address Medicare’s emerging program integrity risks related to the prescription drug benefit. Over the next 10 years, total expenditures for the prescription drug benefit, which was implemented in January 2006, are projected to be about $978 billion, while total expenditures for the Medicare program are projected to be about $6.1 trillion. CMS and others have stated that the prescription drug benefit is at risk for significant fraud and abuse. In December 2005, an assistant U.S. attorney noted that the Medicare prescription drug benefit would be vulnerable to a host of fraud and abuse schemes unless better detection systems are developed. According to CMS, the prescription drug benefit may be vulnerable to fraud and abuse in particular areas, including beneficiary eligibility, fraud by pharmacies, and kickbacks designed to encourage certain drugs to be included by the plans administering the benefit. To respond to these challenges, CMS has selected eight private organizations, called Medicare prescription drug integrity contractors (MEDIC), to support CMS’s benefit integrity and audit efforts. Because the Medicare prescription drug benefit is in the early stages of implementation, CMS does not yet have data to estimate the level of improper payments or information to determine the level of program integrity funds needed to address emerging vulnerabilities. As a result, it is not clear whether, in the future, CMS will need to shift funds from program integrity activities for Parts A and B to protect the Part D drug benefit from potential fraud and abuse. For fiscal year 2006, $112 million beyond the HIPAA limit of $720 million has been appropriated for CMS to support program integrity activities. The President’s Budget for fiscal year 2007 has also proposed additional funds for fiscal year 2007 and fiscal year 2008. CMS plans to use some of the additional funding provided under DRA for fiscal year 2006 to support Part D program integrity efforts. For example, CMS plans to spend $14 million over the next fiscal year to fund efforts by MEDICs to protect the prescription drug benefit by performing selected tasks, such as analyzing data to identify instances of potential fraud and abuse. In addition, CMS plans to spend about $33 million on Part D information technology systems to track data related to beneficiary eligibility and to collect, maintain, and process information on Medicare covered and noncovered drugs for Medicare beneficiaries participating in Part D. See appendix IV for more information. Another significant programmatic change that will affect future MIP funding allocations is Medicare contracting reform. MMA required CMS to transfer all claims administration work, which includes selected program integrity activities, to MACs by October 2011. CMS plans to transfer all work to the MACs by July 2009—about 2 years ahead of MMA’s specified time frame. Contracting reform will affect MIP funding allocations because of (1) changes in contractors’ responsibilities for program integrity activities and their jurisdictions, (2) the potential for operational efficiencies, and (3) increasing use of MIP funds for contractor award payments. The transition to MACs will change some contractors’ program integrity responsibilities and require reallocation of MIP funds among them. The new MACs will be responsible for paying claims that were previously processed by intermediaries and carriers, but CMS has decided that MACs will not be performing all of the MIP activities that they previously conducted. For example, PSCs performed medical reviews of claims in some contractors’ jurisdictions, but this activity will be performed by almost all of the MACs in the future. Further, contractors’ jurisdictions will change as 23 MACs assume the work previously performed by a total of 51 Medicare intermediaries and carriers, within the confines of 15 newly designated geographic jurisdictions. The PSCs conducting benefit integrity work will be aligned with the MACs in the 15 jurisdictions. In some cases, one PSC may be aligned with more than one MAC jurisdiction. According to CMS officials, Medicare contracting reform will lead to operational efficiencies and savings that would mostly be due to more effective medical review. For example, CMS anticipates that greater incentives for MACs to operate efficiently and adopt industry innovations in the automated medical review of claims will result in total estimated trust fund savings of $650 million for Medicare from fiscal year 2006 to fiscal year 2011. Having program integrity activities operate more effectively could give CMS additional flexibility to reallocate some funding while achieving reductions in improperly paid claims. However, we have not validated CMS’s estimate, and in our August 2005 report on CMS’s plan for implementing Medicare contracting reform, we raised concerns about the uncertainty of savings estimates, which were based on future developments that are difficult to predict. As part of contracting reform, CMS plans to increase its allocation of MIP funds that are used as award payments to encourage superior performance of program integrity activities by contractors. Award payments that are tied to appropriate performance measures could encourage contractors to conduct MIP activities effectively and introduce innovations, such as developing new analytical approaches to enhance the medical review process. Intermediaries and carriers, both of which conduct some program integrity activities, are currently paid on the basis of their costs, generally without financial incentives to encourage superior performance. In contrast, CMS currently offers award payments to other types of contractors that conduct program integrity activities, including four MACs that were selected in January 2006, PSCs, the COB contractor, NSC, and the DAC contractor. As early as 2009, or when all administrative work has been transferred to MACs, CMS will be offering the opportunity to be selected for award payments to all contractors that conduct program integrity activities. The usefulness of using MIP funding for award payments to encourage contractors to conduct program integrity tasks effectively depends on how well CMS can develop, and consistently apply, performance measures to gauge differences in the quality of performance. In 2004, CMS conducted a study to evaluate whether the agency could reduce improper payments by using award payments for contractors to lower their paid claims error rates, which represent the amount of claims contractors paid in error compared with their total fee-for-service payments. According to CMS, the outcome of that pilot was positive, and CMS plans to use award payments in the future as part of its strategy for reducing improper payments. However, as we reported in March 2006, CMS will need to refine its measure of contractor-specific improper payments, which would enhance its ability to evaluate their performance of medical review and provider education activities. Further, even when CMS has developed measures to assess the performance of contractors that conduct MIP activities, it has not always effectively or consistently applied them. For example, the OIG recently reviewed the extent and type of information provided in evaluation reports on PSCs’ performance in detecting and deterring fraud and abuse. The OIG found that although the evaluation reports were used as a basis to assess contractors’ overall performance, they did not consistently include quantitative information on the activities contractors performed or their effectiveness. We designated the Medicare program as high risk for fraud, waste, abuse, and mismanagement in 1990, and the program remains so today. To address this ongoing risk and reduce the program’s billions of dollars in improper payments, CMS must use Medicare’s program integrity funding as effectively as possible. Further, Medicare’s susceptibility to fraud is growing, as it addresses the challenges of adding a prescription drug benefit to the program. Despite Medicare’s increasing vulnerability, CMS has generally not changed its allocation approach for MIP funding. In 2006, a decade after MIP was established to support Medicare program integrity activities, CMS officials state that the primary basis for their allocation of funds is how they have been allocated in the past. However, programmatic changes for Medicare’s contractors and emerging risks for the Part D prescription drug benefit suggest that CMS needs to modify its approach for deciding on funding allocations for—and within—the five program integrity activities. Also supporting the need for CMS to assess its current allocation approach is that the agency’s funding decisions do not routinely take into account quantitative data or qualitative information on the relative effectiveness of its five program integrity activities or contractors’ vulnerabilities. Without considering information or data, CMS cannot judge whether funds are being spent as effectively as possible or if they should be reallocated. CMS is developing two new measures that may help the agency evaluate the relative effectiveness of provider education and the audit activity. Better information about MIP activities’ effectiveness should assist CMS in making more prudent management and funding allocation decisions. To better ensure that MIP funds are appropriately allocated among and within the five program integrity activities, we recommend that CMS develop a method of allocating funds based on the effectiveness of its program integrity activities, the contractors’ workloads, and risk. In its written comments on a draft of this report, CMS stated that it generally agreed with our recommendation to develop a method of allocating MIP funds based on the effectiveness of the agency’s program integrity activities, Medicare contractors’ workloads, and risk. However, the agency expressed concern that the report appeared to emphasize the use of ROI, a quantitative measure that tracks dollars saved in relation to dollars spent, as a way to allocate funds. CMS stated this quantitative measure can be an indicator of effectiveness, but noted that such a measure cannot serve as the sole basis for informing funding decisions. The agency stated that some of its MIP activities had benefits that could not be easily quantified. CMS agreed on the value of allocating funds based on risk and provided information on programmatic changes that would help it do so. The agency also noted the efforts it had recently made to strengthen program integrity. CMS expressed concern about our discussion in the draft report concerning the use of ROI as a way to quantitatively measure effectiveness and to allocate MIP funds. CMS stated that the agency cannot provide funding based exclusively on an ROI because some activities, including benefit integrity, do not lend themselves to an ROI measurement and others, such as audit, are governed by statutory requirements. CMS also stated that in allocating MIP funds, it is critical that it consider factors other than ROI, including historical funding, because MIP funding has not increased since 2003. Our report indicates that an ROI is an important factor that should be considered in allocating funds, but cannot be the sole consideration. Our conclusions reflect our support of an approach that takes into account the qualitative benefits of program integrity activities. Our report discusses agency officials’ views on the difficulty of developing quantitative measures for the benefit integrity activity. We also provide information on CMS officials’ qualitative assessments of the positive impact of benefit integrity and provider education. For example, our report notes that according to CMS officials, these benefits include discouraging entities that may be considering defrauding the Medicare program and helping to ensure proper Medicare payments. Both quantitative and qualitative assessments of effectiveness—to the extent they can be developed—could help CMS determine whether MIP funds are being wisely invested or if they should be reallocated. CMS also commented on the allocation of MIP funds to Medicare contractors based on workload and risk. CMS noted that contracting reform and the introduction of MACs will result in contractors’ workloads being more evenly distributed. In addition, CMS noted that it is developing award fee measures for contractors’ medical review activities, including establishing performance goals for the Comprehensive Error Rate Testing program contractor-specific error rate. CMS agreed with us that risk is a factor that should be considered in allocating funds. CMS stated that it is committed to identifying and investigating better approaches to allocate resources to support critical agency functions, including using its new contracting authority to introduce incentives for Medicare fee-for-service claims processing contracts and consolidating Medicare secondary payer activities. CMS also noted that it is using state- of-the-art systems and expertise to aggressively fight waste and abuse in the program, continues to work closely with its contractors to help ensure that providers receive appropriate education and guidance in areas where billing problems have been identified, and has expanded oversight of the new Medicare Part D prescription drug benefit. In addition, CMS discussed recent program integrity efforts and successes, including reducing the number of improper fee-for-service Medicare payments and addressing fraud across all provider types by coordinating the activities of CMS, law enforcement, and Medicare contactors in Los Angeles, California, and Miami, Florida. We have reprinted CMS’s letter in appendix V. CMS also provided us with technical comments, which we incorporated in the report where appropriate. 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 Secretary of HHS, the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions 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 Sheila K. Avruch, Assistant Director; Hazel Bailey; Krister Friday; Sandra D. Gove; and Craig Winslow. To provide information on the amount of funds allocated to the five Medicare Integrity Program (MIP) activities over time, we interviewed officials from the Centers for Medicare & Medicaid Services (CMS). We obtained information concerning MIP funding allocations for audit, medical review, secondary payer, benefit integrity, and provider education for fiscal years 1997 through 2005. We also analyzed allocations within these activities. Further, we obtained and analyzed related financial information, including CMS’s planned and actual expenditures, savings, and return on investment (ROI) calculations for fiscal year 1997 through fiscal year 2005; CMS financial reports; and presidential and Department of Health and Human Service (HHS) budget proposals for fiscal years 2006 and 2007. Because most MIP expenditures are for activities related to the Medicare fee-for-service plan, our analyses focused on those expenditures. We reviewed relevant legislation, such as the Health Insurance Portability and Accountability Act of 1996 (HIPAA); the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA); and the Deficit Reduction Act of 2005 (DRA). We reviewed pertinent reports and congressional testimony, including our own and those of CMS and the HHS Office of Inspector General (OIG), related to program integrity requirements. To examine the approach that CMS uses to allocate MIP funds, we interviewed CMS officials regarding factors they consider when allocating MIP funds. We reviewed related documentation provided to us by CMS, including budget development guidelines; manuals, such as the Financial Management Manual; operating plans; and selected workload data. We also reviewed information on individual projects, such as information technology systems. We also reviewed pertinent GAO reports and testimony and Medicare Payment Advisory Commission reports. We did not independently examine the internal and automated data processing controls for CMS systems from which we obtained data used in our analyses. CMS subjects its data to limited reviews and periodic examinations and relies on the data obtained from these systems as evidence of Medicare expenditures and to support CMS’s management and budgetary decisions. Therefore, we considered these data to be reliable for the purposes of our review. In addition, we interviewed CMS officials regarding changes in the Medicare program that may affect MIP funding allocations, including CMS’s plans to support activities to detect fraud and improper billing for the new Part D prescription drug benefit and MIP activities to be performed by contractors in the future. We also interviewed CMS officials concerning performance measures and evaluations of contractors. We reviewed related documentation, including the statement of work for the Medicare prescription drug integrity contractors; plans for Medicare contracting reform; policies and procedures associated with CMS’s measurement of contractor performance; standards and performance measures, such as the Comprehensive Error Rate Testing program; various manuals, including the Medicare Program Integrity Manual; and an OIG report on performance evaluations of program safeguard contractors (PSC). We also reviewed CMS’s evaluations of contractor performance. We performed our work from August 2005 through August 2006 in accordance with generally accepted government auditing standards. The following tables contain details on MIP funding, expenditures, allocations, and ROI. Table 2 shows MIP funding ranges under HIPAA. Table 3 shows the amounts of MIP expenditures allocated to each of the program integrity activities. Table 4 shows the percentage of MIP funds allocated to the program integrity activities. Table 5 shows the ROI for three of the program integrity activities. Hospitals, nursing homes, home health agencies, and other institutional providers that are—or have been— paid on a cost reimbursement basis submit cost reports to CMS. Cost reports provide a detailed accounting of what costs have been incurred, what costs the provider is charging to the Medicare program, and how such costs are accounted for by the provider. Contractors review all or part of the cost report to assess whether costs have been properly allocated and charged to the Medicare program. Contractors determine if the cost report is acceptable or if it needs further review. In some instances, contractors may conduct on-site cost report audits, which include the review of financial records and related documentation supporting costs and charges. Contractors identify billing errors made by providers through analysis of claims data; take action to prevent errors, address identified errors, or both; and publish local coverage policies to provide guidance to the public and medical community concerning items and services that are eligible for Medicare payment. Most medical reviews do not require a manual review of medical records. Often contactors conduct medical reviews simply by examining the claim itself, usually using automated methods. Coordination of benefits (COB) contractor, intermediaries and carriers, and Medicare administrative contractors (MAC) The COB contractor collects, manages, and maintains information regarding health insurance coverage for Medicare beneficiaries. To gather information to properly adjudicate submitted claims, the COB contractor sends questionnaires to newly enrolled Medicare beneficiaries and employers to solicit information about beneficiaries’ health insurance coverage. The COB contractor also collects secondary payer data from providers, insurers, attorneys, and some state agencies. The COB contractor uses data match programs to identify claims that should have been paid by another insurer. When information indicates that a beneficiary has other health insurance, the COB contractor initiates a secondary payer claims investigation. Intermediaries and carriers also conduct secondary payer operations, including prepayment activities in conjunction with the COB contractor, and they recover erroneous secondary payer payments. Contractors are tasked with preventing, detecting, and deterring Medicare fraud. PSCs conduct medical reviews to support fraud investigations, analyze data to support medical reviews, process fraud complaints, develop fraud cases, conduct provider education related to fraud activities, and support law enforcement entities. Once a case is developed, PSCs refer it to the OIG or to law enforcement for prosecution. NSC reviews and processes applications from organizations and individuals seeking to become suppliers of medical equipment and supplies in the Medicare program. NSC verifies suppliers’ application information; conducts on-site visits to the prospective suppliers; issues supplier authorization numbers, which allow suppliers to bill Medicare; and maintains a central data repository of information concerning suppliers. NSC also periodically reenrolls active suppliers and uses data to assist with fraud and abuse research. The DAC contractor conducts ongoing data analysis and reporting of trends related to supplier billing for medical equipment and supplies and provides ongoing feedback to the PSCs. When billing problems are identified through medical reviews, contractors take a variety of steps to educate providers about Medicare coverage policies, billing practices, and issues related to fraud and abuse. Contractors may conduct group training sessions, including seminars and workshops; send informational letters to providers; arrange for teleconferences; conduct site visits; and provide information on their Web sites. For fiscal year 2006, DRA provided $112 million in MIP funds beyond the annual HIPAA limit of $720 million. Of this amount, DRA specified that $12 million was for the Medi-Medi program and $100 million was for MIP in general. Table 6 provides information on CMS’s planned spending of $100 million in general MIP funds provided by DRA, including spending related to the Part D prescription drug benefit. | Since 1990, GAO has considered Medicare at high risk for fraud, waste, abuse, and mismanagement. The Medicare Integrity Program (MIP) provides funds to the Centers for Medicare & Medicaid Services (CMS--the agency that administers Medicare--to safeguard over $300 billion in program payments made on behalf of its beneficiaries. CMS conducts five program integrity activities: audits; medical reviews of claims; determinations of whether Medicare or other insurance sources have primary responsibility for payment, called secondary payer; benefit integrity to address potential fraud cases; and provider education. In this report, GAO determined (1) the amount of MIP funds that CMS has allocated to the five program integrity activities over time, (2) the approach that CMS uses to allocate MIP funds, and (3) how major changes in the Medicare program may affect MIP funding allocations. For fiscal years 1997 through 2005, CMS's MIP expenditures generally increased for each of the five program integrity activities, but the amount of the increase differed by activity. Since fiscal year 1997, provider education has had the largest percentage increase in funding--about 590 percent, while audit and medical review had the largest amounts of funding allocated. In fiscal year 2006, funding for MIP will increase further to $832 million, which includes $112 million in funds that CMS plans to use, in part, to address potential fraud and abuse in the new Medicare prescription drug benefit. CMS officials told us that they have allocated MIP funds to the five program integrity activities based primarily on past allocation levels. Although CMS has quantitative measures of effectiveness for two of its activities--the savings that medical review and secondary payer generate compared to their costs--it does not have a means to determine the effectiveness of each of the five activities relative to the others to aid it in allocating funds. Further, CMS has generally not assessed whether MIP funds are distributed to the contractors conducting each program integrity activity to provide the greatest benefit to Medicare. Because of significant programmatic changes, such as the implementation of the Medicare prescription drug benefit and competitive selection of contractors responsible for claims administration and program integrity activities, the agency's current approach will not be adequate for making future allocation decisions. For example, CMS will need to allocate funds for program integrity activities to address emerging vulnerabilities that could affect the Medicare prescription drug benefit. Further, through contracting reform, CMS will task new contractors with performing a different mix of program integrity activities. However, the agency's funding approach is not geared to target MIP resources to the activities with the greatest impact on the program and to ensure that the contractors have funding commensurate with their relative workloads and risk of making improper payments. |
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Charities are organizations established to address the needs of the poor or distressed and other social welfare issues. Federal, state, and private agencies and the American public monitor how well charities are meeting these needs. Although not all charities have a disaster relief focus, historically charities have adapted their work as needed to the immediate or longer-term needs of disaster survivors. In these disaster aid efforts, charities may cooperate with FEMA. Though charities and FEMA have a substantial role in providing disaster aid, people affected by disasters may also pursue other government or private sources of relief. Charities represent a substantial presence in American society. Internal Revenue Code Section 501(c) establishes 27 categories of tax-exempt organizations; the largest number of such organizations falls under Section 501(c)(3), which recognizes charitable organizations, among others. The term charitable, as defined in the regulations that implement Section 501(c)(3), includes assisting the poor, the distressed, or the underprivileged; advancing religion, education, or science; erecting or maintaining public buildings, monuments, or works; eliminating prejudice and discrimination; defending human and civil rights; or combating community deterioration and juvenile delinquency. An organization must apply for IRS recognition as a tax-exempt charity that strives to meet one or more of these purposes. In general, a charity serves these broad public purposes, rather than specific private interests. By 2000, IRS had recognized 1.35 million tax-exempt organizations under Section 501(c), of which 820,000 (60 percent) were charities. At the end of 1999, the assets of Section 501(c)(3) organizations approached $1.2 trillion and their annual revenues approached $720 billion. Charities pay no income taxes on contributions received, but they can be taxed on income generated from unrelated business activities. Federal agencies, state charity officials, other nonprofit organizations, and the general public may all participate in overseeing charitable operations to protect the public interest. At the federal level, IRS has primary responsibility for recognizing tax-exempt status and determining compliance with tax laws, such as those governing the use of charitable funds. Notwithstanding these powers, IRS is not generally responsible for overseeing how well a charity spends its funds or meets its charitable purpose. Despite the federal government’s significant indirect subsidy of charities through their tax-exempt status and the allowance of charitable deductions by individuals, the federal government has a fairly limited role in monitoring charities, with states providing the primary oversight of charities through their attorneys general and/or charity offices. These officials maintain registries of charities and professional fundraisers, including financial reports of registrants. They also monitor the solicitation and administration of charitable assets. Attorneys general and state charity officials have extensive power to investigate charities’ compliance with state law and can correct noncompliance through the courts. Although local law enforcement agents, such as district attorneys, may assist the state with investigations of charities, they tend to focus on the prosecution of the criminal cases of individuals who defraud charities. Further oversight of charities’ efficiency and effectiveness is likely to be carried out by the private sector, including “charity watchdogs,” and the American public. Watchdogs such as the Better Business Bureau’s Wise Giving Alliance and publications such as The Chronicle of Philanthropy are the public’s primary sources for information on charitable organizations and fund-raising. The questions and concerns people bring to the attention of watchdogs and government officials are often the key motivators for initiating investigations. Charities have historically played a role in the nation’s response to disasters. First, some charities, for example, the American Red Cross or the Salvation Army, are equipped to arrive at a disaster scene and provide mass care, including food, shelter, and clothing, and in some circumstances, emergency financial assistance to affected persons. Next, depending on the extent and nature of devastation to a community and charities’ typical services and capacities, some charities are best structured to provide longer-term assistance, such as job training or mental health counseling. Finally, new charities may form post-disaster to address the needs of all survivors or specific population groups. For example, after the September 11 attacks, charities were established to serve survivors of restaurant workers and firefighters. FEMA is the lead federal agency for responding to disasters and may link with charitable organizations to provide assistance. According to FEMA regulations, in the event of a presidentially declared disaster or emergency, such as September 11, FEMA is required to coordinate relief and assistance activities of federal, state, and local governments; the American Red Cross; the Salvation Army; and the Mennonite Disaster Service; as well as other voluntary relief organizations that agree to operate under FEMA’s direction. Although charities are expected to be among the first agencies to provide assistance to those affected, in the event of some natural disasters, FEMA may anticipate need and be the first to respond. FEMA can provide a range of assistance to individual disaster survivors. In a natural disaster, such as a hurricane or flood, the bulk of FEMA’s individual assistance program money tends to be given to individuals whose residences have been damaged. September 11 presented a different challenge for the agency: few people had damage to their homes, but many needed unemployment assistance and help paying their mortgage or rent. Though FEMA and charities provide key resources to survivors of disasters, a range of additional aid may be available for those affected by the September 11 attacks. Federal sources of aid to individuals include Social Security, Medicaid, Disaster Unemployment, and Department of Justice benefits for fallen police officers and firefighters. In addition, the Congress has set up a Federal Victim Compensation Fund for individuals injured and families of those who died in these attacks. See appendix I for more information about this fund. From states, survivors may obtain State Crime Victim Compensation Board funds, unemployment insurance, or workers’ compensation. Some families may also be able to access private insurance or employer pensions. While it may be difficult to tally precisely the total amount of funds collected, 35 of the larger charities have raised almost $2.7 billion and distributed about 70 percent of the money. Distribution rates vary widely among the charities, in part, because some were established to provide immediate assistance while others were established to provide assistance over the longer term. Charities used the money they collected to provide cash and a broad range of services to people directly and indirectly affected, although questions about how best to use the funds as well as service delivery difficulties complicated charities’ responses. Thirty-five of the larger charities have raised almost $2.7 billion as of October 31, 2002, to aid the survivors of the terrorist attacks. (See table 1.) These include a range of organizations, including large, well-established organizations such as the American Red Cross and the Salvation Army and other organizations created specifically in response to September 11, such as the Twin Towers Fund. While the total amount raised may increase over time, many organizations are no longer actively collecting funds. For example, The September 11th Fund stopped soliciting donations in November 2001 and in January 2002 asked the public to stop sending contributions to the fund. The large number of charities collecting funds for September 11 complicates the efforts to determine a precise count of the total funds raised. The Metro New York Better Business Bureau Foundation has identified 470 September 11-related charities, and the IRS estimates that about 600 charities are involved in September 11-related fundraising. The IRS took steps to quickly grant tax-exempt status to about half of these 600 charities after September 11. While some of these new charities appear to be smaller, specific fundraising events such as the Hike of Hope, others like the Twin Towers Fund, which raised $205 million, became major charities. While any one charity will have information on its funding and services, the charitable sector as a whole generally does not have reporting mechanisms in place to track funds across entities or for any one event. Some tracking efforts are under way, however. For example, the Metro New York Better Business Bureau Foundation recently surveyed the 470 September 11-related charities they identified and 270 responded to its request for fund information. Further complicating a precise tally of funds is the interfund transfers that occurred among charities. For example, the Americares Foundation raised $5.3 million in its Heroes Fund and transferred it to the Twin Towers Fund to be distributed. Likewise, the United Jewish Federation of New York distributed $5.4 million in grants it received from the New York Times 9/11 Neediest Fund and the United Jewish Communities of North America. The Metro New York Better Business Bureau Foundation estimates that more than $400 million of the charitable aid it is tracking represents duplicate listings of money raised by grant-making organizations and the direct service providers they are funding. Moreover, an unknown number of corporations have sold and are still selling products for which some portions of the proceeds are to be donated to September 11 charities, a practice known as “cause-related marketing.” Some reports cite hundreds of products being sold in the name of September 11 charities; the extent to which these funds have already been forwarded to charities is not known. A more complete accounting of the number of September 11 charities and the amounts they raised might be possible when all charitable organizations have filed with IRS the required annual information form, called the IRS 990. Among other items, these tax-exempt 501(c)(3) organizations must report on their total revenues (including donations), expenses, grants and allocations, and the total dollars of specific assistance they provided to individuals. This form is due in the fifth month after the close of the organization’s taxable year. As IRS 990 forms for these charities become available, examination of them may yield more information; however, the way these data are reported may not necessarily allow a precise accounting of dollars raised for September 11. For example, pre-existing charities that served other purposes as well as September 11, may not report funding data at the level of detail that would link spending to September 11 purposes. Of the almost $2.7 billion estimated collected by the larger 35 charities, about $1.8 billion, or 70 percent, has been reported distributed as of October 31, 2002. Fund distribution rates, however, vary widely from less than 1 percent to 100 percent, in part because of the differing goals and purposes of the charities. For example, some charities with high distribution rates like the New York Times 9/11 Neediest Fund or the United Way of the National Capital Area are primarily fundraisers that make grants to direct service providers such as the Children’s Aid Society and the Salvation Army, which provide immediate assistance to survivors. Other charities, particularly those that will be providing scholarship assistance to survivors like the Citizens’ Scholarship Foundation, the Navy-Marine Corps Relief Society, the Army Emergency Relief, and Windows of Hope, have much lower distribution rates that reflect the longer-term missions of their charities. Figure 1 shows the amount of aid raised and distributed by charities. See appendix II for the amount of funds raised, distributed, and distribution rates for each of the 35 charities. Charities provided a wide range of assistance to the different categories of individuals affected, including the families of those killed, those indirectly affected through the loss of a job or displacement from their home, and services provided to the rescue workers and volunteers, as shown in table 2. A full accounting of the range of services provided is difficult to ascertain, as many large funders have provided grants to multiple service providers. For example, The September 11th Fund has provided grants to over 100 organizations, including direct service providers like Safe Horizon, which provide assistance to families and communities and to rescue and recovery efforts. Families of those killed on September 11 have received cash gifts from various charities to help them through the first year of the recovery process. McKinsey’s survey of nonuniformed World Trade Center families showed that 98 percent of families reported receiving cash assistance averaging $90,000 per family. Because of the charities specifically established to assist the survivors of the firefighters and police killed in the attacks, their survivors will receive more cash assistance than survivors of the nonuniformed people killed. A Ford Foundation study reports that uniformed rescue workers funds have provided families of the Port Authority Police and NYC Police and Firefighters with cash benefits of $715,000, $905,000, and $938,000, respectively. It was a change in IRS rules and subsequent legislation that enhanced the abilities of charities to distribute aid on a per capita basis—as did some of the charities focused on those firefighters and police killed—rather than on the basis of more in-depth needs assessment. IRS rules governing the uses of charitable aid were changed for September 11 survivors. Recognizing the unique circumstances caused by this tragedy and in anticipation of congressional legislation that was subsequently passed, IRS relaxed the burden on charities—in the case of this disaster only—to show that the assistance provided was based on need. In November 2001, IRS issued guidance that authorized charities to make payments to September 11 victims and their families without a specific needs test, if made in good faith and using objective standards. Some charities and oversight agencies we spoke with said that this placed some charities under pressure to more quickly distribute their funds. It allowed others, such as the International Association of Fire Fighters, to distribute funds on a per capita basis, regardless of need, to the surviving families of those who perished, a practice that had not been permitted prior to the September 11 disasters. Questions about how aid should be distributed as well as problems identifying and serving thousands of people directly and indirectly affected complicated charities’ tasks as they moved to aid those affected by the attacks. Charities faced considerable debate on how their funds should be distributed—to whom, for what, and when? Some victims’ groups and charities believe the money should be in the form of cash grants, distributed as quickly as possible, and typically focused on families of those killed, believing that the survivors are in the best position to understand and deal with their individual needs. Other charities and oversight organizations believe that needs are best met when the charitable funds take into account a broad range of needs, including those in the long term, and focus on services rather than cash grants. For example, Oklahoma City charities emphasized needed services rather than cash grants. While most of the September 11 funds have been distributed in the first year, some charities are planning to provide services over the longer term. The American Red Cross announced that it is setting aside $133 million to be spent over the next 3 to 5 years primarily in the areas of mental health and uncovered health care costs. The September 11th Fund announced that it will use its remaining $170 million over the next 5 years to also fund services such as mental health counseling, employment assistance, health care, and legal and financial advice. In addition, the Survivors’ Fund, the largest fund set up exclusively to support the needs of survivors of the Pentagon attack, is focusing its services on the long-term needs of the survivors. Since the attacks, decisions made by the American Red Cross—by far the largest holder of funds for September 11 purposes—were the focus of much media and congressional scrutiny, raising concerns about its plans for funds raised. By the middle of November 2001, contributions to the American Red Cross’s Liberty Fund reached nearly $543 million. The American Red Cross had established the Liberty Fund to help people affected by the September 11 attacks, its aftermath, and other terrorist events that could occur in the near future. While American Red Cross officials said that from early on it used its traditional language in its fund appeals saying that funds raised would be used for “this and other disasters,” it was widely perceived as a violation of the donors’ intent in this case. In response to concerns about the organization’s use of funds, on November 14, 2001, the American Red Cross pledged that the entire Liberty Fund would be spent to care for those directly and indirectly affected by the September 11 attacks, their families, and the rescue workers. Fulfillment of donor intent is an important issue, and many charities we spoke with said that they were keeping their spending within the framework of what they believed donors wanted: to quickly meet the needs of those for whom aid is intended. Representatives from philanthropic oversight organizations said charities in general could have minimized some of the problems they faced by paying more attention to the public relations aspects of their work. This might have reduced adverse publicity when people expected one thing and charities did another. Problems these representatives cited include the following: Some charities made vague appeals for money, and the public didn’t understand what programs these funds might support. Victims and the needs of the survivors were too narrowly defined. Some charities communicated a simplistic definition of those needing help as only the survivors of those people who were killed or those who were injured in the terrorist attacks. However, in the September 11 disasters, thousands of others were displaced from their homes, lost their jobs, and needed counseling to cope with post-traumatic stress disorder. Some charities implied that all of the funds collected would go to direct assistance without any management and administrative cost. This created a misperception that services could be delivered without trained professionals, administrative back offices, support staff, or personnel to help ensure accountability in the use of the donated funds. Charities told us that they had to make extensive efforts to identify the people who were killed and locate their survivors, as there were no uniform lists, and privacy issues affected the sharing of information. For example, when the Robin Hood Foundation wanted to provide $10,000 cash gifts to the surviving families, it found it had to develop its own list of the people who were killed and contact information for their survivors. The foundation recruited volunteers to contact World Trade Center employers and reported having to sign 55 different confidentiality agreements with companies, airlines, and individuals, to ensure that Robin Hood Foundation would not share its list with other agencies. In the case of those killed and injured at the Pentagon, confidentiality was a concern as well. The Pentagon provided the Foundation with a list of beneficiary names for the checks but sent a representative to New York to put the checks in the envelopes and apply the address labels. Charities made many efforts to reach out to hard-to-serve clients, non- English speakers, and immigrants. For example, the New York Immigration Coalition received $800,000 from The September 11th Fund and money in other grants to provide legal assistance, establish immigrant help desks at each disaster center, and train charity workers on how to better reach immigrants. The NYC Department of Health reported that 20 percent of those killed in NYC were foreign-born, coming from 167 different countries. Charity officials said the Immigration and Naturalization Service facilitated their efforts to reach immigrants by announcing it would not pursue information on the immigration status of individuals. Also, some charities such as Windows of Hope were created to specifically serve low-income restaurant workers with language barriers. In spite of outreach efforts, representatives from the victims groups we spoke with said that survivors were not aware of all charitable services and assistance available. A recent study of dislocated hospitality-industry workers in the Washington, D.C., region also reported that despite the efforts to meet the needs of these workers, many still struggled to connect with services. Workers interviewed for the study said a single source of information and referrals for emergency assistance, job placement assistance, or job training would have been helpful. In addition, some people we spoke with in NYC expressed concern that many indirectly affected survivors did not qualify for assistance because they lived outside the geographic area below Canal Street in Manhattan, which was initially targeted for aid by FEMA and many charities. After much public concern about the limited geographic range of FEMA’s eligibility regulations, in August 2002, the Congress mandated FEMA to expand its mortgage and rental assistance to employees working anywhere in Manhattan and to those who could track job loss or loss of income to September 11. FEMA also provides this assistance to those workers whose employers are not located in Manhattan, but who are economically dependent on a Manhattan firm, and anyone living in Manhattan, who commuted in and out of the island and who suffered financially because of post-September 11 disruptions. Charities and government oversight agencies have taken a number of steps to prevent fraud, and relatively few cases have been uncovered so far. For example, to minimize fraud by individuals, some charities required applicants to provide documentation certifying their needs and the relationship of their need to the disaster. Also, some charities conducted independent reviews of their applications and eligibility processes. State attorneys general and local district attorneys told us that although they had limited resources to dedicate to such efforts, they are actively responding to public concerns about charities. Officials from these government oversight agencies pursued investigation of fraud by individuals and charities; most of the few cases of fraud being prosecuted or investigated in New York relate to individuals who are charged with or have been convicted of falsely obtaining assistance. Different types of fraud can occur in the solicitation and delivery of charitable funds: fraud by individuals, charities, and businesses, as shown in table 3. Charity and oversight agency officials told us that they employed a number of methods to prevent this fraud, as also shown in table 3. Most charities we spoke with required applicants to provide documentation certifying identity, injury, death of a family member, or loss of job or home, and may have asked for proof of financial need, for example, paycheck stubs. To verify that they were adequately screening for fraud, some charities conducted independent reviews of their eligibility processes. State charity officials and local district attorneys typically relied heavily on complaints from the public and on the charities themselves to identify ineligible individuals or fraudulent charitable groups or solicitations. These officials also reached out to a number of professional groups, including presentations to fund-raising associations and charity boards about state guidelines on charitable solicitation. Finally, they also issued educational press releases, suggesting that people should examine charities before they write checks. See appendix III for contact information for each state’s charity oversight agency. Charities, state attorneys generals, and local district attorneys we spoke with said that they have found relatively few cases of fraud by charities or individuals. Charities like Safe Horizon told us that they were developing relationships with local law enforcement and had referred a number of suspicious cases to the police department. Furthermore, charities’ internal audits identified additional potential cases of fraud. For example, the American Red Cross’s review identified 350 suspected cases of fraudulent claims on its Liberty Fund, representing less than 1 percent of distributed funds. State and local oversight officials told us that although they did not have additional resources available to address September 11-related fraud, they are actively pursuing any fraud identified. They reported that since September 11, they had found relatively few cases of fraud, either by charities or individuals. These attorneys general and state charity officials from the seven states that suffered high numbers of casualties from September 11 told us they are investigating a combined total of 17 suspected cases of fraudulent solicitation of funds. Local officials indicate that they have more reports of individual fraud than charity fraud. For example, the New York County District Attorney’s Office reported that as of October 15, 2002, it had arrested 84 people for individual fraud and 2 people for fraudulent solicitation of funds. Representatives of this district attorney estimated that about $1 million in aid has been fraudulently obtained. The following are examples of suspected individual fraud uncovered to date by the New York County District Attorney’s Office. One man staged his own death in the Trade Center, then, posing as his next of kin (a recently deceased brother), applied for and received over $272,000 from two charities. Another NYC man reported that his 13th child had accompanied him to a job interview at the World Trade Center and had perished in the attack. The investigation revealed that the child never existed, a fact confirmed by other family members. The man received $190,867 from two charities. A group of cafeteria employees in a building near the Trade Center were paid for 4 days of work when their building was closed post- disaster. One employee applied for disaster-related income replacement for those 4 days (even though he had been paid) and received funds. This employee told his co-workers about his success in obtaining charitable aid under pretense, and 23 of his colleagues attempted to do the same. A man hired 13 homeless people to help him defraud charities. He supplied the homeless people with fraudulent documentation of job loss and financial need, then drove them around to relief sites around the city, where they applied for and received a total of $108,905 from charities. In addition, the New York State Attorney General’s Office reported investigating approximately 20 additional cases of individual fraud, many of which are related to individuals who allegedly attempted to obtain false death certificates. While information is available on identified fraud cases, the total extent of fraud is not known and will be difficult for oversight agencies and charities to assess. First, detection of fraud by individuals could be challenging, despite checks being in place, as charities said they were overwhelmed by the volume of applications for assistance and had to hire new staff or volunteers to help them manage their relief efforts. The potential for fraud by individuals may have increased, as the new personnel may have been unfamiliar with the charities’ eligibility regulations and may have inappropriately distributed or denied funds. Second, fraud detection may be particularly problematic in areas such as cause-related marketing by businesses. For example, the executive director of the Twin Towers Fund told us he was unaware of a record company’s marketing campaign on the fund’s behalf, until he read about it in the newspaper. The charity had to contact the record company, then set up a contract to formalize the terms of the fundraising. Third, it may also be difficult to track fund-raising by groups using September 11 to solicit for other purposes. In one state, oversight officials told us that an organization conducted a telemarketing drive promising that funds would be given to “firefighters, like those who died September 11,” but no funds went to the survivors of firefighters who died in the attacks. Oversight agencies said that these types of organizations tended to move very quickly in and out of geographic areas, making it difficult to find and prosecute them. Despite some early cooperation attempts, survivors had difficulty accessing charitable aid. The unprecedented scope and complexity of the September 11 disasters presented a number of challenges to charities in their attempts to provide seamless social services for those in need of assistance. Some months after the disaster, however, oversight agencies and large funders worked to establish a more coordinated approach at the September 11 attack sites. This included the formation of coordinating entities, the implementation of case management systems, and attempts to implement key coordination tools, such as client databases. Following the disasters, charitable organizations and FEMA took some immediate steps to help survivors get assistance, including checking in with other agencies. Charities moved quickly to collect funds, give grants to service providers, and establish 800 numbers and Web sites with aid information. FEMA headquarters contacted charities likely to be active in disaster relief to discuss how FEMA contacts would be of assistance. Some efforts at formal coordination include Family Assistance Centers and Disaster Assistance Service Centers, where some of the larger charities and government agencies set up booths to provide assistance to survivors and those economically affected by the disaster. The United Way of the National Capital Area held information-sharing meetings for Washington and Virginia service providers and the New York Community Trust did so as well. Despite these efforts, September 11 survivors generally believed that they had to navigate a maze of service providers in the early months, and both charities and those individuals who were more indirectly affected by the disaster (e.g., by job loss) were confused about what aid might be available. Survivors and charities told us that aid distribution was hindered by a number of factors. First, those seeking aid had to fill out a separate application and provide a unique set of documentation for each charity to which they applied. Second, in the early stages post-disaster, all survivors had to apply in person for charitable assistance, even if they had previously obtained aid from the organization. This became troublesome for the many survivors who did not live in metropolitan New York or Washington. Charities like Pennsylvania September 11th Assistance ended up paying for survivors’ travel to the Liberty Park Family Assistance Center in New Jersey. Third, over the course of the first few weeks after the disaster, many dimensions of coordination were limited by little information sharing between organizations helping survivors. For example, some charities said that they were not familiar with other organization’s rules, especially FEMA’s. Furthermore, because of privacy laws, charities and FEMA did not share information about clients with each other; as a result, in early stages of service delivery, charities might have duplicated services to clients. Although ways to address some of these issues have been used in the past, the scope and complexity of the September 11 disasters presented a number of challenges to charities in their attempts to provide seamless social services for survivors of the disaster. In the aftermath of the Oklahoma City bombing, charities and service providers worked together to create a database of aid recipients, provide each recipient a case manager, and to participate in a long-term recovery committee to better coordinate aid, fostering a more integrated service delivery approach. The September 11 events differed in key ways that hindered a similar approach: A much larger and more diverse number of actual and potential aid recipients. The 168 Oklahoma City victims who were killed were a more homogeneous population of federal government workers, while the World Trade Center disaster alone had 2,795 victims from a number of businesses and 167 countries. In addition, thousands more than in Oklahoma City were indirectly affected through loss of their jobs and homes. Numerous governmental jurisdictions. The September 11 attacks occurred in three states, which involved multiple government entities at each site. Larger numbers and multiple layers of funders and grantees. In addition to existing charities that were already involved in disaster relief services, the hundreds of new charities that emerged to provide aid to families of those killed were involved. Some months after the disaster, oversight agencies and large funders worked to establish a more coordinated approach at the September 11 attack sites. This approach included the formation of coordinating entities, the implementation of case management systems, and attempts to implement key coordination tools. Several coordination efforts emerged at the disaster sites. In NYC, the State Attorney General had encouraged charities to work together to ease access to aid, including use of a common application form and database. The 9/11 United Services Group (USG), a consortium of human service organizations and their affiliated service coordinators, was formed in December 2001 to foster a more coordinated approach to aid delivery. (See appendix V for a list of USG organizations participating in USG service coordination.) Furthermore, in the spring of 2002, FEMA successfully established long-term recovery committees in New York and New Jersey for charities that had smaller September 11 funds than those of USG. In Virginia, the Survivors’ Fund set up a board to assess the unmet needs of survivors and persons who were economically displaced by the disasters. Members of this board include key area agencies, such as the United Way and FEMA, which have historically facilitated coordination in areas affected by disasters. As coordination efforts progressed, some charities continued to follow Oklahoma’s model by establishing case managers for individuals who lost family members in the attacks. Although all the charities were familiar with a case management model, cross-agency case management presented challenges, as agencies’ mission statements or regulations specified different qualifications and specializations of their social workers (e.g., Master’s degree required). Despite these challenges, USG’s service coordinator program involves the efforts of a number of charities across the city. If families need help, they can call the Safe Horizon hotline, and an operator there assesses whether the clients have short- or long-term needs, his or her geographic area, and the clients denominational or ethnic preferences for service providers, and then connects them with a 9/11 USG service coordinator. Coordinators are current staff of local charities and have been trained by USG to help survivors identify and access a broad range of services. They have access to a number of technology tools, including an automated centralized directory of benefits and services available to families and a community website that allows service coordinators to communicate with the entire service coordinator community. Service coordinators, key charity managers, and the New York FEMA Voluntary Agency Liaison also meet weekly to discuss service provision issues. The Survivors’ Fund in Virginia also set up case managers but contracted with another agency to hire new social workers to provide case management services to the injured and families of those killed in the Pentagon attacks. Agencies began to develop client databases and a common application form for disaster relief aid. One key advantage of client databases is that the services clients had already received could be tracked by the charities, and as such, would prevent duplication of services. Although many charities expressed concern that their clients would lose their anonymity by signing a confidentiality waiver, the 9/11 USG has established a database of September 11 services for its service coordinators, and a number of their member organizations are creating and using a confidential client information database. The Survivors’ Fund and United Way of the National Capital Area have also created a client database, which is primarily being used by these two agencies. A common application form would improve the aid delivery process by reducing the amount of documentation and forms clients have to provide to each agency. The common application form is in progress in New York. The form has not been established yet, as charities that have trained volunteers nationwide indicated that at this time, they are not interested in retraining all their volunteers to a new application. Charities, government agencies, watchdog groups, and survivors’ organizations shared with us lessons that could improve the charitable aid process in disasters in the future. These lessons include easing access to aid, enhancing coordination among charities and between charities and FEMA, increasing attention to public education, and planning for future events. Some efforts are under way to address these issues. However, the independence of charitable organizations, while one of their key strengths, will make implementation of these lessons learned dependent on close collaboration and agreement among these independent organizations. Charities, government agencies, watchdog groups, and survivors’ organizations shared with us the lessons they learned from the September 11 charitable aid process that could be incorporated into the nation’s strategies for responding to large-scale disasters in the future. Easing access to aid for those eligible—Helping individuals in need find out what assistance is available, and easing their access to that assistance could be facilitated if a central, accessible source of public and private assistance is made available to survivors. Access to assistance could be further facilitated if charities adopted a simplified, one-stop application process and a standard waiver of confidentiality that would allow survivors to get access to multiple charities and allow charities to share information on individuals served and avoid duplicative services. While the focus of such an effort would be to facilitate services to those in need, a one-step application process could include a set of basic interview questions or steps designed to prevent fraud. Another way to facilitate eligible survivors receiving assistance is by offering each survivor a case manager, as was done in NYC and in Washington. Case managers can help to identify gaps in service and provide assistance over the long term. Enhancing coordination among charities and between charities and FEMA—Private and public agencies could better assist those in need of aid by coordinating, collaborating, sharing information with each other, and understanding each other’s roles and responsibilities. This requires effective working relationships with frequent contacts. Collaborative working relationships are essential building blocks of strategies that ease access to aid, such as a streamlined application process or the establishment of a database of families of those killed and injured to help charities identify service gaps and further collaboration. Increasing attention to public education—Charities’ increased attention to public education could better inform the donor public on how their money will be spent and the role of charities in disasters. Controversies over donor intent could be minimized if charities took steps when collecting funds to more clearly specify the purposes of the funds raised, the different categories of people they plan to assist, the services they plan to provide, and how long that assistance will be provided, as that information becomes known. Charities can further ensure accountability by more fully informing the public about how their contributions are being used and providing comprehensive information on facets of their operation to the public. The September 11th Fund’s and the Robin Hood Foundation’s Web sites, for example, list updated information on grants, recipients, amounts, and purposes. Moreover, efforts such as those of the Metro New York Better Business Bureau to compile information across multiple organizations can help provide accountability for how funds are used. For future events, the Ford Foundation report on the philanthropic response to September 11 suggested that “the major philanthropies should consider designating a well-respected public figure who would provide daily media briefings on their responses.” Planning for future events—Planning for the role of charities in future disasters could aid the recovery process for individuals and communities. While disasters, victims, and survivors can vary widely, it could be useful for charities to develop an assistance plan to inform the public and guide the charities’ fundraising efforts. In addition, state and local efforts related to emergency preparedness could explicitly address the role of charities and charitable aid in future events. Future plans could also address accountability issues, including training for charitable aid workers and law enforcement officials about identifying potential fraud and handling referrals for investigations. While some of the lessons learned can be implemented at the individual charity level, most require a more collaborative response among charities, and some steps are under way to build collaborative responses. Key efforts include the following: The National Voluntary Organizations Active in Disaster—This organization has 34 national member organizations, such as the American Red Cross, The Salvation Army, and Catholic Charities USA, 52 state and territorial organizations, and some local organizations. Established in 1970, its goal is to promote collaboration, while encouraging agencies to respond independently but cooperatively in disasters. Since September 11, 2001, this organization has initiated information sharing meetings in NYC and Washington, D.C., and has discussed lessons learned at its annual meeting in March 2002. See appendix IV for a list of its members. As part of its mission, the 9/11 United Services Group is planning to develop a blueprint for the coordinated delivery of social services and financial aid in future emergencies. Later this year, FEMA is facilitating a meeting between a committee of the National Voluntary Organizations Active in Disaster and the 9/11 United Services Group. While some charitable organizations are taking steps to incorporate lessons learned, they face significant challenges. By its inherent nature, the charitable sector is comprised of independent entities responsive to clients and donors; it is not under the direction of a unifying authority. While in situations such as September 11 FEMA is required to coordinate activities of certain charitable organizations, as well as others that agree to such an arrangement, FEMA officials said that in exercising this authority for September 11 and other events, they work closely with charities as a facilitator, not as a leader or director. FEMA officials noted it is important to build and maintain trust with the charitable organizations and to be careful to give local leadership the opportunity to lead in disasters. An externally imposed effort to direct or manage charities, whether by FEMA or another entity, could have deleterious effects; a key strength of charities is their ability to react flexibly and independently in the event of disasters. Overall, charitable aid made a major contribution in the nation’s response to the September 11 attacks. Given the massive scale and unprecedented nature of the attacks, the charities responded under very difficult circumstances. Through the work of these charities, millions of people have been able to contribute to the recovery effort and provide assistance to those directly and indirectly affected by the attacks. While much has been accomplished by charities in this disaster, lessons or strategies have also been identified related to improving access to aid, enhancing coordination among charities and between charities and FEMA, increasing attention to public education, and planning for future events that could improve future responses in disasters. There are no easy answers as to how to incorporate strategies that may result in a more accessible and transparent service delivery system into any future disasters. Coordination and collaboration among charitable organizations are clearly essential elements of these strategies, and some organizations have taken steps in this direction. At this point in time, an appropriate role for the federal government is to facilitate these efforts through FEMA, the federal agency that already has relationships with many of the key organizations involved in disaster response. This will help to ensure that lessons learned from the September 11 attacks and their aftermath can be incorporated into the nation’s strategies for dealing with large-scale disasters like this in the future. At the same time, it will help to ensure that charities may remain independent and vital in their programs and priorities. We are recommending that the director of FEMA convene a working group of involved parties to take steps to implement strategies for future disasters, building upon the lessons identified in this report and by others to help create sustained efforts to address these issues. The working group should address these and other issues as deemed relevant: (1) the development and adoption of a common application form and confidentiality agreement; (2) the establishment of databases for those receiving aid in particular disasters; and (3) strategies for enhancing public education regarding charitable giving in general and for large-scale disasters in particular, including ways to enhance reporting on funds collected and expended. This working group could include FEMA, representatives of key charitable and voluntary organizations and foundations; public and private philanthropic oversight groups and agencies; and federal, state, and local emergency preparedness officials. In commenting on a draft of this report, FEMA said that the recommendation is a practical one that is likely to foster enhanced communication and coordination among charitable organizations, foundation leaders, and government emergency managers. While FEMA acknowledged the challenges of working with a number of independent entities, it added that a working group of involved parties, along with skillful leadership and active participation among members, is likely to lead to important improvements in coordination and ultimately better service to those affected by disasters. In addition, FEMA noted that a component of the existing National Voluntary Organizations Active in Disaster may serve as the basis upon which to build. FEMA’s full comments are presented in appendix VI. We also shared a draft of the report with the American Red Cross, the Salvation Army, The September 11th Fund, the 9/11 United Services Group, an official of the National Voluntary Organizations Active in Disaster, and officials in the New York State Attorney General’s Office in New York City and obtained their oral comments. They said the report was fair and balanced and provided technical comments which we included where appropriate. Regarding the recommendation, the American Red Cross expressed some concern over whether FEMA was the right party to convene the working group, stating that the group’s goals would be outside of FEMA’s mission and that it would, therefore, be inappropriate to ask that FEMA be responsible for ensuring the success of the work group. The American Red Cross also said that the goals of the work group would more properly fall under the purview of the nonprofit sector and that work has already started on some of these areas. In responding to this concern, we emphasize that our recommendation charges FEMA with convening a working group of involved parties but does not specify that FEMA play the leadership role or be charged with management or oversight of the group’s progress. We agree that the key to the success of a working group in this area will depend on the actions of the charitable and voluntary organizations involved. We also acknowledge that some efforts are under way, including among the American Red Cross, Salvation Army, and the United Way, to address some of these issues. However, we continue to think that it is appropriate for FEMA to play a role in initiating meetings that will bring together involved parties. This will help to ensure that sustained attention is paid to these important issues and potentially result in improving the nation’s response to those in need in any future disasters. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of the report to other interested parties. We will also make copies available upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-7215 or Gale C. Harris, Assistant Director, at (202) 512-7235. Kevin Kumanga and Emily Leventhal also made key contributions to this report. Who is eligible: Any individual who was physically injured or the families and beneficiaries of any individual who was killed as a result of the terrorist-related aircraft crashes of September 11, 2001. Payments: The average award under the September 11th Victim Compensation Fund of 2001—before the statutorily required collateral offsets—is projected to be more than $1.8 million per claimant. Although it is difficult to determine the amount of collateral sources (e.g., life insurance) each claimant will have, the Special Master who oversees the fund believes the average payout after collateral sources will be approximately $1.5 million per claimant. Charitable aid received by families is not taken into account in determining award amounts. Total estimated expenditures: Over $5 billion. Applications: Filing deadline is December 2003. All information as of October 31, 2002, unless noted in one of the table notes. The National Voluntary Organizations Active in Disaster has 34 national member organizations as well as 52 state and territorial Voluntary Organizations Active in Disaster. | Surveys suggest that as many as two-thirds of American households have donated money to charitable organizations to aid in the response to the September 11 disasters. To provide the public with information on the role of charitable aid in assisting those affected by the attacks, GAO was asked to report on the amount of donations charities raised and distributed, the accountability measures in place to prevent fraud by organizations and individuals, and lessons learned about how to best distribute charitable aid in similar situations. Although it may be difficult to precisely tally the total amount of funds raised in response to the September 11 attacks, 35 of the larger charities have reported raising an estimated $2.7 billion since September 11, 2001. About 70 percent of the money that has been collected by these 35 charities has been reported distributed to survivors or spent on disaster relief since September 11, 2001. Charities used the money they collected to provide direct cash assistance and a wide range of services to families of those killed, those more indirectly affected through loss of their job or residence, and to disaster relief workers. Some of the charities plan to use funds to provide services over the longer term, such as for scholarships, mental health counseling, and employment assistance. Charities and government oversight agencies have taken a number of steps to prevent fraud by individuals or organizations, and relatively few cases have been uncovered so far. However, the total extent of fraud is not known and will be difficult to assess particularly in situations when organizations solicit funds on behalf of September 11 but use the funds for other purposes. Overall, charitable aid made a major contribution in the nation's response to the September 11 attacks, despite very difficult circumstances. Through the work of charities, millions of people contributed to the recovery effort. At the same time, lessons have been learned that could improve future charitable responses in disasters, including easing access to aid, enhancing coordination among charities and between charities and the Federal Emergency Management Agency (FEMA), increasing attention to public education, and planning for future events. FEMA and some charitable organizations have taken some steps to address these issues. However, the independence of charitable organizations, while one of their key strengths, will make the implementation of these lessons dependent on close collaboration and agreement among charities involved in aiding in disasters. |
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FEMA’s fire grant programs are available to a variety of fire departments— those composed of volunteer firefighters, career firefighters, or a combination thereof. In the case of the AFG program, grants also extend to nonaffiliated EMS organizations. In the case of the FP&S program, grants also extend to local, state, national, or community organizations that are not fire departments, such as research universities and fire service organizations. The statutes authorizing FEMA’s fire grant programs specify how funds are to be distributed among certain eligible applicants and activities. Authority for the AFG and FP&S programs derives from section 33 of the Federal Fire Prevention and Control Act of 1974 (Fire Act). The Fire Act requires FEMA to convene an annual meeting of individuals who are members of national fire service organizations for the purpose of recommending criteria for awarding grants for the next fiscal year. The act also requires FEMA, in consultation with national fire service organizations, to appoint fire service personnel to conduct a peer review of the grant applications, the results of which FEMA is to consider in awarding the grants. The Fire Act also contains specific grant application requirements. In particular, AFG and FP&S grant applicants are statutorily required to provide information demonstrating financial need; an analysis of costs and benefits resulting from the assistance; a list of other sources of federal funding received by the applicant to avoid duplicative funding; and an agreement by the applicant to provide information during the grant period to the National Fire Incident Reporting System, which represents the world’s largest national, annual database of fire incident information. AFG grant applicants are subject to an additional evaluation requirement—the extent to which the grant would enhance the applicant’s daily operations and the grant’s impact on the protection of lives and property. Section 34 of the Federal Fire Prevention and Control Act of 1974 (SAFER Act) provides the authority for the third fire grant program administered by FEMA. There are two types of SAFER grants: hiring grants, which are open to career, volunteer, and combination fire departments, and recruitment and retention grants, which are open to volunteer and combination fire departments, or to state or local organizations that represent the interests of volunteer firefighters. Hiring grants are subject to specific cost-sharing requirements between the federal government and the grantee, with the federal share decreasing over the 4-year grant period. Furthermore, the grantee is required to commit to retaining any firefighter hired through grant funds for at least 1 year after federal funding ends, amounting to a 5-year service commitment. The statutory cost-share and service commitment requirements applicable to SAFER hiring grants do not apply to SAFER recruitment and retention grants. SAFER grants, like AFG and FP&S grants, are awarded on a competitive basis through a peer review process. The SAFER Act is also similar to the Fire Act in requiring grant applications to include certain types of information. In addition to any information FEMA may require applicants to submit, the statute requires applicants to provide assurances regarding diversity in hiring; to explain their inability to address the need without federal assistance; and to specify long-term retention plans after federal funding ends, including, for hiring grants, how the applicant plans to meet the statute’s 5-year service commitment. A hiring grant applicant is also required to discuss what it will do to ensure that its department does not discriminate against firefighters who engage in volunteer activities in another jurisdiction during off-duty hours. The SAFER Act has a statutory sunset of 10 years from the date of enactment, such that the agency’s authority to make SAFER grants will elapse on November 24, 2013. (See app. II for a table that sets forth the statutory requirements applicable to the AFG, FP&S, and SAFER grant programs). Each appropriations act enacted after January 2002 has made fire grant appropriations available for 2 fiscal years, after which any unobligated funds expire. The Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009—which contains the fiscal year 2009 Department of Homeland Security Appropriations Act—provided $775 million for firefighter assistance, including $565 million for fire grants and $210 million for SAFER grants. Table 1 shows the AFG and SAFER appropriations beginning with their first funded years, fiscal year 2001 and fiscal year 2005, respectively. (The FP&S funds are included in the AFG appropriation.) FEMA describes annual funding priorities for the grant programs in its grant guidance document, which incorporates recommendations from the programs’ criteria development panel. The criteria development panel is composed of subject matter experts who meet annually for 3 days to review and modify the previous year’s funding priorities and award criteria for all three fire grant programs, and whose recommendations are summarized in a report to FEMA. Detailed information about the mission and purpose of each fire service organization is contained in appendix III. The review process for all three grant programs includes three evaluation stages: an automated scoring or prescreening process to determine eligibility and alignment with the grant programs’ funding priorities; a peer review panel, in which practitioners within the fire service community evaluate and score the applications; and a final technical review by subject matter specialists, FEMA officials in the AFG Program Office and the Grants Management Division, as well as officials in state homeland security offices, if applicable. The criteria development panel also updates the previous year’s scoring matrix, which is a confidential, weighted numerical scoring methodology that reflects the identified funding priorities. The scoring matrix is used to rate AFG and SAFER applications by scoring the answers to the application questions that are weighted to reflect the funding priorities. If applicants request funding for multiple activities, each activity is scored independently of the others. The activities’ scores are then weighted based on the dollar amount and combined to determine the application’s overall score. Following review and discussion of the previous year’s information, the criteria development panel submits its recommendations on the grant criteria and funding priorities—including those on which participants do not reach consensus—to the AFG Program Office in the form of a report. After incorporating the panel’s recommendations and developing the grant guidance for the three grant programs, the AFG Program Office submits the guidance to other offices within FEMA for internal review. Subsequently, it sends the guidance to DHS and OMB for approval. The grant review and award process is represented in figure 1. (See app. IV for more detailed information about each of the steps involved in the application and award process.) Figure 2 shows the distribution of federal funds for the three fire grant programs by state for fiscal year 2008. As shown in table 2, grant applicants submitted more than 22,000 applications for the AFG and SAFER grant programs for fiscal year 2008, and as of July 2009, FEMA had awarded a total of 5,060 grants. As of July 2009, applicants submitted about 2,500 applications for the fiscal year 2007 FP&S grants and FEMA had awarded a total of 216 grants. FP&S application and award numbers are for fiscal year 2007 funding and reflect all fiscal year 2007 awards made through July 2009. No fiscal year 2008 FP&S grants had been awarded as of July 2009. FEMA received about 25,000 applications for AFG, SAFER, and FP&S grants in fiscal year 2007 and awarded more than 5,000 grants. See apps. V through X for more detailed information about the distribution of AFG, SAFER, and FP&S program funds. In awarding fiscal year 2008 AFG and SAFER grants and fiscal year 2007 FP&S grants, FEMA met seven of eight statutory and two of three program requirements. These requirements specified how FEMA was to distribute appropriated grant funds between different applicants and activities. In July 2009, when FEMA provided fire grant award data for our review, the agency was in the process of awarding fiscal year 2007 FP&S grants and fiscal year 2008 AFG and SAFER grants. These years were the latest for which grants had been awarded and for which we were able to determine FEMA’s compliance with statutory and program funding distribution requirements. Fire grant data for fiscal years 2007 and 2008 are current as of July 2009. According to AFG program guidance, NFPA reported that combination departments protect 33 percent of the nation’s population and volunteer departments protect 22 percent. We did not verify FEMA’s estimates. FEMA met four of five statutory requirements related to AFG grants for fiscal year 2008. First, as shown in figure 3, FEMA has consistently met the population-based statutory requirement for awarding fire grants to volunteer and combination fire departments from fiscal year 2002 through July of fiscal year 2008. Based on our review of fiscal year 2008 grant data, FEMA also met three other statutory funding distribution requirements for the AFG program, as identified in table 3. Fire grant data for fiscal year 2008 are current as of July 2009. The fiscal year 2008 fire grant period closed on September 30, 2009, which is the end of fiscal year 2009. maximum ceilings established by the Fire Act. In addition, FEMA a about $378,560 of its fiscal year 2008 AFG appropriation for foam firefighting equipment. According to a program specialist responsible f administering the AFG and SAFER grant programs, FEMA granted all requests that were submitted for foam firefighting equipment, since the total amount requested was below the $3 million FEMA was required tomake available for this purpose. Thus, in meeting these requirements, FEMA ensured that its grant award s were consistent with the funding percentages mandated by statute. The AFG guidance states that no more than 45 percent of the AFG funds may be awarded to career departments. As shown in figure 4, FEMA has FEMA has consistently met this requirement from fiscal years 2002 through 2008. consistently met this requirement from fiscal years 2002 through 2008. According to a program specialist responsible for administering the AFG and SAFER grant programs, in fiscal year 2007, OMB instructed the AFG Program Office to separate the percentage of funding given to volunteer and combination departments in proportion with the population that each type of department protects. Thus, FEMA incorporated this requirement in its program guidance. Specifically, the AFG 2008 grant guidance specified two requirements for FEMA to distribute grant awards: (1) volunteer departments are to receive at least 22 percent and (2) combination departments are to receive at least 33 percent of the total appropriation. While FEMA met the requirement to award at least 22 percent to volunteer fire departments in fiscal year 2008, it had not reached the minimum requirement of awarding at least 33 percent to combination departments as of July 2009. Specifically, FEMA awarded volunteer departments about 39 percent ($217 million) of its $560 million in fiscal year 2008 appropriated funds, but only awarded about 27 percent ($149 million) of its appropriation to combination departments. We also analyzed fiscal year 2007 data to determine whether FEMA met the requirement related to distributing funds to combination departments since the separation between volunteer and combination departments occurred. FEMA fell slightly short of meeting this program requirement because it awarded combination fire departments about 32 percent ($173 million) of the total appropriation of fiscal year 2007 grant funds—only 1 percent less than that required by program guidance (see fig. 5). According to a program specialist responsible for administering the AFG and SAFER grant programs, FEMA attempts to comply with the guidance pertaining to population-based proportional grant funding, and he indicated that the shortfall in fiscal year 2007 awards to combination fire departments may have been an oversight. Because of delays in the approval of program guidance, no fiscal year 2008 FP&S grants had been awarded as of July 2009. Therefore, we reviewed FEMA’s data related to its fiscal year 2007 FP&S grant funding distributions. According to these data, FEMA met the 5 percent minimum statutory requirement in fiscal year 2007 by awarding $33,887,071, or about 6.2 percent, of the total AFG appropriation for FP&S grants. Thus, FEMA ensured that FP&S grant applicants received the percentage of funds mandated by statute. In fiscal year 2008, FEMA met statutory requirements related to distributing funds for SAFER grants. FEMA is required to set aside 10 percent of the annual SAFER Act appropriation for all volunteer or majority volunteer fire departments to compete for hiring grants, which are otherwise open to all fire departments regardless of their career, combination or volunteer status. Recruitment and retention grants, which are open to volunteer and combination but not career departments, must also account for at least 10 percent of appropriated funding, in addition to the unused balance, if any, from the 10 percent hiring grant set-aside. FEMA complied with these requirements by awarding $21 million, or about 11 percent, of the $190 million in SAFER funding to volunteer and majority volunteer fire departments for hiring efforts. In addition, FEMA also awarded $20 million, or about 11 percent, of the funds to volunteer and combination departments for the purpose of recruitment and retention. Thus, FEMA ensured that SAFER grant applicants received the percentage of funds mandated by statute (see fig. 6). FEMA has developed various tools to assist grant applicants with the application process and involves the nine major fire service organizations in developing criteria for annual fire grant funding priorities and in the peer review process. FEMA assists grant applicants by sponsoring workshops, publishing an online tutorial, and providing a toll-free hotline, among other actions. Each of the nine major fire service organizations sends representatives to serve on the annual criteria development panel, which recommends changes to the grant evaluation criteria and the funding priorities for the next fiscal year. During the peer review process, fire service practitioners independently rank the grant applications according to the evaluation elements recommended by the criteria development panel. FEMA has developed various tools to assist fire grant applicants with the application process. According to a program specialist responsible for administering the AFG and SAFER grant programs, FEMA’s regional offices sponsored approximately 400 AFG and SAFER workshops throughout the country in 2008. While not all of the 36 randomly selected fire grant applicants in our nonprobability sample had attended workshops, 6 grant applicants that had done so explained that they received basic information on the grant application and award process, such as a review of the grant guidance and funding priorities, and how to write the narrative section of the application. See appendix XI for a listing of fire grant applicants included in our interviews. FEMA has also contracted with the North American Fire Training Directors to provide a grant-writing training class to fire departments in all 50 states throughout the year. The training class explains the grant opportunities available through the AFG program, describes the application process, and provides detailed information to guide applicants in drafting narratives. The course includes a slide presentation with an instructor’s guide and is designed to be about 4 to 6 hours in length. The contract allots up to $5,000 per state, totaling $250,000 for grant-writing technical assistance to be delivered from January 2009 through January 2010. In addition, FEMA has created an online tutorial to guide AFG, SAFER, and FP&S applicants through the grant application process. Of the 36 applicants we interviewed, 20 applicants stated that they used online tutorials and 13 of them stated that the tutorial was helpful to a great or very great extent. Two of these applicants stated that the tutorials were useful to a great extent because they provide needed information on specific sections of the applications and help identify problematic areas. Applicants seeking further assistance can call a toll-free hotline, which is staffed by contract personnel who have firefighting experience, or they can e-mail FEMA. FEMA provides technical assistance Monday through Friday for each of the three grant programs and also provides such assistance over the weekend for AFG applicants. In 2008, FEMA received an estimated total of 12,000 calls to the hotline and responded to an estimated 10,000 e-mails. FEMA has also established a mentoring program designed for departments that have unsuccessfully applied for fire grants for at least 5 years and offers this assistance to all departments that qualify. About half of the departments accept FEMA’s offer to participate in the mentoring program, in which each participating department is paired with a former peer review panelist and given a tutorial to guide it through the process. As of May 2009, about 400 departments were being mentored and about 30 to 40 percent have been successful in receiving a subsequent grant. While FEMA allows applicants to hire a grant writer to assist them with the process, applicants are responsible for the accuracy of information provided by the grant writer. The grant writer fees included in the grant amount requested are reimbursable, providing that they are declared in the application and do not depend on award. FEMA has taken a number of steps to involve the fire service community in the grant process. For example, each year, FEMA brings together a panel of fire service professionals representing the leadership of the nine major fire service organizations to conduct a criteria development meeting to develop the program’s priorities for the coming year. According to a program specialist responsible for administering the AFG and SAFER grant programs, the panel convenes for 3 days in the summer before the annual appropriations process and is composed of 3 representatives from each of the organizations, totaling roughly 50 participants, including FEMA staff. The panel is responsible for making recommendations to FEMA’s AFG Program Office regarding the creation of program priorities, modification of program priorities, or both for all three fire grant programs—AFG, FP&S, and SAFER—as well as the development of criteria upon which the evaluation of grant applications is based. The panel’s recommendations are placed in a report that panelists submit to FEMA, which then incorporates the suggestions into the next fiscal year’s grant guidance. FEMA’s peer review process—in which members of the nine major fire service organizations participate in assessing grant applications—also helps ensure that the fire service community is involved in making grant awards. According to FEMA, the peer review process is a key component for ensuring fairness in awarding fire grants. Peer review panelists are to conduct an independent assessment of the merits of the applications based on the extent to which the proposed projects align with the grant year’s funding priorities and meet the program’s goals and objectives. Before arriving at the peer review panel, participants are required to complete an online tutorial and test, and then submit their certification of a passing grade during the panel orientation. If a panelist has not completed the tutorial, he or she is required to do so at the panel orientation. When panelists arrive at orientation, they are required to sign and submit a statement declaring that they have no known or apparent conflicts of interest as well as a nondisclosure form agreeing to keep the results of the review confidential. The panelists are then divided into groups of four at different tables. FEMA instructs the panelists not to review applications if they know the applicant or if the applicant is from their state. In the event that a potential conflict of interest arises, FEMA replaces the entire batch of applications provided to the table of panelists with a new batch. FEMA also instructs the panelists not to share applicant information with any panelists other than those seated at their table. All panelists receive an evaluation sheet that lists the evaluation factors, along with a rubric that provides guidelines for rating grant applications against the evaluation factors. They also receive a copy of the grant guidance, which contains the funding priorities. New panelists receive a 2-½-hour orientation by FEMA program staff, who provide instruction on distinguishing between average and good applications, the logistics of individual scoring and table discussion, and the possible need to reduce the requested grant amount, among other things. Once the orientation is completed, the panelists individually read and score the narrative section of the applications as well as responses to other parts of the application, based on the applicable evaluation criteria. For example, for fiscal year 2008 AFG applications, panelists provided numerical scores on the basis of four evaluation factors stated in their score sheets, which were (1) project description, (2) cost/benefit of the proposed project, (3) financial need, and (4) effect of the proposed project on daily operations. After each panelist at the table scores an application, the panelists discuss any differences of opinion and the merits or limitations of the application. Orientation facilitators inform panelists that the aim of the table discussion is not to arrive at a consensus, but rather to discuss each application as it pertains to each of the evaluation elements. If panelists are unable to reconcile any large scoring disparity (defined as 10 points or greater), they bring the dispute to the attention of a panel chair member who is responsible for ensuring that panelists document their discussion and indicate the scoring disparity on their scoring sheets. Panelists may amend their individual scores or choose to keep them unchanged on their evaluation sheets. FEMA files all of the panelists’ evaluation sheets for each application, including the panelists’ comments and recommendations to reduce the funding amount, reject, or award, with the applications. After evaluations are entered into FEMA’s database, an average score is electronically generated that determines whether the application proceeds to the technical review process, which occurs concurrently in a separate room at the panel location for applications with the highest scores. FEMA AFG Program Office officials explained that the number of panelists varies from year to year and the number of nominees that they request from each of the nine major fire service organizations depends upon the amount of appropriated funding as well as the number of applications submitted. Typically, the organizations each nominate about 24 to 40 people for the AFG panel, 10 for the SAFER panel, and 24 to 28 for the FP&S panel. FEMA also sends letters to subgroups within the organizations that represent minorities to receive nominations to help diversify the panel. According to a program specialist responsible for administering the AFG and SAFER grant programs, while FEMA does not verify whether the organizations’ nominees are qualified to attend the panel, it asks for the résumés of self-nominees or of those nominated by members of Congress. The official explained that in selecting the peer review panelists, FEMA considers availability to attend, racial diversity, and the ratio of new-to-repeat panelists. In fiscal year 2008, 285 people served on the AFG panel, 47 served on the SAFER panel, and 160 served on the FP&S panel. The official stated that FEMA considers panelists new if they have not participated in that particular grant program panel review, regardless of prior experience as a peer reviewer for another grant program. Although FEMA selects both new and returning panelists to review applications in any or all three grant categories, it tries to limit returning panelists to no more than one-third of the total panel composition. However, AFG Program Office officials may invite additional returning panelists if there are not enough confirmed attendees. Panelists are volunteers—although FEMA pays the entire cost of each panelist’s transportation, food, and lodging, it does not compensate panelists for any loss of income they may incur while serving on the panel. Lodging is typically provided at a federal training facility in Emmitsburg, Maryland, at no cost to the grant program. In interviews with a nonprobability sample of 36 fire grant applicants, 22 applicants, or about 61 percent, stated that they had never been asked to serve on a panel. When asked whether they thought that the peer review process was fair and objective, 23 stated that it was, while 3 stated that it was not, and 10 did not know. In addition, 32 of the applicants stated that they believed that experience as a peer reviewer was beneficial to completing a grant application. Although FEMA officials attempt to ensure that new peer review panelists make up two-thirds of the peer review panel each year, they stated that they do not currently undertake additional outreach activities themselves to encourage nominations of new panelists, such as notifying applicants of opportunities to serve on peer review panels during FEMA’s workshops or other assistance activities they sponsor for applicants. Rather, FEMA relies on the nine major fire service organizations for nominations of new panelists. AFG Program Office officials stated that while they strive to provide an even chance to as many fire departments and other organizations as possible to serve on peer review panels, representatives of departments that are invited sometimes fail to appear to serve on the panel without informing FEMA. Therefore, officials have invited some departments multiple times because they have proven to be reliable and good reviewers. They acknowledged that although FEMA does not currently limit the number of times that a department can send representatives to serve on the panels, establishing such a limit could expand opportunities for other departments to participate in the peer review process. In addition, they also stated that they are considering conducting outreach efforts to expand peer review participation, such as announcing opportunities to serve on an upcoming peer review panel at workshops. In addition to expanding peer review participation, such efforts could benefit peer review panelists by allowing them to incorporate firsthand knowledge of the panel process into their future grant applications. FEMA has taken actions—such as publishing grant guidance and applications online—to ensure that its grant process is more easily accessible to grant applicants, but the agency could enhance the clarity and consistency of its grant guidance and the controls over its review and approval process. While grant guidance priorities are generally perceived as clear by grant applicants we interviewed, we identified inconsistencies between the grant guidance and the grant applications and grant scoring matrix language. In addition, FEMA has experienced significant delays in issuing grant guidance, and the agency does not have controls to monitor the progress of the review process. Finally, the majority of fire grant applicants that we interviewed felt they received inadequate feedback on why their applications were rejected. Before each annual grant application period, FEMA publishes updated grant guidance on its Web site and has created an online grant application, which is designed to be user-friendly. Publication of the annual grant guidance on the FEMA Web site makes it more accessible to potential applicants. The grant guidance provides applicants with an explanation of the information that will be required in the application, as well as informing them of any grant priorities for the fire grants for that year, such as whether training will be given priority. FEMA encourages applicants to apply for fire grants online because of delays and mistakes associated with processing paper applications. The electronic application has built-in “Help” screens and drop-down menus. Applicants for each of the three grant programs are required to answer a series of questions about their department and the particular grant they are applying for, as well as provide a narrative that discusses the impact to result from the proposed use of the grant funds, among other things. Both the answers to the questions and the narrative are to be reviewed and scored by the peer review panel. The statutes authorizing the three fire grant programs contain specific grant application requirements, which require FEMA to collect and consider certain information from applicants in making grant awards; however, not all of these requirements are included in FEMA’s grant guidance and application forms. For the AFG and FP&S grant programs, the Fire Act requires grant applicants to include (1) information demonstrating financial need, (2) an analysis of costs and benefits resulting from the assistance, (3) a list of other sources of federal funding received by the applicant to avoid duplicative funding, and (4) an agreement by the applicant to provide information to the National Fire Incident Reporting System during the grant period. An additional requirement applies to the AFG program, requiring FEMA to consider the extent to which the grant would enhance the fire department’s daily operations and the grant’s impact on the protection of lives and property. Based on our review, the AFG and FP&S fiscal year 2008 grant guidance and application forms instruct applicants to provide information consistent with the above statutory requirements, with one exception relating to the FP&S R&D activity, as indicated in table 4. FP&S grants cover two activities: (1) fire prevention and safety and (2) firefighter safety R&D. However, FEMA grant guidance only instructed applicants to provide the statutorily required cost-benefit analysis for projects proposed under the fire prevention and safety activity, not the R&D activity. Apart from this exception, the grant guidance and applications forms for both the AFG and FP&S programs incorporate the Fire Act’s information requirements. In particular, according to the grant guidance for both programs, fire departments that are awarded grants are to provide information to the National Fire Incident Reporting System during the grant period, as required by statute. In addition, the application forms for both grant programs require applicants to identify other sources of federal funding they are receiving that may duplicate the purpose of their grant request. Although a program specialist responsible for administering the AFG and SAFER grant programs stated that few grant applicants receive grant awards from other sources, FEMA queries its internal records of all grant applicants to prevent making duplicate awards. The three remaining AFG statutory requirements—financial need information, a cost-benefit analysis, and an impact statement—appear as evaluation criteria in the AFG guidance that applicants are to address in their project narratives. The two remaining FP&S statutory requirements—financial need information and a cost- benefit analysis—appear as evaluation criteria for the fire prevention and safety activity, but the evaluation criteria for the R&D activity include only one of these two statutory requirements, financial need. By taking steps to ensure that all statutorily required information is included in the grant guidance and application forms, FEMA is better positioned to provide reasonable assurance that grants are awarded in accordance with the statute. In addition, the SAFER Act also specifies certain information that applicants are required to submit, in addition to any other information required by FEMA. The statute requires each applicant to (1) provide assurances regarding diversity in hiring, (2) explain its inability to address the need without federal assistance, and (3) specify long-term retention plans after federal funding ends. With respect to the latter requirement, SAFER hiring grant applicants are to specifically discuss how they plan to meet the statute’s 5-year service commitment (i.e., 1-year of service for SAFER-funded firefighters after the 4-year funding period ends). Furthermore, SAFER hiring grant applicants are to address another statutory requirement, a commitment not to discriminate against firefighters serving as volunteers in other jurisdictions during off-duty hours. 15 U.S.C. § 2229a(b)(3)(B). and retention grants, the guidance and application form only partially address one of the information requirements, as indicated in table 5. FEMA’s guidance for SAFER hiring grants includes each of the statutory information requirements within the evaluation factors that applicants are to address in their project narratives. For example, each hiring grant applicant is to include a statement regarding how the applicant plans to meet the nonfederal match requirement for the 5-year service period, including any long-term plans to retain the new firefighter positions, as required by the statute. Although the SAFER hiring grant guidance instructs applicants to submit all statutorily required information, the statement of long-term retention plans is less specific in the SAFER recruitment and retention grant guidance and application questions, which ask applicants to include “specifics about the recruitment and/or retention plan.” Because this language gives applicants the option of providing specifics on recruitment or retention plans, FEMA may not receive information on applicant’s long-term retention plans after federal funding ends, especially from applicants seeking grants for recruitment purposes. Clarifying the SAFER recruitment and retention grant guidance with respect to applicants’ long-term retention plans could help FEMA ensure that it collects the information necessary to determine whether awarded grants used for recruitment or retention purposes will have a lasting impact after federal funding ends. FEMA does explicitly instruct applicants to address the other two statutory requirements—diversity in hiring and inability to meet the need without federal assistance—which apply to SAFER recruitment and retention grants. Seventy-eight percent (28 of 36) of the grant applicants that we interviewed described the grant guidance as being clear to a great or to a very great extent, 7 said that it was clear to a moderate extent, and 1 applicant said that he did not know. For example, 1 applicant stated that the guidance was consistently well written and another commented that it was simple and user-friendly. However, 10 applicants provided suggestions for how FEMA could further clarify its grant guidance— including its grant priorities. For example, 1 suggested that priorities be more expressly stated so that he could make a more qualified decision on whether to apply. The fiscal year 2008 AFG program guidance does not summarize funding priorities for any activity other than for the vehicle acquisition program. Likewise, the fiscal year 2008 FP&S and SAFER program guidance also do not summarize funding priorities. AFG Program Office officials acknowledged that the fire grants program guidance could be made clearer, possibly by incorporating tables or charts highlighting program priorities. Moreover, while FEMA’s grant guidance and application questions for the AFG, FP&S, and SAFER grant programs generally incorporate statutory information requirements, priorities in the grant guidance are not always reflected in the scoring matrix and application questions. For example, the fiscal year 2008 SAFER guidance states that continuity—which refers to whether an applicant’s recruitment and retention activities are designed to continue beyond the grants’ period of performance—is a priority for recruitment and retention grants. However, there is no application question that addresses this priority, nor is there a scoring matrix value that corresponds to continuity. Further, the fiscal year 2008 AFG guidance for wellness and fitness grants prioritizes fitness and injury prevention projects over rehabilitation, but in the scoring matrix all wellness and fitness project categories are scored equally. Grant priorities/criteria in the guidance are updated every year based on the recommendations made by the criteria development panel. According to a program specialist responsible for administering the AFG and SAFER grant programs, it would be difficult to capture the concept of continuity in the form of a question, and the misalignment regarding wellness and fitness priorities may have occurred because of insufficient oversight by FEMA. It is important that FEMA ensure that its grant guidance is not only clear but also consistently aligned with the application questions and scoring matrix. According to the National Procurement Fraud Task Force, grant funds are awarded to carry out goals and objectives as they are identified in the grant guidance. In order for there to be accurate and consistent alignment between the grant awards and guidance, the application questions and their weighted scoring values must also reflect the intentions of the grant program as stated in the guidance. Developing grant guidance and application questions that are consistent with funding priorities could help FEMA ensure that grant funds are awarded in accordance with the agency’s priorities. FEMA’s Section Chief for the FP&S program stated that although the FP&S grant guidance is to be issued in August or September at the start of each fiscal year, it has not been issued on time for the past 3 fiscal years— the review and approval process for the fiscal year 2008 grant guidance took over 17 months, and guidance was not issued until February 2009. See appendix XII for more detailed information about the time frames for the fiscal year 2008 fire grants process. Because of this delay, the peer review panel convened to assess grant applications in April 2009, and FEMA began awarding fiscal year 2008 FP&S awards in August 2009. FEMA program officials stated that because of the delays in the approval of the grant guidance, FEMA was unable to reserve classroom and dormitory space at the federal facility in Emmitsburg, Maryland, where prior peer review panels had met, and the panel met at a private hotel in Towson, Maryland, at a cost of about $90,000. As a result of this expenditure, there were fewer funds to award to grant applicants. According to FEMA’s Office of Policy and Program Analysis, there is no systematic method for tracking the review and approval process for fire grant guidance, no internal deadlines, and no documentation to help determine the cause for delays in the issuance of grant guidance. AFG Program Office officials said that they are not fully aware of the review and approval process once the drafted guidance leaves the AFG Program Office and is sent to other offices within FEMA and DHS. They said that the delay in issuing the fiscal year 2008 FP&S guidance occurred when the FEMA Policy Coordinating Group found that the AFG Program Office did not possess a Paperwork Reduction Act clearance in order to collect information from others outside of the federal government. In response, the AFG Program Office submitted a request for an emergency clearance, which OMB did not approve. According to OMB officials, the clearance was denied because OMB believed that FEMA should go through proper channels to obtain a routine clearance for its fire grant program because FEMA had previously asked for other emergency clearances. OMB officials stated that obtaining a routine clearance typically requires about 120 days. Once the grant review process is completed, unsuccessful applicants receive letters notifying them of the reason(s) their applications were turned down for grant awards, but some applicants have stated that they would like more information on the reasons for their rejection. According to AFG Program Office officials, applicants receive rejection letters at the same time as grant awards are being announced. The officials further stated that sending rejection letters to thousands of applicants is time and resource intensive. The AFG Program Office has developed 16 templates to use in sending AFG applicants letters explaining the reasons for their rejection. Explanations that FEMA provides to unsuccessful applicants include (1) discrepancies between the itemized request and the narrative justification for those items, (2) an applicant or the specific activity for which grant funding was requested is ineligible for funding, or (3) incomplete fulfillment of the requirements of previous grant awards received by the applicant. These letters inform the applicants that there were an extremely high number of applications and a finite amount of funding, which resulted in many worthy applicants not being funded. In certain cases, the information contained in these letters is more positive and does not provide detailed information on the reason for the rejection. For example, FEMA may send an applicant a letter explaining that while the peer review panelists’ scores indicated that its application was generally good, the agency does not have enough funding to offer the applicant an award after awarding grants to applicants with higher scores. However, FEMA states that if it identifies any excess funding or if some of the applicants that have been offered a grant decline the offers, the agency might be able to fund the request. According to AFG Program Office officials, applicants are not allowed to appeal panelists’ scores. Rather, they can only request reconsiderations because of processing issues. For example, they can argue that terminology in the grant guidance was unclear. Four of the nine major fire service organizations expressed concern about the level of feedback provided to rejected applicants. One official stated that FEMA’s denial letters lack specificity about why their applications were denied, while another official stated that rejected departments were frustrated with not knowing why their applications were rejected year after year. Another official suggested that FEMA publish a list of the top 10 reasons why grants are turned down in order to provide greater clarity to applicants. Moreover, 61 percent of the 36 grant applicants that we interviewed (22 of 36) stated that the feedback they received from FEMA regarding why their applications were turned down was helpful to little or no extent. One applicant stated that he did not receive any feedback from FEMA and that his fire department had called the agency to learn the status of its application. In addition, 6 applicants stated that the feedback was helpful to some or to a moderate extent and another 6 stated that the feedback was helpful to a great or very great extent. However, 1 applicant reported not knowing the extent to which the feedback was helpful. Seventy-five percent (27 of 36) of grant applicants with whom we spoke suggested that FEMA’s feedback should include specific reasons why the grant application was denied. For example, 3 grant applicants suggested that it would be helpful if FEMA provided information regarding the specific stage in the application review process where an application was rejected. One fire department suggested that FEMA cite whether an application contained a poorly written narrative or was rejected for another reason, such as a request for equipment that was not a funding priority. Another applicant suggested that peer reviewers provide applicants the reasons why their applications scored low, and another suggested that FEMA include information on available assistance for future grant cycles, such as the online tutorial or list of workshops. Providing feedback to grant applicants is an important part of the fire grant program. In its 2007 report on the AFG program, the National Academy of Public Administration listed improving feedback to grant applicants as a strategic objective for the grant management process. The strategic objective is for FEMA to improve the feedback to unsuccessful candidates so that applicants can understand why they did not receive grants, thereby increasing participation and improving the quality of requested grants. AFG Program Office officials acknowledged that they could strengthen efforts to improve feedback to applicants who are turned down for grants following the peer review process. According to the Director of the AFG program, FEMA could modify the feedback provided to unsuccessful applicants to better explain the reasons why applications were rejected. We have previously reported the need to provide clear feedback to unsuccessful applicants on the strengths and weaknesses of their grant applications. Providing specific feedback to applicants regarding the reasons that they are denied grants could help FEMA strengthen future grant application processes and better position it to achieve its intended benefits of assisting fire departments that are most in need. Through the years, the U.S. fire service community has experienced changes in its responsibilities to the public as well as decreases in local budget distribution, which underscore the need for fire departments nationwide to have the resources necessary to protect their communities. Through its fire grant programs, FEMA has an opportunity to assist fire departments that are struggling to meet their responsibilities. While FEMA distributed fire grants to a variety of applicants for a variety of activities, developing and implementing a procedure for capturing the percentage of appropriated funds awarded to fire departments related to EMS equipment and training would better position FEMA to more readily determine if it met the minimum amount established by statute. FEMA could improve the clarity and consistency of the grant review and award process by collecting all statutorily required information and eliminating inconsistencies between the guidance, the scoring matrix, and the application, which may confuse applicants. Additionally, by improving its internal controls to document and track the grant guidance review and approval against established milestones, FEMA could provide applicants the opportunity to plan for matching funds by determining when guidance will be issued each year. Finally, by providing more specific feedback and information on assistance, FEMA could help ensure that applicants have the opportunity to prepare better applications, and thus have a greater chance of being awarded grants in the future. To ensure compliance with all AFG statutory requirements, we recommend that the Administrator of FEMA establish a procedure for tracking the percentage of grant funds awarded to fire departments for EMS purposes. In addition, to improve the clarity, consistency, and controls of the grant review and award process, we recommend that the Administrator of FEMA take the following three actions: Ensure that the priorities in the grant guidance are aligned with the scoring matrix and the grant application questions, and that FEMA requests applicants to submit all statutorily required information. Coordinate with the Secretary of Homeland Security to document the review and approval process for its grant guidance, develop a tracking system to monitor the progress of the review within FEMA and DHS, and set internal deadlines so that guidance can be issued in a timely manner. Inform unsuccessful applicants about the forms of assistance available to them in future grant cycles and provide more specific feedback to applicants that are turned down for grants following the peer review. We provided a draft of this report to DHS and FEMA for review and comment. On October 22, 2009, DHS provided written comments on the draft report, which are reprinted in appendix XIV. DHS concurred with our recommendations and is taking actions to address them. DHS stated that FEMA will examine the available options and adopt one for manually and electronically monitoring percentages of grant funds awarded to fire departments for emergency medical services purposes to ensure compliance. DHS also stated that FEMA will explore options and identify means for providing clear, concise, and consistent information to applicants on the funding priorities and statutorily required information. In addition, DHS stated that FEMA will work with applicable offices to enable a timely review and tracking of program guidance material. Further, DHS stated that additional training and outreach efforts are being developed to enhance feedback to applicants. We are sending copies of this report to the Secretary of Homeland Security, Director of the Office of Management and Budget, interested congressional committees, and other interested parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, or wish to discuss these matters further, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix XV. The accompanying explanatory statement to the Consolidated Appropriations Act, 2008, mandates that we review the application and award process for Assistance to Firefighters Grant (AFG) and Staffing for Adequate Fire and Emergency Response (SAFER) grants. Thus, we addressed the following questions: To what extent has the Federal Emergency Management Agency (FEMA) met statutory and program requirements for distributing the grant funds to a variety of applicants and activities? What actions has FEMA taken to provide assistance to grant applicants and involve the fire service community in the grant process? To what extent has FEMA taken actions to help ensure the fire grant process and related guidance are accessible, clear, and consistent with applicable statutory and program requirements? To review the extent to which FEMA met statutory and program requirements for distributing fire grants to a variety of applicants and activities, we reviewed relevant statutory requirements from sections 33 and 34 of the Federal Fire Prevention and Control Act of 1974 (called the Fire Act and the SAFER Act, respectively, for purposes of this report). Based upon these statutes, we identified a total of eight statutory requirements that established specific percentages or dollar amounts designating how FEMA was to distribute funds among different grant applicants and activities. We also identified three relevant program requirements established in FEMA’s grant guidance for the AFG, SAFER and Fire Prevention and Safety (FP&S) grant programs, which related to distributing grant funds among different categories of activities and applicants. We then compared these statutory and program requirements to FEMA grant award data that stratified awards based on the type of fire department: volunteer, career, or combination—and based on the type of activity, such as awards for vehicle acquisitions. FEMA began maintaining electronic fire grant award data in fiscal year 2002. FEMA’s fire grant award data are current as of July 2009, at which time FEMA was in the process of awarding fiscal year 2007 FP&S grants and fiscal year 2008 AFG and SAFER grants. These years were the latest for which grants had been awarded at the time of our review and for which we were able to determine FEMA’s compliance with statutory and program funding distribution requirements. In addition to analyzing compliance issues, we also analyzed FEMA’s annual listings of applications and awards for the AFG and FP&S grant programs from fiscal years 2002 through 2008 and SAFER grant program from fiscal years 2005 through 2008 to provide descriptive information on a number of other characteristics, such as the type of community served by the applicant—urban, suburban, or rural. We provided descriptive information on the type of community served because the Fire Act requires FEMA to distribute AFG grants to a variety of different fire departments based on such characteristics as the type of community served, although the statute did not provide a specific percentage of funds against which we could evaluate compliance for the community-based requirement. We also determined the number of times that departments have applied for and been awarded grants. The descriptive information regarding the distribution of grant awards appears in appendixes V through X and appendix XIII of this report. To assess the reliability of data provided by FEMA, we reviewed and discussed the sources of data with agency officials. We determined that the data were sufficiently reliable for the purposes of this report. To determine the actions FEMA has taken to provide assistance to grant applicants and involve the fire service community in the grant process, we collected and reviewed pertinent FEMA documents, such as program guidance, and observed FEMA’s fiscal year 2010 criteria development panel process and the fiscal year 2008 FP&S peer review panel process. We conducted interviews with officials from FEMA and the nine fire service organizations to determine the type of information FEMA provides to applicants on the grant application and review process. We analyzed the methods FEMA uses to inform applicants about the fire grant programs, including the various types of outreach and assistance that the agency provides to applicants. Specifically, we reviewed information on grant-writing workshops, online tutorials, technical support, and mentoring, among other forms of applicant outreach, and reviewed the contract between the North American Fire Training Directors and FEMA to provide additional grant-writing assistance to applicants. We also conducted interviews with officials from FEMA, the U.S. Fire Administration, and the nine fire service organizations to understand how FEMA establishes criteria for awarding grants to applicants. We analyzed the information regarding FEMA’s procedures for selecting peer reviewers; the training that panelists receive before reviewing applications; and the measures FEMA takes to ensure that peer review panelists maintain independence, safeguard against any conflict of interest, and adhere to restrictions related to confidentiality. We analyzed peer review guidance and other AFG Program Office documents, such as the criteria development reports and panel application evaluation sheets, to determine the process through which peer reviewers score grant applications. We collected and analyzed information pertaining to the technical review process and observed the fiscal year 2008 FP&S subject matter specialists’ portion of the technical review to determine how FEMA incorporates scores from the technical reviewers and makes final award decisions. To evaluate the extent to which FEMA has taken actions to help ensure that the fire grant process and related guidance are accessible, clear, and consistent with applicable statutory and program requirements, we reviewed FEMA’s methods of publishing grant guidance online and the online applications. We also identified statutory requirements pertaining to information applicants are required to submit in their fire grant applications and analyzed FEMA’s fiscal year 2008 grant guidance and application forms to determine whether they consistently instructed applicants to submit the statutorily required information. We obtained and analyzed FEMA AFG Program Office documents, such as the scoring matrix and documents describing the prescreening process. We analyzed and compared the fire grant programs’ funding priorities contained in fiscal year 2008 AFG and SAFER grant guidance and 2007 FP&S grant guidance with the application questions and the scoring matrix to determine the extent to which they were consistent based on criteria from the National Procurement Fraud Task Force. Through our analysis of grant program documents for fiscal years 2007 and 2008 and our interviews with officials from the Office of Management and Budget, the Department of Homeland Security (DHS), and FEMA, we obtained obtain information about the approval and issuance of the program and application guidance as well as how grant decisions are announced. We analyzed the procedures that FEMA uses to announce grant decisions and the type of feedback it provides to unsuccessful applicants and determined the circumstances under which applicants may appeal FEMA’s grant decisions. We compared the views of a nonprobability sample of 36 randomly selected fire grant applicants regarding feedback to unsuccessful candidates, and reviewed the National Academy of Public Administration 2007 assessment of the AFG program. From June 22 through June 29, 2009, we conducted structured interviews by phone with fire chiefs and other officials knowledgeable about the fire grants program from a nonprobability sample of 36 randomly selected fire grant applicants that did or did not receive fiscal year 2008 funding for the AFG and SAFER grants and fiscal year 2007 funding for the FP&S grants. We obtained their perspectives on the application and award process. The sample included fire grant applicants across the continental United States and Alaska. We obtained a list of the universe of applicants from FEMA for the respective fiscal years, from which we randomly selected fire departments within seven grant categories: (1) awarded AFG applicant, (2) turned down AFG applicant following the peer review panel process, (3) turned down AFG applicant following the initial electronic screening process, (4) awarded FP&S applicant, (5) turned down FP&S applicant following the peer review panel process, (6) awarded SAFER applicant, and (7) turned down SAFER applicant following the peer review panel process. We conducted two pretest interviews in person with representatives of fire departments in South Carolina and Pennsylvania to further refine our questions. An independent GAO methodologist reviewed our questionnaire to identify and revise potentially biased questions. Although we are not able to generalize the results of the nonprobability sample to the general population of applicants, the questionnaire allowed for a series of open-ended and close-ended responses on the grant application and award process, including questions on the perceived fairness and objectivity of the grant programs. Because of the scope of our work, we reviewed the fire grant programs’ application and award process, but did not assess the extent to which FEMA measures its performance in implementing these fire grant programs. We conducted this performance audit from January 2009 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. To assess the reliability of data provided by DHS and FEMA on the fire grant applicants, review criteria, and award procedures, we reviewed and discussed the sources of data with agency officials. We determined that the data were sufficiently reliable for the purposes of our review, and that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The AFG, FP&S, and SAFER grant programs are authorized to award funds for a range of purposes to various eligible organizations. Statutory requirements pertaining to each grant program are shown in table 6. Officials from the nine fire service organizations participate in the criteria development panel to recommend changes to the upcoming year’s grant priorities, as well as nominate members to serve on the peer review panel. The organizations’ missions and memberships represent a range of interests within the fire service community. (See table 7.) The AFG, FP&S, and SAFER grant programs are evaluated in three phases of review. The first phase is an automated scoring process to select competitive AFG grant applications, or a prescreening process for FP&S and SAFER grants. The second phase for all grants is a peer review panel process to evaluate the extent to which an application aligns with the grant year’s funding priorities and meets the programs’ goals and objectives. The third phase is a technical review panel process to determine technical feasibility, avoid duplication with state initiatives, and make any modifications to the potential award. After the application period is closed, all fire grant applications undergo either an automated scoring process, where each application is ranked relative to the funding priorities described in the guidance, or a prescreening process, where each application is screened for eligibility. For example, for the AFG and SAFER grant programs, the AFG Program Office creates a scoring formula (following the criteria development panel’s scoring matrix), which is then entered into a computerized system by FEMA’s Information Technology Office. Through this formula, each application is scored and ranked electronically. For the AFG program, if an application for a project has a high-dollar item or activity that was ranked as a low priority, that item or activity may have adversely affected the scoring and thus may have taken the application out of the competitive range for peer review. FEMA officials stated that because more than 21,000 AFG applications are submitted every year and the AFG Program Office does not have the resources to review all of the applications, the number of applications it submits for peer review is the number of applications with the highest scores whose cumulative funding requests total 200 percent of the appropriated funding. In other words, AFG grants that go to peer review can total no more than twice the dollar value of the available grant amount. SAFER applications also undergo an automated scoring and ranking process; however, FEMA submits all of them for peer review (1,314 applications for fiscal year 2008). Applications that best address the funding priorities score higher than applications that do not. Unlike the AFG automated scoring, which is used for the sole purpose of selecting applications for peer review, the automated score for SAFER grants accounts for one-half of the overall consideration provided each application, with the peer review accounting for the balance of the consideration. Unlike AFG and SAFER grants, FP&S applications do not undergo an automated scoring and ranking process. Because of the smaller size of the FP&S program and the more technical and academic nature of some FP&S requests, the AFG Program Office manually screens for eligibility all applications submitted for the two FP&S activities, which are fire prevention and safety grants and R&D grants. Both the applicants and the projects are screened for eligibility based on statutory and programmatic eligibility criteria, and those found ineligible are removed from further consideration before the peer review process. For example, for-profit applicants and projects requesting fire suppression equipment or fire vehicles are considered ineligible. According to an AFG Program Office section chief, out of 2,637 FP&S applications submitted for fiscal year 2008 funding, 170 applications were considered ineligible before the peer review panel process and another 16 applications were found ineligible during the peer review and therefore were not scored. Peer review panel participants are fire service professionals who are members of one or more of the nine major fire service organizations. The panel’s goal is to evaluate the extent to which an application aligns with the grant year’s funding priorities and meets the programs’ goals and objectives. The AFG Program Office officials explained that FEMA requests that each organization nominate members to serve as peer review panelists. FEMA also sends letters to subgroups within the organizations that represent minorities to receive nominations to help diversify the panel. Although the officials select both new and returning panelists to review applications in any or all three grant categories, they attempt to limit returning panelists to no more than one-third of the total panel composition. However, FEMA may invite more experienced panelists if there are not enough confirmed attendees. In the orientation for the peer review of fiscal year 2008 FP&S applications, new panelists completed a review of two mock applications and discussed them as a group to familiarize themselves with the review process. These simulated exercises for new panelists occur for the AFG and SAFER panels as well. For fiscal year 2008 SAFER hiring grants, panelists also scored applications numerically according to six evaluation factors stated in their score sheets, which were the extent to which the application described (1) a plan to use firefighters and the specific benefit these firefighters will provide for the fire department and the community, (2) a risk to the community and current firefighters that will be significantly reduced with grant funding, (3) the need for financial assistance, (4) a plan to recruit and hire minorities and women, (5) a long-range plan to make the nonfederal match and retain firefighters, and (6) a policy to prevent discrimination against firefighters who volunteer for other departments. For SAFER recruitment and retention grants, only the first four evaluation factors apply. For fiscal year 2008 FP&S applications, panelists scored applications for the fire prevention and safety activity based on six evaluation factors stated in their score sheets using adjectives ranging from “Strongly Agree” to “Strongly Disagree,” which the AFG Program Office subsequently converts to numerical scores. The evaluation sheet contains six detailed evaluation factors: (1) financial need, (2) vulnerability statement, (3) implementation plan, (4) project evaluation plan, (5) sustainability, and (6) cost-benefit analysis. For the FP&S research and development activity, panelists scored applications reflecting the degree to which they addressed the following evaluation factors: (1) study purpose(s), goals and objectives, and specific aims; (2) scientific and technical merit of the proposed research; (3) dissemination and implementation; (4) resources— people and time; (5) protection for human subjects; (6) financial need; and (7) impact on firefighter safety. In the House report accompanying DHS’s fiscal year 2008 appropriations bill, the House Committee on Appropriations raised concerns about the number of fire grant applications that did not reach the peer review stage (9,268 out of 20,972 according to the House report). In the subsequent explanatory statement accompanying DHS’s fiscal year 2008 appropriations act, both the House and Senate appropriations committees directed FEMA to provide fire grant applicants whose applications were not selected for peer review an official notification detailing the reasons for their rejection. A program specialist responsible for administering the AFG and SAFER grant programs stated that the agency sent all AFG applicants that submitted applications that were not peer reviewed a letter notifying them that their applications were not among those selected for the second phase of the competitive review. The letter explained that during the second phase, those applications that best addressed AFG’s established funding priorities for each eligible activity were approved and forwarded for peer review and that the objective of peer review is to further ensure the best use of grant funds. According to AFG Program Office officials, in fiscal year 2008, about 21,000 AFG applications were submitted, of which 8,000 were subsequently not selected for peer review. FEMA offered the applicants an opportunity to receive a more detailed explanation. The officials stated that applicants that submitted about 7,000 of these applications requested additional information, and four FEMA contractors spent about 4 months gathering the information needed to send electronic responses to these applicants to clarify specifically why the applications did not meet the criteria for peer review. To determine the types of applicants whose applications were rejected before the peer review process, we reviewed data provided by FEMA. For fiscal year 2008, we found that 4,489 applicants (or about 29 percent) of the 15,544 applicants were turned down for all applications they submitted for AFG funds through the automated scoring process, and consequently none of their applications were peer reviewed. Appendix XIII contains more detailed information about unsuccessful fire grant applicants by department type and community service area. Fire grant applications that receive the highest scores by the peer review panels are submitted for technical review. The technical review process consists of reviews made by subject matter specialists, the AFG Program Office or grants management specialists, or state homeland security representatives. The AFG Program Office has a group of subject matter specialists who review each potential award application to ensure that the project is technically feasible and that the application does not contain projects, activities, or items that are ineligible or otherwise not worthy of funding. In addition, they identify potential modifications to projects that would enhance the overall award, and identify applications that have scored outside the fundable range but should receive the award. The subject matter specialists review the entire application as well as the panelists’ comments. Once they have completed their review, the AFG Program Office staff reviews each potential award before making a recommendation on whether to award a grant to the applicant. The AFG Program Office staff assesses the findings from the previous reviews, determines whether any duplicate applications exist, and validates the eligibility of both the applicant and the items requested. Following the review by the AFG Program Office staff, grant applications that have been recommended for award are submitted to grants management specialists in FEMA’s Grants Management Division. These specialists are responsible for reviewing the financial information in applications and for ensuring that the requested amounts are reasonable and calculated correctly. They also ensure that applicants have provided responses to a questionnaire that the Grants Management Division sends to applicants. The questionnaire solicits information such as whether any proposed reductions in the requested amount in the grant applications are acceptable and if the applicant is a recipient of other federal grants. These responses to the questionnaire, which are supplemental to the grant application, are processed internally by the Grants Management Division. The Grants Management Division might contact the grantee for additional follow-up or send the application back to the AFG Program Office, as appropriate. According to grants management specialists, their review typically requires only a couple of hours, but the approval process might take as long as a month or more, depending on how long applicants take to respond to the questionnaire and the extent to which follow-up information is necessary. Once the specialists approve the recommended applications for award, the applications are sent to the assistance officers in the Grants Management Division for approval, at which point the assistance officers obligate the awards. Although FEMA generally makes funding decisions using rank-order results from the peer review panel evaluation, it may deviate from the panel’s scores and make funding decisions based on the type of department (career, combination, or volunteer), the size and character of the community the applicant serves (urban, suburban, or rural), or both to satisfy statutory and programmatic funding goals. State homeland security offices may also review applications to ensure that the relevant proposed projects do not duplicate existing statewide programs. Since the number of submitted application requests exceeds the appropriated funding, applications reviewed within this final stage may not be awarded grants, despite falling within the fundable range. FEMA announces these awards over several months as decisions are made, but does not make the awards in any specified order (i.e., by state, program, or any other characteristic). Awards are made until the funding is exhausted or the appropriation has expired. Tables 8 and 9 show the AFG and SAFER applicants and award breakdown, respectively, by state for fiscal year 2008. Table 10 shows the FP&S applicants and award breakdown for fiscal year 2007. Tables 11, 12, and 13 show the distribution of AFG, SAFER, and FP&S awards, respectively, from fiscal years 2002 to 2008 by department types (e.g., career, combination, volunteer, paid on call/stipend, or a combination of these). Tables 14, 15, and 16 show the distribution of AFG, SAFER, and FP&S awards, respectively, from fiscal years 2002 to 2008 by community service area (e.g., rural, suburban, and urban). Table 17 shows the distribution of AFG awards by activity (e.g., operations and safety, vehicle acquisition, and regional) for fiscal years 2002 through 2008. The amount of funding provided for operations and safety activities is consistently higher than that spent on regional activities and vehicle acquisition. Fiscal year 2008 funding for operations and safety grants amounted to $273.1 million out of the total $453.9 million grant awards. Grant funding for vehicle acquisition and regional applications was $131.7 million and $49.2 million, respectively. Tables 18 and 19 show the distribution of AFG and SAFER awards and funding, respectively, by department type for fiscal year 2008. Table 20 shows the distribution of FP&S awards and funding by department type for fiscal year 2007. Tables 21 and 22 show the distribution of AFG and SAFER awards, respectively, by service area for fiscal year 2008. Table 23 shows the distribution of FP&S awards by service area for fiscal year 2007. We conducted structured interviews with randomly selected applicants that applied for fiscal year 2008 funding for the AFG and SAFER grants and fiscal year 2007 funding for the FP&S grants to discuss various aspects of FEMA’s grant application and award process. (See table 24.) We obtained information from FEMA officials and documents in order to prepare a timeline depicting the time frames for the fiscal year 2008 fire grants process. (See fig. 8.) Tables 25 and 26 show the breakdown of unsuccessful AFG and SAFER applicants, respectively, by department type and community service area for fiscal year 2008. Table 27 shows the breakdown of unsuccessful FP&S applicants by department type and community service area for fiscal year 2007. In addition to the contact named above, Leyla Kazaz, Assistant Director, and Deborah Ortega, Analyst-in-Charge, managed this assignment. Sarah Arnett, Marie Webb, and Su Jin Yon made significant contributions to the work. Christine Davis provided legal support. Stanley Kostyla and Jerome Sandau assisted with design, methodology, and data analysis, and Lara Kaskie provided assistance in report preparation. | The Department of Homeland Security, through the Federal Emergency Management Agency (FEMA), awards grants to fire departments and other organizations for equipment, staffing, and other needs. As of July 2009, FEMA had received about 25,000 and 22,000 applications for its fiscal years 2007 and 2008 fire grant programs, respectively, and had awarded more than 5,000 grants in both years. GAO was congressionally directed to review the application and award process for these grants. This report addresses the (1) extent to which FEMA has met statutory and program requirements for distributing the grant funds; (2) actions FEMA has taken to provide assistance to grant applicants and involve the fire service community in the grant process; and (3) extent to which FEMA has ensured that its grant process is accessible, clear, and consistent with requirements, including its grant guidance. GAO analyzed relevant laws and interviewed 36 randomly selected grant applicants to obtain their views, but the results are not generalizable. FEMA met seven of eight statutory requirements and two of three FEMA established program requirements for distributing fiscal years 2007 and 2008 grant funds. (GAO used fiscal year 2007 data for two requirements because not all fiscal year 2008 funds had been awarded by July 2009.) For example, FEMA met the statutory requirement that volunteer and combination fire departments (which have both paid and volunteer firefighters) collectively receive at least a minimum of 55 percent of fiscal year 2008 grant funds, and also met the program requirement that volunteer departments receive at least 22 percent. GAO was unable to determine whether FEMA met the statutory requirement that at least 3.5 percent of fiscal year 2008 grant funds be awarded for EMS. FEMA reported that its system is not designed to separately track grants awarded to fire departments for EMS purposes and, therefore, it could not determine if it met this requirement. FEMA reported that while it conducted research to determine that it met this requirement for 1 year, doing so was laborious. Establishing procedures to track awards for EMS purposes would allow FEMA to readily determine if it met statutory requirements. FEMA assists grant applicants by sponsoring workshops and involves representatives of the fire service community in establishing criteria and reviewing applications. Each year, FEMA convenes leaders of nine major fire service organizations to conduct a criteria development meeting to develop the program's criteria and funding priorities. FEMA's peer review process--in which members of the fire service organizations assess grant applications--also helps ensure that the fire service community is involved in the grant process. FEMA officials stated that they strive to provide an even chance for as many fire departments and other organizations as possible to serve on peer review panels. They also stated that they are considering conducting outreach efforts to expand peer review participation, such as announcing opportunities to serve on an upcoming peer review panel at workshops. FEMA has taken actions to ensure that its fire grants award process is accessible and clear to grant applicants--28 of 36 applicants GAO interviewed found the guidance to be clear--but GAO also identified inconsistencies between the stated grant application priorities and the application questions and scoring values. For example, the fiscal year 2008 guidance for the grant that funds the recruitment and retention of firefighters states that continuity--maintaining recruitment and retention efforts beyond the life of the grant--was a priority for grant awards. However, no grant application question addressed this priority and the scoring values did not include it. Thus, it is difficult for FEMA to ensure that grant funds are awarded in accordance with the agency's funding priorities. Further, four of the nine major fire service organizations voiced concerns about feedback FEMA provided to rejected applicants, and 22 of the 36 applicants stated that the feedback was helpful to little or no extent. FEMA officials stated that they could strengthen efforts to improve feedback. Providing specific feedback to rejected applicants could help FEMA strengthen future grant application processes. |
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According to the President’s budget, the federal government plans to invest more than $96 billion on IT in fiscal year 2018—the largest amount ever. However, as we have previously reported, investments in federal IT too often result in failed projects that incur cost overruns and schedule slippages, while contributing little to the desired mission-related outcomes. For example: The Department of Veterans Affairs’ Scheduling Replacement Project was terminated in September 2009 after spending an estimated $127 million over 9 years. The tri-agency National Polar-orbiting Operational Environmental Satellite System was halted in February 2010 by the White House’s Office of Science and Technology Policy after the program spent 16 years and almost $5 billion. The Department of Homeland Security’s Secure Border Initiative Network program was ended in January 2011, after the department obligated more than $1 billion for the program. The Office of Personnel Management’s Retirement Systems Modernization program was canceled in February 2011, after spending approximately $231 million on the agency’s third attempt to automate the processing of federal employee retirement claims. The Department of Veterans Affairs’ Financial and Logistics Integrated Technology Enterprise program was intended to be delivered by 2014 at a total estimated cost of $609 million, but was terminated in October 2011. The Department of Defense’s Expeditionary Combat Support System was canceled in December 2012 after spending more than a billion dollars and failing to deploy within 5 years of initially obligating funds. Our past work found that 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 had not consistently applied best practices that are critical to successfully acquiring IT. Federal IT projects have also failed due to a lack of oversight and governance. Executive-level governance and oversight across the government has often been ineffective, specifically from chief information officers (CIO). For example, we have reported that some CIOs’ authority was limited because they did not have the authority to review and approve the entire agency IT portfolio. Recognizing the severity of issues related to the government-wide management of IT, FITARA was enacted in December 2014. The law was intended to improve agencies’ acquisitions of IT and enable Congress to monitor agencies’ progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes specific requirements related to seven areas. Federal data center consolidation initiative (FDCCI). Agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing their data centers (to include planned cost savings), and quarterly updates on progress made. The law also requires OMB to develop a goal for how much is to be saved through this initiative, and provide annual reports on cost savings achieved. Enhanced transparency and improved risk management. OMB and covered agencies are to make detailed information on federal IT investments publicly available, and agency CIOs are to categorize their IT investments by level of risk. Additionally, in the case of major IT investments rated as high risk for 4 consecutive quarters, the law requires that the agency CIO and the investment’s program manager conduct a review aimed at identifying and addressing the causes of the risk. Agency CIO authority enhancements. CIOs at covered agencies are required to (1) approve the IT budget requests of their respective agencies, (2) certify that OMB’s incremental development guidance is being adequately implemented for IT investments, (3) review and approve contracts for IT, and (4) approve the appointment of other agency employees with the title of CIO. See appendix I for details on the current status of federal CIOs. Portfolio review. Agencies are to annually review IT investment portfolios in order to, among other things, increase efficiency and effectiveness and identify potential waste and duplication. In establishing the process associated with such portfolio reviews, the law requires OMB to develop standardized performance metrics, to include cost savings, and to submit quarterly reports to Congress on cost savings. Expansion of training and use of IT acquisition cadres. Agencies are to update their acquisition human capital plans to address supporting the timely and effective acquisition of IT. In doing so, the law calls for agencies to consider, among other things, establishing IT acquisition cadres or developing agreements with other agencies that have such cadres. Government-wide software purchasing program. The General Services Administration is to develop a strategic sourcing initiative to enhance government-wide acquisition and management of software. In doing so, the law requires that, to the maximum extent practicable, the General Services Administration should allow for the purchase of a software license agreement that is available for use by all executive branch agencies as a single user. Maximizing the benefit of the Federal Strategic Sourcing Initiative. Federal agencies are required to compare their purchases of services and supplies to what is offered under the Federal Strategic Sourcing Initiative. OMB is also required to issue regulations related to the initiative. In June 2015, OMB released guidance describing how agencies are to implement FITARA. This guidance is intended to, among other things: assist agencies in aligning their IT resources with statutory establish government-wide IT management controls that will meet the law’s requirements, while providing agencies with flexibility to adapt to unique agency processes and requirements; clarify the CIO’s role and strengthen the relationship between agency CIOs and bureau CIOs; and strengthen CIO accountability for IT costs, schedules, performance, and security. The guidance identified several actions that agencies were to take to establish a basic set of roles and responsibilities (referred to as the common baseline) for CIOs and other senior agency officials, which were needed to implement the authorities described in the law. For example, agencies were required to conduct a self-assessment and submit a plan describing the changes they intended to make to ensure that common baseline responsibilities were implemented. Agencies were to submit their plans to OMB’s Office of E-Government and Information Technology by August 15, 2015, and make portions of the plans publicly available on agency websites no later than 30 days after OMB approval. As of November 2016, all agencies had made their plans publicly available. In addition, in August 2016, OMB released guidance intended to, among other things, define a framework for achieving the data center consolidation and optimization requirements of FITARA. The guidance includes requirements for agencies to: maintain complete inventories of all data center facilities owned, operated, or maintained by or on behalf of the agency; develop cost savings targets for fiscal years 2016 through 2018 and report any actual realized cost savings; and measure progress toward meeting optimization metrics on a quarterly basis. The guidance also directs agencies to develop a data center consolidation and optimization strategic plan that defines the agency’s data center strategy for fiscal years 2016, 2017, and 2018. This strategy is to include, among other things, a statement from the agency CIO stating whether the agency has complied with all data center reporting requirements in FITARA. Further, the guidance indicates that OMB is to maintain a public dashboard that will display consolidation-related costs savings and optimization performance information for the agencies. In February 2015, we introduced a new government-wide high-risk area, Improving the Management of IT Acquisitions and Operations. This area highlighted several critical IT initiatives in need of additional congressional oversight, including (1) reviews of troubled projects; (2) efforts to increase the use of incremental development; (3) efforts to provide transparency relative to the cost, schedule, and risk levels for major IT investments; (4) reviews of agencies’ operational investments; (5) data center consolidation; and (6) efforts to streamline agencies’ portfolios of IT investments. We noted that implementation of these initiatives was inconsistent and more work remained to demonstrate progress in achieving IT acquisition and operation outcomes. Further, our February 2015 high-risk report stated that, beyond implementing FITARA, OMB and agencies needed to continue to implement our prior recommendations in order to improve their ability to effectively and efficiently invest in IT. Specifically, from fiscal years 2010 through 2015, we made 803 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations. These recommendations included many to improve the implementation of the aforementioned six critical IT initiatives and other government-wide, cross-cutting efforts. We stressed that OMB and agencies should demonstrate government-wide progress in the management of IT investments by, among other things, implementing at least 80 percent of our recommendations related to managing IT acquisitions and operations within 4 years. In February 2017, we issued an update to our high-risk series and reported that, while progress had been made in improving the management of IT acquisitions and operations, significant work still remained to be completed. For example, as of May 2017, OMB and the agencies had fully implemented 380 (or about 47 percent) of the 803 recommendations. This was a 24 percent increase compared to the percentage we reported as being fully implemented in 2015. Figure 1 summarizes the progress that OMB and the agencies had made in addressing our recommendations, as compared to the 80 percent target, as of May 2017. In addition, in fiscal year 2016, we made 202 new recommendations, thus further reinforcing the need for OMB and agencies to address the shortcomings in IT acquisitions and operations. Also, beyond addressing our prior recommendations, our 2017 high-risk update noted the importance of OMB and federal agencies continuing to expeditiously implement the requirements of FITARA. To further explore the challenges and opportunities to improve federal IT acquisitions and operations, we convened a forum on September 14, 2016, to explore challenges and opportunities for CIOs to improve federal IT acquisitions and operations—with the goal of better informing policymakers and government leadership. Forum participants, which included 13 current and former federal agency CIOs, members of Congress, and private sector IT executives, identified key actions related to seven topics: (1) strengthening FITARA, (2) improving CIO authorities, (3) budget formulation, (4) governance, (5) workforce, (6) operations, and (7) transition planning. A summary of the key actions, by topic area, identified during the forum is provided in figure 2. In addition, in January 2017, the Federal CIO Council concluded that differing levels of authority over IT-related investments and spending have led to inconsistencies in how IT is executed from agency to agency. According to the Council, for those agencies where the CIO has broad authority to manage all IT investments, great progress has been made to streamline and modernize the federal agency’s footprint. For the others, where agency CIOs are only able to control pieces of the total IT footprint, it has been harder to achieve improvements. The administration has initiated two efforts aimed at improving federal IT. Specifically, in March 2017, it established the Office of American Innovation to, among other things, improve federal government operations and services, and modernize federal IT. The office is to consult with both OMB and the Office of Science and Technology Policy on policies and plans intended to improve government operations and services, improve the quality of life for Americans, and spur job creation. In May 2017, the administration also established the American Technology Council to help transform and modernize federal IT and how the government uses and delivers digital services. The President is the chairman of this council, and the Federal CIO and the United States Digital Service administrator are members. Agencies have taken steps to improve the management of IT acquisitions and operations by implementing key FITARA initiatives. However, agencies would be better positioned to fully implement the law and, thus, realize additional management improvements, if they addressed the numerous recommendations we have made aimed at improving data center consolidation, increasing transparency via OMB’s IT Dashboard, implementing incremental development, and managing software licenses. One of the key initiatives to implement FITARA is data center consolidation. OMB established FDCCI in February 2010 to improve the efficiency, performance, and environmental footprint of federal data center activities and the enactment of FITARA reinforced the initiative. However, in a series of reports that we issued over the past 6 years, we noted that, while data center consolidation could potentially save the federal government billions of dollars, weaknesses existed in several areas, including agencies’ data center consolidation plans and OMB’s tracking and reporting on related cost savings. In these reports, we made a total of 141 recommendations to OMB and 24 agencies to improve the execution and oversight of the initiative. Most agencies and OMB agreed with our recommendations or had no comments. As of May 2017, 75 of our recommendations remained open. Also, in May 2017, we reported that the 24 agencies participating in FDCCI collectively had made progress on their data center closure efforts. Specifically, as of August 2016, these agencies had identified a total of 9,995 data centers, of which they reported having closed 4,388, and having plans to close a total of 5,597 data centers through fiscal year 2019. Notably, the Departments of Agriculture, Defense, the Interior, and the Treasury accounted for 84 percent of the completed closures. In addition, 18 of the 24 agencies reported achieving about $2.3 billion collectively in cost savings and avoidances from their data center consolidation and optimization efforts from fiscal year 2012 through August 2016. The Departments of Commerce, Defense, Homeland Security, and the Treasury accounted for approximately $2.0 billion (or 87 percent) of the total. Further, 23 agencies reported about $656 million collectively in planned savings for fiscal years 2016 through 2018. This is about $3.3 billion less than the estimated $4.0 billion in planned savings for fiscal years 2016 through 2018 that agencies reported to us in November 2015. Figure 3 presents a comparison of the amounts of cost savings and avoidances reported by agencies to OMB and the amounts the agencies reported to us. As mentioned previously, FITARA required agencies to submit multi-year strategies to achieve the consolidation and optimization of their data centers no later than the end of fiscal year 2016. Among other things, this strategy was to include such information as data center consolidation and optimization metrics, and year-by-year calculations of investments and cost savings through October 1, 2018. Further, OMB’s August 2016 guidance on data center optimization contained additional information for how agencies are to implement the strategic plan requirements of FITARA. Specifically, the guidance stated that agency data center consolidation and optimization strategic plans are to include, among other things, planned and achieved performance levels for each optimization metric; calculations of target and actual agency- wide spending and cost savings on data centers; and historical cost savings and cost avoidances due to data center consolidation and optimization. OMB’s guidance also stated that agencies were required to publicly post their strategic plans to their agency-owned digital strategy websites by September 30, 2016. As of April 2017, only 7 of the 23 agencies that submitted their strategic plans—the Departments of Agriculture, Education, Homeland Security, and Housing and Urban Development; the General Services Administration; the National Science Foundation; and the Office of Personnel Management—had addressed all five elements required by the OMB memorandum implementing FITARA. The remaining 16 agencies either partially met or did not meet the requirements. For example, most agencies partially met or did not meet the requirements to provide information related to data center closures and cost savings metrics. The Department of Defense did not submit a plan and was rated as not meeting any of the requirements. To better ensure that federal data center consolidation and optimization efforts improve governmental efficiency and achieve cost savings, in our May 2017 report, we recommended that 11 of the 24 agencies take action to ensure that the amounts of achieved data center cost savings and avoidances are consistent across all reporting mechanisms. We also recommended that 17 of the 24 agencies each take action to complete missing elements in their strategic plans and submit their plans to OMB in order to optimize their data centers and achieve cost savings. Twelve agencies agreed with our recommendations, 2 did not agree, and 10 agencies and OMB did not state whether they agreed or disagreed. To facilitate transparency across the government in acquiring and managing IT investments, OMB established a public website—the IT Dashboard—to provide detailed information on major investments at 26 agencies, including ratings of their performance against cost and schedule targets. Among other things, agencies are to submit ratings from their CIOs, which, according to OMB’s instructions, should reflect the level of risk facing an investment relative to that investment’s ability to accomplish its goals. In this regard, FITARA includes a requirement for CIOs to categorize their major IT investment risks in accordance with OMB guidance. Over the past 6 years, we have issued a series of reports about the Dashboard that noted both significant steps OMB has taken to enhance the oversight, transparency, and accountability of federal IT investments by creating its Dashboard, as well as concerns about the accuracy and reliability of the data. In total, we have made 47 recommendations to OMB and federal agencies to help improve the accuracy and reliability of the information on the Dashboard and to increase its availability. Most agencies agreed with our recommendations or had no comments. As of May 2017, 17 of these recommendations have been implemented. In June 2016, we determined that 13 of the 15 agencies selected for in- depth review had not fully considered risks when rating their major investments on the Dashboard. Specifically, our assessments of risk for 95 investments at the 15 selected agencies matched the CIO ratings posted on the Dashboard 22 times, showed more risk 60 times, and showed less risk 13 times. Figure 4 summarizes how our assessments compared to the selected investments’ CIO ratings. Aside from the inherently judgmental nature of risk ratings, we identified three factors which contributed to differences between our assessments and the CIO ratings: Forty of the 95 CIO ratings were not updated during April 2015 (the month we conducted our review), which led to differences between our assessments and the CIOs’ ratings. This underscores the importance of frequent rating updates, which help to ensure that the information on the Dashboard is timely and accurately reflects recent changes to investment status. Three agencies’ rating processes spanned longer than 1 month. Longer processes mean that CIO ratings are based on older data, and may not reflect the current level of investment risk. Seven agencies’ rating processes did not focus on active risks. According to OMB’s guidance, CIO ratings should reflect the CIO’s assessment of the risk and the investment’s ability to accomplish its goals. CIO ratings that do no incorporate active risks increase the chance that ratings overstate the likelihood of investment success. As a result, we concluded that the associated risk rating processes used by the 15 agencies were generally understating the level of an investment’s risk, raising the likelihood that critical federal investments in IT are not receiving the appropriate levels of oversight. To better ensure that the Dashboard ratings more accurately reflect risk, we recommended that the 15 agencies take actions to improve the quality and frequency of their CIO ratings. Twelve agencies generally agreed with or did not comment on the recommendations and three agencies disagreed, stating that their CIO ratings were adequate. However, we noted that weaknesses in these three agencies’ processes still existed and that we continued to believe our recommendations were appropriate. As of May 2017, these recommendations have not yet been fully implemented. OMB has emphasized the need to deliver investments in smaller parts, or increments, in order to reduce risk, deliver capabilities more quickly, and facilitate the adoption of emerging technologies. In 2010, it called for agencies’ major investments to deliver functionality every 12 months and, since 2012, every 6 months. Subsequently, FITARA codified a requirement that agency CIOs certify that IT investments are adequately implementing OMB’s incremental development guidance. However, in May 2014, we reported that 66 of 89 selected investments at five major agencies did not plan to deliver capabilities in 6-month cycles, and less than half of these investments planned to deliver functionality in 12-month cycles. We also reported that only one of the five agencies had complete incremental development policies. Accordingly, we recommended that OMB clarify its guidance on incremental development and that the selected agencies update their associated policies to comply with OMB’s revised guidance (once made available), and consider the factors identified in our report when doing so. Four of the six agencies agreed with our recommendations or had no comments, one agency partially agreed, and the remaining agency disagreed with the recommendations. The agency that disagreed did not believe that its recommendations should be dependent upon OMB taking action to update guidance. In response, we noted that only one of the recommendations to that agency depended upon OMB action, and we maintained that the action was warranted and could be implemented. Subsequently, in August 2016, we reported that agencies had not fully implemented incremental development practices for their software development projects. Specifically, we noted that, as of August 31, 2015, 22 federal agencies had reported on the Dashboard that 300 of 469 active software development projects (approximately 64 percent) were planning to deliver usable functionality every 6 months for fiscal year 2016, as required by OMB guidance. Table 1 lists the total number and percent of federal software development projects for which agencies reported plans to deliver functionality every 6 months for fiscal year 2016. Regarding the remaining 169 projects (or 36 percent) that were reported as not planning to deliver functionality every 6 months, agencies provided a variety of explanations for not achieving that goal. These included project complexity, the lack of an established project release schedule, or that the project was not a software development project. Further, in conducting an in-depth review of seven selected agencies’ software development projects, we determined that 45 percent of the projects delivered functionality every 6 months for fiscal year 2015 and 55 percent planned to do so in fiscal year 2016. However, significant differences existed between the delivery rates that the agencies reported to us and what they reported on the Dashboard. For example, for four agencies (the Departments of Commerce, Education, Health and Human Services, and Treasury), the percentage of delivery reported to us was at least 10 percentage points lower than what was reported on the Dashboard. These differences were due to (1) our identification of fewer software development projects than agencies reported on the Dashboard and (2) the fact that information reported to us was generally more current than the information reported on the Dashboard. We concluded that, by not having up-to-date information on the Dashboard about whether the project is a software development project and about the extent to which projects are delivering functionality, these seven agencies were at risk that OMB and key stakeholders may make decisions regarding the agencies’ investments without the most current and accurate information. As such, we recommended that the seven selected agencies review major IT investment project data reported on the Dashboard and update the information as appropriate, ensuring that these data are consistent across all reporting channels. Finally, while OMB has issued guidance requiring agency CIOs to certify that each major IT investment’s plan for the current year adequately implements incremental development, only three agencies (the Departments of Commerce, Homeland Security, and Transportation) had defined processes and policies intended to ensure that the CIOs certify that major IT investments are adequately implementing incremental development. Accordingly, we recommended that the remaining four agencies—the Departments of Defense, Education, Health and Human Services, and the Treasury—establish policies and processes for certifying that major IT investments adequately use incremental development. The Departments of Education and Health and Human Services agreed with our recommendation, while the Department of Defense disagreed and stated that its existing policies address the use of incremental development. However, we noted that the department’s policies did not comply with OMB’s guidance and that we continued to believe our recommendation was appropriate. The Department of the Treasury did not comment on its recommendation. In total, we have made 23 recommendations to OMB and agencies to improve their implementation of incremental development. As of May 2017, 17 of our recommendations remained open. Federal agencies engage in thousands of software licensing agreements annually. The objective of software license management is to manage, control, and protect an organization’s software assets. Effective management of these licenses can help avoid purchasing too many licenses, which can result in unused software, as well as too few licenses, which can result in noncompliance with license terms and cause the imposition of additional fees. As part of its PortfolioStat initiative, OMB has developed policy that addresses software licenses. This policy requires agencies to conduct an annual, agency-wide IT portfolio review to, among other things, reduce commodity IT spending. Such areas of spending could include software licenses. In May 2014, we reported on federal agencies’ management of software licenses and determined that better management was needed to achieve significant savings government-wide. In particular, 22 of the 24 major agencies did not have comprehensive license policies and only 2 had comprehensive license inventories. In addition, we identified five leading software license management practices, and the agencies’ implementation of these practices varied. As a result of agencies’ mixed management of software licensing, agencies’ oversight of software license spending was limited or lacking, thus, potentially leading to missed savings. However, the potential savings could be significant considering that, in fiscal year 2012, 1 major federal agency reported saving approximately $181 million by consolidating its enterprise license agreements, even when its oversight process was ad hoc. Accordingly, we recommended that OMB issue needed guidance to agencies; we also made 135 recommendations to the 24 agencies to improve their policies and practices for managing licenses. Among other things, we recommended that the agencies regularly track and maintain a comprehensive inventory of software licenses and analyze the inventory to identify opportunities to reduce costs and better inform investment decision making. Most agencies generally agreed with the recommendations or had no comments. As of May 2017, 123 of the recommendations had not been implemented, but 4 agencies had made progress. For example, three agencies—the Department of Education, General Services Administration, and U.S. Agency for International Development—regularly track and maintain a comprehensive inventory of software licenses. In addition, two of these agencies also analyze agency-wide software licensing data to identify opportunities to reduce costs and better inform investment decision making. The National Aeronautics and Space Administration uses its inventory to make decisions and reduce costs, but does not regularly track and maintain a comprehensive inventory. While the other agencies had not completed the actions associated with these recommendations, they had plans in place to do so. Table 2 reflects the extent to which agencies implemented recommendations in these areas. In conclusion, with the enactment of FITARA, the federal government has an opportunity to improve the transparency and management of IT acquisitions and operations, and to strengthen the authority of CIOs to provide needed direction and oversight. The forum we held also recommended that CIOs be given more authority, and noted the important role played by the Federal CIO. Most agencies have taken steps to improve the management of IT acquisitions and operations by implementing key FITARA initiatives, including data center consolidation, efforts to increase transparency via OMB’s IT Dashboard, incremental development, and management of software licenses; and they have continued to address recommendations we have made over the past several years. However, additional improvements are needed, and further efforts by OMB and federal agencies to implement our previous recommendations would better position them to fully implement FITARA. To help ensure that these efforts succeed, OMB’s and agencies’ continued implementation of FITARA is essential. In addition, we will continue to monitor agencies’ implementation of our previous recommendations. Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staffs have any questions about this testimony, please contact me at (202) 512-9286 or at [email protected]. Individuals who made key contributions to this testimony are Kevin Walsh (Assistant Director), Chris Businsky, Rebecca Eyler, and Jessica Waselkow (Analyst in Charge). As of May 2017, 9 of the 25 federal CIO positions were filled by acting CIOs that do not permanently hold the position. Of the 9, 2 were career positions and the remaining positions require some form of appointment. Table 3 summarizes the status of the CIO position at the federal level. | The federal government plans to invest almost $96 billion on IT in fiscal year 2018. Historically, these investments have too often failed, incurred cost overruns and schedule slippages, or contributed little to mission-related outcomes. Accordingly, in December 2014, Congress enacted FITARA, aimed at improving agencies' acquisitions of IT. Further, in February 2015, GAO added improving the management of IT acquisitions and operations to its high-risk list. This statement summarizes agencies' progress in improving the management of IT acquisitions and operations. This statement is based on GAO prior and recently published reports on (1) data center consolidation, (2) risk levels of major investments as reported on OMB's IT Dashboard, (3) implementation of incremental development practices, and (4) management of software licenses. The Office of Management and Budget (OMB) and federal agencies have taken steps to improve information technology (IT) through a series of initiatives, and as of May 2017, had fully implemented about 47 percent of the approximately 800 related GAO recommendations. However, additional actions are needed. Consolidating data centers . OMB launched an initiative in 2010 to reduce data centers, which was reinforced by the Federal Information Technology Acquisition Reform Act (FITARA) in 2014. GAO reported in May 2017 that agencies had closed 4,388 of the 9,995 total data centers, and had plans to close a total of 5,597 through fiscal year 2019. As a result, agencies reportedly saved or avoided about $2.3 billion through August 2016. However, out of the 23 agencies that submitted required strategic plans, only 7 had addressed all required elements. GAO recommended that agencies complete their plans to optimize their data centers and achieve cost savings and ensure reported cost savings are consistent across reporting mechanisms. Most agencies agreed with the recommendations. Enhancing transparency . OMB's IT Dashboard provides information on major investments at federal agencies, including ratings from Chief Information Officers that should reflect the level of risk facing an investment. GAO reported in June 2016 that agencies had not fully considered risks when rating their investments on the Dashboard. In particular, of the 95 investments reviewed, GAO's assessments of risks matched the ratings 22 times, showed more risk 60 times, and showed less risk 13 times. GAO recommended that agencies improve the quality and frequency of their ratings. Most agencies generally agreed with or did not comment on the recommendations. Implementing incremental development . OMB has emphasized the need for agencies to deliver investments in smaller parts, or increments, in order to reduce risk and deliver capabilities more quickly. Since 2012, OMB has required investments to deliver functionality every 6 months. In August 2016, GAO reported that while 22 agencies had reported that about 64 percent of 469 active software development projects planned to deliver usable functionality every 6 months for fiscal year 2016, the other 36 percent of the projects did not. Further, for 7 selected agencies, GAO identified differences in the percentages of software projects reported to GAO as delivering functionality every 6 months, compared to what was reported on the Dashboard. GAO made recommendations to agencies and OMB to improve the reporting of incremental data on the Dashboard. Most agencies agreed or did not comment on the recommendations. Managing software licenses . Effective management of software licenses can help avoid purchasing too many licenses that result in unused software. In May 2014, GAO reported that better management of licenses was needed to achieve savings. Specifically, only two agencies had comprehensive license inventories. GAO recommended that agencies regularly track and maintain a comprehensive inventory and analyze that data to identify opportunities to reduce costs and better inform decision making. Most agencies generally agreed with the recommendations or had no comments; as of May 2017, 4 agencies had made progress in implementing them. From fiscal years 2010 through 2015, GAO made about 800 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations, and included recommendations to improve the oversight and execution of the data center consolidation initiative, the accuracy and reliability of the Dashboard, incremental development policies, and software license management. Most agencies agreed with GAO's recommendations or had no comments. In addition, in fiscal year 2016, GAO made about 200 new recommendations in this area. GAO will continue to monitor agencies' implementation of these recommendations. |
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NPRC maintains the personnel and medical records of nearly all former members of the U.S. military service departments who served during the twentieth century and responds to requests for these records. The records maintained by NARA are the property of the Department of Defense (DoD), which reimburses NARA for storing and servicing the records. NARA maintains DoD’s records at the Military Personnel Records facility in St. Louis, Missouri, which opened in 1955 for this purpose. Although the building experienced a major fire in 1973 that destroyed some records, it currently contains about 55 million military personnel records and an additional 39 million auxiliary records such as military pay vouchers. The records—paper copy—are kept in cardboard boxes stacked on 10 foot high shelves. They are filed in sections according to branch of service, time period of service, or date of transfer to NPRC. Within the sections, records are filed alphabetically, by service number or by registry number (a sequential numbering system). Each box is marked with the name or number of the first record in the box to identify its contents. Figure 1 shows the central corridor of a typical storage area, and figure 2 shows a typical row of records in the storage area. Prior to 1999, NPRC operated in the same fashion as it had since the 1950s, when its building first opened. Request processing was manual and labor intensive. Only recently has the NPRC begun to make computers and other technology available to its staff that processes requests. Even telephones were not installed on employees’ desks until February 2000. The pre- reengineering philosophy was that having telephones on the desks of all technicians might reduce productivity. As a result of not having telephones on their desks, technicians generally did not contact requesters to obtain additional information to assist them in locating the requested military service record or to clarify an unclear request. In the past, requests that were unclear and could not be clarified were returned to the requester. For requests that were clear, staff located the appropriate cardboard box, pulled the record, processed the request, and later returned the record. For each request, staff created a reply using forms with preprinted responses that could be checked off. The forms were handwritten and sent out with the relevant record copies. NPRC was organized by branches of service—the Army, Navy and Air Force—and each branch processed its own records. Technicians were assigned work based on the level of difficulty of the tasks required to fulfill the requests. These tasks could range from simply photocopying a form to formulating complex correspondence. More complex cases were assigned to higher pay grade employees. However, the division of workload among branches and pay grades made it difficult to respond to fluctuations in workload and affected timeliness and customer service, according to NPRC officials. In 1997, NPRC began an ongoing business process reengineering project to improve timeliness among other things. In February 1999, a pilot team began using the new work processes. When the reengineering project is fully implemented, NPRC will be organized into five units or cores. As of March 2001, four of the cores had been implemented. Each core will process requests pertaining to records of veterans in all military services. Within the cores, each technician is expected to be able to process requests of varying levels of difficulty. In addition, NPRC is introducing computer technology into its processing. NPRC has implemented an interim computer system with the capability to track requests electronically, identify duplicate requests, and access prior responses concerning a record. Ultimately, NPRC expects to implement a more capable computer system that, among other things, will enable it to receive requests electronically and directly access other agencies’ data bases in order to fulfill requests. NPRC officials expect these two features to significantly improve timeliness. The challenge that NPRC faces in shortening the amount of time it takes to respond to requests for records is in part a function of its human capital challenges. Our designation in January 2001 of strategic human capital management as a governmentwide high-risk area underscored the connection between human capital challenges and programmatic challenges and risks. To help agencies manage these challenges, in September 2000 we published a human capital self-assessment checklist.The checklist emphasized the need to pursue a workforce planning strategy, through which an organization should identify its current and future human capital needs, including the size and deployment of its workforce across the organization, and the knowledge, skills, and abilities needed for the agency to pursue its mission, goals, and business strategies. Moreover, an agency’s workforce planning strategy should be linked to strategic and program planning efforts. In fiscal year 2000, on average, NPRC took 54 days to respond to written requests for records. Although NPRC completed about 6 percent of record requests within 10 days in fiscal year 2000, its goal is to eventually complete 95 percent of requests within 10 days by fiscal year 2005. This goal is identified in NARA’s strategic plan under the Government Performance and Results Act. NPRC officials attribute delays in completing requests primarily to the large backlog of requests waiting to be processed. As of the end of the second quarter of fiscal year 2001, NPRC had a backlog of about 214,000 requests. This would represent about a 3-month wait from the time NPRC receives the request to the time that a technician begins to process the request. NPRC officials identify two events as the cause of the backlog. The first is the loss of 43 employees out of a staff of 273 who accepted buyouts—cash incentives to retire or resign—in fiscal year 1995. According to NARA, the buyout was part of a governmentwide effort to streamline the federal workforce. The second is the ongoing implementation of NPRC’s reengineering project. NPRC officials told us that reengineering slowed down productivity because employees were participating in training, moving to redesigned work spaces, and adjusting to the restructuring of the work process. Data from NPRC showing changes in the backlog appear consistent with NPRC’s explanation of the causes of the backlog. Specifically, the backlog initially increased dramatically in fiscal year 1995, the year of the buyout; dropped to about 61,000 in 1997 as the number of staff rose to pre-buyout levels; and increased dramatically again during fiscal years 1999 and 2000 when NPRC began implementing the reengineering project. Our analysis of workload and staffing data provided by the NPRC shows that productivity declined by about 25 percent from the end of fiscal year 1997 to the end of fiscal year 2000. Figure 3 shows the request backlogs from 1993 through 2000. NPRC’s current efforts are not likely to improve response time soon, and it is unclear whether NPRC will meet its fiscal year 2005 timeliness goal. NPRC’s use of overtime has not stopped the growth in the backlog of requests while reengineering is being implemented. NPRC expects the backlog to continue to increase as its employees adjust to the new process. Moreover, in the long term it is not clear that the reengineering project will result in NPRC meeting its timeliness goals. NPRC does not have a plan that shows how it will achieve its fiscal year 2005 timeliness goal, in part because NPRC does not yet have data to show what level of production it will achieve by operating in the reengineered environment. In addition, NPRC has not yet implemented its proposed computer system, which it expects to have a significant impact on timeliness. NPRC is using overtime in an attempt to contain the growth of the backlog while it implements its reengineering. However, the number of cases completed through overtime work has not reduced the backlog. Even while using overtime, NPRC was unable to complete its incoming workload in the first 6 months of fiscal year 2001. As a result, the backlog of cases grew by about 69,000 cases to 214,000 cases in the first half of fiscal year 2001. NPRC projects that it can complete about 26,000 to 28,000 additional cases per year by using overtime given its current overtime budget. Even if NPRC could keep up with its normal workload during regular hours and overtime efforts were applied only to reducing the backlog, we estimate it would take over 7 years to eliminate the backlog. NPRC officials expect the backlog of requests to increase as it implements its reengineering. According to NPRC officials, employees are still adjusting to their expanded roles and the new process. These adjustments include learning to work in teams, handling requests of varying difficulty levels and for different service branches, and using computers to receive, track, and draft responses to requests. The productivity of staff working under the old system is greater than that of staff working under the reengineered system. According to NARA, NPRC’s units working in the new environment completed about 15 cases per staff day. In fiscal year 2000 units still operating under the old process completed about 31 cases per staff day. However, according to NPRC officials, future productivity numbers may not be comparable to those achieved under the old process. This is because NPRC anticipates handling cases completely and correctly the first time they are received, which could take longer. NPRC officials estimate that the backlog could exceed 240,000 cases at the end of this year. This is almost 100,000 cases more than at the end of fiscal year 2000. Currently, it is not clear whether reengineering will result in NPRC meeting its goal of answering 95 percent of requests within 10 working days by fiscal year 2005. NPRC does not have a plan that shows how it will achieve its fiscal year 2005 timeliness goal. NPRC has not identified specific timeframes, staff, or production levels needed to meet its long- term goal and how its use of overtime and its reengineering efforts will enable it to meet the goal. According to NPRC officials, they do not have such a plan because they do not have enough information to develop such a plan. For example, the officials said that they do not have data on the overall NPRC productivity improvements anticipated in the reengineered environment. NPRC is currently developing this type of data. While NPRC has begun implementing its reengineering, full implementation of its proposed computer technologies has not occurred. NPRC is depending on electronic receipt of requests and the ability to access other agency data bases to significantly improve timeliness. NPRC officials believe that these technologies will significantly free up time for staff to work on more cases. They believe that in some situations requests will be filled electronically without human intervention. NPRC officials do not anticipate beginning to implement receipt of electronic requests until April 2002, and accessing other agency data bases could begin as late as fiscal year 2004. NPRC is attempting to improve its timeliness in responding to requests for veterans’ records. NPRC is using overtime to control the backlog while it implements the business reengineering in an effort to revamp its outmoded manual process. However, NPRC’s use of overtime has not been able to control its backlog, which is expected to increase significantly. NPRC’s ability to realize any potential benefits from reengineering is hampered by the existence of the backlog. Computer technology, which is expected to significantly improve timeliness, has not been fully implemented. NPRC does not have a plan that shows what it needs to meet its long-term timeliness goal and how its actions will enable it to do so. Without such a plan, NPRC cannot provide assurances that it will meet its timeliness goal and that its actions will be sufficient to improve timeliness. We recommend that NARA require NPRC to develop a plan that shows what is needed to meet its fiscal year 2005 timeliness goal, including human capital issues such as staffing and production levels and timeframes, and how its use of overtime and reengineering will enable it to meet its goal. We received written comments on a draft of this report from NARA (see app. I). In its comments, NARA stated that it supported our recommendation to develop a plan that shows what is needed to meet its fiscal year 2005 timeliness goal. NARA noted that it expects to complete a plan that will link reengineering milestones to cycle time improvements by mid-July of this year. NARA also indicated that the draft report did not take into account its customer service and human capital management initiatives. However, the draft report discussed changes in both the work environment and quality of customer service as they potentially relate to timeliness – the central focus of our review. NARA also commented that timeliness was just one facet of its effort and that its “balanced scorecard” approach established other goals. We agree that measuring timeliness without measuring other factors, such as quality of the work, would be inappropriate. Finally, NARA commented that the draft report tried to compare productivity statistics from before reengineering to the pilot phase of the reengineering project. We disagree. In fact, we explicitly acknowledged that future productivity numbers may not be comparable to those achieved under the old process because of the NPRC’s plan to handle cases completely and correctly the first time they are received. This approach may take longer than the previous system, but, to the extent that it reduces duplicate requests and other rework, it would ultimately improve timeliness. NARA also provided technical comments, which we incorporated where appropriate. NARA stated that the NPRC backlog is not a factor in the timeliness of the Veterans Benefits Administration’s (VBA’s) servicing of disability compensation claims. However, our previous work on VBA’s process shows that NPRC is an external source from which VBA often needs documentation. To expedite obtaining this information, VBA established its own unit at the NPRC in 1999. 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 Honorable John Carlin, Archivist of the United States; appropriate congressional committees; and other interested parties. We will also make copies available to others on request. If you have any questions about this report, please call me on (202) 512- 7101 or Irene Chu, Assistant Director, on (202) 512-7102. Other key contributors were Martin Scire, Bob Sampson, and Patrick di Battista. | The National Personnel Records Center (NPRC) is responsible for maintaining the official military personnel records of discharged members of the military services. Veterans frequently need their records for a variety of reasons, such as obtaining disability compensation, health benefits, GI bill education benefits, home loan guarantees, and burial in national cemeteries. However, access to these benefits has been hampered due to delays in obtaining documentation of their military service from NPRC. This report evaluates NPRC's timeliness in responding to veterans' requests for records. GAO reviewed (1) how long it took NPRC to answer veterans' requests for records and (2) whether the actions NPRC was taking would improve response time. GAO found that, in fiscal year 2000, NPRC took an average of 54 days to respond to written requests for records, answering about six percent of written requests within 10 working days. Actions NPRC was taking to respond more quickly were unlikely to significantly improve timeliness soon, and the prospects for meeting its fiscal year 2005 goal of answering 95 percent of requests within 10 working days were unclear. |
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As people age, their ability to perform routine daily activities, such as eating, bathing, dressing, paying bills, and preparing meals declines (see fig. 1). About 70 percent of those aged 65 and older are likely to need long-term services and supports at some point in their lives, for an average of 3 Family or years. Twenty percent will need that care for at least 5 years.friends often informally assist frail older adults with these daily activities. However, when they have no one to help them informally, or need assistance that family and friends cannot provide, older adults rely on long-term services and supports (LTSS) from paid providers in both institutional and home and community-based settings. In either case, the cost of these services and supports can often be a considerable financial burden for older adults and families. For eligible low-income older adults, state Medicaid programs may cover the cost of institutional long-term services and supports and certain HCBS. According to the Census Bureau, the proportion of the U.S. population aged 65 and over is expected to increase from 13 percent in 2010 to more than 20 percent in 2050 and be more diverse. In 2050, about 22 percent of this group will be 85 and older compared to 14 percent in 2010. As the size of the older population grows, so will the number of older adults needing long-term services and supports, particularly for those 85 and older. 42 U.S.C. § 3012(b). established grants to states for the provision of services and supports. The framework of agencies, programs, and activities established by the act produced what is referred to today as the national aging services network. With support from AoA, within HHS’ Administration for Community Living (ACL), the 56 state units on aging, 618 area agencies on aging (AAA), and 264 Indian tribal and 2 Native Hawaiian organizations as components of the aging services network, are responsible for planning, developing, and coordinating home and community-based services and supports for older adults, nationwide. Community-based organizations (CBO) are public agencies or private nonprofit organizations that represent one or more communities or segments of communities and are engaged in meeting the human services needs of community residents. CBOs can include local or regional governmental or quasi-governmental organizations, as well as private nonprofit organizations. the receipt of, need for, and unmet need for services authorized under Title III of the act. State units on aging are to use their AAAs’ plans as a basis for an overall state plan that they submit to AoA. Five federal agencies across four departments have one or more programs that operate within a system of HCBS and related supports that older adults often require to live as independently as possible in their homes and communities (see table 1). The Older Americans Act is the cornerstone for federal leadership in the development of an HCBS system for older adults. The act authorizes funding to cover the cost of a range of services for older adults provided by local HCBS systems—sometimes referred to as core service delivery activities. HCBS funded under Title III of the act are available to anyone 60 or older, but are to be targeted to those with greatest economic or social need, particularly low-income and low-income minority older adults, and older adults living in rural areas, among others.authorizes funding a variety of aging services network support activities or technical assistance provided to state and local agencies by AoA (see table 2). Appendix II provides funding information for these programs for fiscal years 2010 through 2014. In addition to Older Americans Act funding for nutrition services, four programs within the Department of Agriculture target food assistance, at least in part, to low-income older adults (see table 4). These programs provide nutrition assistance in a variety of forms, ranging from commodities, to prepared meals, to vouchers or other targeted benefits used in commercial food retail locations. Two of these programs are exclusively for low-income older adults. The Commodity Supplemental Food Program provides food to participating states that, in turn, distribute it to older adults. The Senior Farmers’ Market Nutrition Program awards grants to states, territories and Indian tribes to provide coupons to low-income older adults to purchase fresh food at authorized farmers’ markets, roadside stands, and community- supported agricultural programs. Appendix II provides funding information for these two programs for fiscal years 2010 through 2014. 42 U.S.C. § 1766. Other USDA Programs That Provide Nutrition Assistance to Older Adults The Emergency Food Assistance Program (7 U.S.C. §§ 7501-7515) and the Food Distribution Program on Indian Reservations (7 U.S.C. § 2013(b)) also benefit older adults. The Emergency Food Assistance Program helps supplement the diets of low-income Americans, including older adults, by providing them with emergency food and nutrition assistance at no cost. It provides food and administrative funds to states to supplement the diets of these groups. The Food Distribution Program on Indian Reservations Program provides USDA foods to low-income households, including older adults, living on Indian reservations and to Native American families residing in designated areas near reservations and in the state of Oklahoma. According to USDA, fiscal year 2013 obligations for these programs were approximately $266 million and $100 million, respectively. Assistance provided to victims of Hurricane Sandy under the emergency food program in fiscal year 2013 is not included in this amount. of the Child and Adult Care Food Program offers federal funding, administered through state health or aging agencies, for meals at adult day care centers. These centers help elderly and disabled adults remain in their homes and communities and avoid premature institutionalization. According to USDA, this program plays a vital role in improving the quality of day care and making it more affordable for many low-income families. In fiscal year 2014, the program served over 71 million meals to older adults who received care in these centers. SNAP, the largest nationwide nutrition assistance program, enables low- income households to obtain a more nutritious diet by increasing their purchasing power. SNAP provides an electronic benefit transfer card to eligible low-income individuals and families, including older adults, that they can redeem for eligible food items at more than 261,150 stores across the nation authorized to accept SNAP benefits. USDA, close to nine percent of all SNAP participants in 2013 were age 60 or over. According to USDA, participation in SNAP does not interfere with older adults receiving meals free-of-charge at dining facilities that prepare and serve communal meals for older adults. Affordable housing is the nucleus of a system of HCBS and supports for older adults because, without access to affordable housing, care in nursing homes and similar facilities is the only option for low-income, frail older adults. The Department of Housing and Urban Development administers the Supportive Housing for the Elderly (Section 202) program, which plays a critical role in addressing the demand for affordable, supportive housing for older adults in this country. Currently, the program maintains the supply of multi-family housing stock for low- income older adults through renewal of existing rental assistance contracts that cover the difference between a property owner’s HUD- approved operating costs for a project and the tenants’ payments. In addition, Section 202 supports independent living by funding the salaries of nearly 1,300 service coordinators, nationwide, who help residents in Section 202-funded properties find the HCBS and supports they need to continue living in their own homes.program totaled $358 million in fiscal year 2014. Appendix II provides funding information for this program for fiscal years 2010 through 2014. Other HUD Programs That Serve Older Adults In addition to the Section 202 program, several other HUD programs serve older adults. For example, local public housing agencies can apply to HUD for approval to designate public housing developments or portions of developments, such as buildings or floors, for occupancy by only elderly families, only disabled families, or elderly and disabled families. HUD refers to this as “designated public housing”. 42 U.S.C. § 1437e. According to HUD, older adult tenants generally are well represented in HUD’s major rental assistance programs and as of December 2014, 42.5 percent of project- based Section 8 units and 31 percent of Public Housing units (42 U.S.C. § 1437b) were rented by older adult households, while 22 percent of Housing Choice Vouchers assisted older adult households. Section 8 units refer to low-income housing units under section 8 of the United States Housing Act of 1937 (Pub. L. No. 75-412, 50 Stat. 888 (as added by the Housing and Community Development Act of 1974, Pub. L. 93-383, 88 Stat. 633, 662-66, (codified as amended at 42 U.S.C. § 1437f)). Under the project-based Section 8 program, HUD contracts with property owners that receive rental subsidies for units rented to low-income tenants. The Federal Housing Administration (FHA), a component of HUD, also administers the Home Equity Conversion Mortgage program. 12 U.S.C. § 1715z-20. The program allows older adult homeowners access to FHA- insured reverse mortgages to convert the equity in their homes into monthly streams of income and/or lines of credit. According to HUD, in fiscal year 2013, FHA endorsed more than 60,000 of these loans nationwide. Up until fiscal year 2012, the Section 202 program also provided capital advances to private, nonprofit organizations (sponsors) to finance the construction, rehabilitation, or acquisition of new affordable rental housing units for very low-income older adults. According to HUD officials, appropriations for capital advances were discontinued beginning in fiscal year 2012 as a result of the Consolidated and Further Continuing Appropriations Act of 2012. They also indicated that, for fiscal year 2015, the department proposed to Congress adding rental assistance contracts and funding for service coordinators to units set aside for older adults in developments funded through the Low-Income Housing Tax However, according to HUD officials, no Credit and other programs.funds for new Section 202 rental assistance contracts were appropriated in fiscal year 2015. The Department of Transportation’s Enhanced Mobility of Seniors and Individuals with Disabilities program mainly supports projects that improve mobility for seniors and people with disabilities in four ways.program funds, public transportation projects planned, designed, and carried out to meet the special needs of these targeted groups when public transportation is insufficient, inappropriate, or unavailable; public transportation projects that improve access to fixed-route service and decreased reliance on complementary paratransit; public transportation projects that exceed the requirements of the Americans with Disabilities Act (ADA); and alternatives to public transportation, such as volunteer driver programs, accessible and/or senior friendly taxi services and other transportation options. The Federal Transit Administration (FTA) within DOT operates this program, which provides formula grants to states that typically award this funding to eligible local human services agencies to, for example, purchase accessible vehicles (e.g., vehicles with lifts) to provide transportation to older adults or persons with disabilities for a range of purposes. At least 55 percent of program funds must be used for public transportation capital, which includes the purchase or lease of buses, mobility management, and other expenses. Obligations for this program totaled $240 million in fiscal year 2014. To qualify for funding, the Enhanced Mobility program requires recipients to develop coordinated public transit human services plans with other organizations that have a stake in their local transit systems. Recipients also are required to contribute matching funds to their projects. Only projects that are part of a locally coordinated human services transportation plan are to be approved for this funding. In addition to promoting well-coordinated transit systems, the Enhanced Mobility program’s planning requirement also facilitates coordination of resources across federal programs. According to AoA officials, coordination between this program and AoA’s HCBS program under Title III of the Older Americans Act, for example, has led to an agreement between FTA and AoA that the funding AAAs receive under Title III can be used as matching funds for local projects receiving Enhanced Mobility program funding. Federal funds for HCBS and other supports for older adults typically are targeted to local governments, other community-based organizations, and service providers. Figure 3 illustrates federal funding streams for HCBS and other supports for older adults. While HUD provides funding directly to nonprofit sponsors, AoA, CMS, USDA, and DOT direct their funding to state agencies that, in turn, allocate them to state or local governments, CBOs, and other service providers. Formula grants under the Older Americans Act, for example go to each state unit on aging, which distributes this funding among their AAAs. AAAs have key local planning and service delivery responsibilities and some degree of latitude in determining what HCBS to provide for older adults in their service areas. CMS pays a share of each state Medicaid agency’s medical assistance expenditures for HCBS; state Medicaid agencies pay the service providers that deliver the care. In San Francisco, California; Montgomery County, Maryland; and the Atlanta, Georgia region, similar steps were taken to plan HCBS and related supports for the growing population of older adults in their communities. To assist in planning, every AAA is required to have an advisory council. The Montgomery County Commission on Aging serves as the Montgomery County AAA’s advisory council. Each year the commission conducts a summer studies program through which its members engage outside experts and county officials to examine issues such as care giving, senior transportation, and greater representation of older adults in county decision making. According to commission members, the AAA’s new senior transportation mobility manager was hired in part because of their recommendations. In addition to reporting on community needs and activities, the Advisory Committee on Aging, within Atlanta’s AAA, promoted public awareness of resources for older adults, and assisted municipalities, educational institutions, private businesses, and nonprofit organizations in developing older adult programs and services. The AAA operated by the Atlanta Regional Commission is the largest AAA in Georgia and serves 10 of the 29 counties in the Atlanta metropolitan region. sources served as the basis for the area plan each AAA submitted to its state unit on aging. In the three localities we visited, HCBS and related supports for older adults were delivered through a broad network of CBOs and programs. In each locality, these services and supports primarily relied on funding from federally-supported programs, state and local government programs, and from private sources such as foundation grants, charitable donations, and fees for services. The AAA in each locality played a key role in determining what HCBS programs and related supports would receive funding from the Older Americans Act as well as other sources. Each locality’s system of HCBS and related supports for older adults provided information and referral, nutrition and in-home services, as well as affordable housing and transportation services. There were some differences, however, in how these services and supports were funded and delivered in each locality. While a variety of CBOs provided information and referral services to help older adults find appropriate available HCBS and related supports in each locality, each AAA’s Aging and Disability Resource Center served as the primary referral service in each locality. In San Francisco, the AAA responded to the city’s multi-lingual population by creating 12 ADRC “outstations” throughout the city. These outstations provide services in multiple languages, such as English, Spanish, Mandarin, and American Sign. In Atlanta, the AAA also developed a referral database containing more than 25,000 registered providers of aging and long-term care services, covering nutrition services, housing options and services, and transportation assistance. This database was accessible, through subscription, to CBOs throughout the region that worked with older adults. In Montgomery County and San Francisco, “villages” of older adults served as important sources of information and referral for HCBS and related supports for their members. In addition to providing information and referral services, San Francisco Village is trying to diversify its membership in terms of socio-economic status. While the majority of its members are considered “middle-income,” the Village has received a grant from the San Francisco AAA to subsidize membership for low- income older adults. Subsidized memberships fees are $100 per individual or $150 per household, as compared to regular membership fees of $600 and $750, respectively. The San Francisco village, one of two we spoke with, also provided companionship visits and assistance with errands. The “Village” Model for Aging in Place Villages are grassroots, community-based membership organizations that facilitate access to HCBS and strengthen social supports for older adults as they age in their homes and communities. They are created and funded primarily by older adults and rely heavily on members volunteering to help other members. Usually governed by an advisory council or board, villages are operated by volunteers or by some mix of paid staff and volunteers. A recent report, based on a survey of 69 villages in the United States, found that villages largely consist of older adults of middle to high socio-economic status, who are most likely between ages 65 and 74. The average annual membership fee was $431 for an individual and $587 for a household, but approximately two-thirds of the villages charging fees offered discounted memberships based on income. Villages focus on providing access for their members to social and non-medical supports, emphasizing transportation, technology assistance, and home repair and maintenance. Many also negotiate with outside service providers for discounted fees for their members. The report found that approximately half of the villages were receiving at least 45 percent of their funds from membership fees. And, half of the villages received at least 20 percent of their budgets from fund-raising and charitable donations. Government funding and contributions from nonprofit organizations each accounted for 5 percent or less of village budgets. Currently, over 200 villages belong to the national Village to Village Network, an organization that helps establish and manage villages. The five report authors represented four universities: Rutgers, the State University of New Jersey, New Brunswick; the University of California, Berkeley; the University of Michigan, Ann Arbor; and the University of Maryland, Baltimore. Service programs in naturally occurring retirement communities (NORC) were also important sources of information and referral for older adult residents of certain communities in the Atlanta region, including the service programs in the East Point and Toco Hills NORCs. In all three localities, each AAA’s ADRC program was the primary entry point for older adults into the system of HCBS and related supports. As such, the ADRC was the first point of contact for older adults seeking publicly-funded in-home services, such as personal care and homemaker services. In each locality, ADRC program staff assessed the individual needs and financial resources of older adults seeking such services, developed service plans for them, and referred them to providers for in- home services that, in some cases, were funded under the Older Americans Act. In Montgomery County, for example, the Senior Care program provided in-home services funded by the state. Older adults who were determined to be eligible for Medicaid HCBS under the state Medicaid program were referred to the county Department of Health and Human Services for care. In addition to Medicaid and Older Americans Act funding, CBOs relied on other sources of financial support to cover the cost of in-home services for older adults. Senior Connections, a CBO in Atlanta, employed certified home-care aides to assist homebound older adults and those with It charged for its services, other than meals, physical limitations.according to a sliding scale, based on an individual’s income. Senior Connections also relied on financial support from the county, United Way, private donations, and fundraisers to subsidize the cost of services to its clients in need. As a part of HCBS, meals for older adults can be provided in a congregate setting away from recipients’ homes or delivered to their homes. Four of the CBOs we visited across the three localities provided meals, and we observed some differences in their delivery and funding in each locality. For example, Senior Connections in Atlanta offered congregate and home-delivered meals for older adults at a per meal and package price, with meals available to those who qualified based on income, age, and county of residence at no-cost or subsidized with Older Further, Senior Connections delivered meals to Americans Act funding.senior facilities, opened its congregate meals to residents at area housing complexes and workers at businesses, at a cost to the latter, and offered nutrition counseling. There was also a senior multipurpose facility in Atlanta that offered congregate meals daily, and membership dues for the facility covered the cost of these meals. Staff at two CBOs we visited told us that they also referred the low- income older adults they served to SNAP and helped them complete the required paperwork. Despite the options USDA has provided states for making their SNAP application process simpler, according to some CBOs we contacted in two of the three localities, older adults continue to consider the annual recertification process in their states burdensome, especially considering that their anticipated monthly benefit could be as low as $16. We consistently heard in each locality that housing options and transportation were among the services most in demand by older adults. Among the five Section 202 properties we visited across our three localities, services and amenities provided for their older adult residents, include service coordinators who connected especially frail residents to the supportive services they needed (see appendix III for a description of the Section 202 properties we visited). For example, a service coordinator in a Montgomery County Section 202 property assessed residents’ needs and referred them to various community resources. This coordinator also helped establish support networks and volunteer services for residents. At one Atlanta property, the service coordinator was in charge of organizing education and wellness programs, such as stroke awareness, healthy eating on a budget, and music therapy, as well as making referrals and providing residents with information about outside services. According to some of the sponsors of Section 202 housing properties we interviewed, the program’s service coordinators save federal dollars because they delay older adults’ reliance on federally funded nursing home care. At one of the Section 202 properties we visited, staff expressed concern over the suspension of federal funding for construction of housing units for low-income older adults under the Section 202 program. Further, some sponsors of existing Section 202 housing told us that using low- income housing tax credits for older adults may not be realistic because households with extremely low incomes may not be able to afford the rents that would be charged even under a tax credit program. Some CBOs and local governments we contacted across our three localities provided transportation services for older adults that received funding under the federal Enhanced Mobility program. For example, Dekalb County, Georgia collaborated with CBOs to operate a senior shuttle service that provided county residents who were 60 and older with curb-to-curb rides. Similarly, the Montgomery County transportation project we contacted coordinated transportation services for older adults in Montgomery County and was funded with Enhanced Mobility funds. San Francisco used a DOT, Federal Transportation Administration grant to provide peer escorts to accompany older adults with dementia. According to AAA and CBO officials, the growing population of older adults, in conjunction with constraints on federal, state, and local government funding, made it difficult to meet older adults’ needs for affordable housing, in-home and nutrition services, and transportation. In addition, the growing diversity of the older adult population—differences in language, culture, and customs—compounded these challenges. Some CBOs also indicated that as funding from public programs has remained flat in recent years, they were finding it difficult to secure funds from other sources to sustain the HCBS and supports they provide to older adults. In all three localities that we visited, we were told that there were lengthy waiting lists—one consequence of funding constraints—for a number of HCBS and supports. AAA officials in Atlanta and Montgomery County reported that while Medicaid funding for HCBS has been increasing in recent years, hundreds of older adults referred to Medicaid for in-home services under state Medicaid waiver programs were ending up on waiting lists because their state Medicaid agencies had not met their funding match. In one locality, there was concern that the state Medicaid program may have chosen to devote a higher percentage of state Medicaid resources to nursing home care than to HCBS. In Montgomery County, an AAA official said that of the 23,000 people, statewide, who were on Maryland’s waiting list for the state’s Medicaid Community First Choice option, about 10 to 12 percent were Montgomery County residents. In Atlanta, the AAA director said that there were 800 people in the region who were eligible for services under one of the state’s Medicaid 1915(c) waiver programs and on a waiting list because the program was closed due to lack of state Medicaid matching funds. According to the Atlanta AAA director, applicants would be assessed for eligibility for Medicaid funded in-home services as soon as more state funds became available. Only older adults who are low-income are eligible for Medicaid-funded HCBS, and in Atlanta and Montgomery County, AAA officials described a mix of Older Americans Act, state, and local funds that they used to serve older adults who were not eligible for Medicaid. In the Atlanta region and Montgomery County, officials reported that there were also waiting lists for Older Americans Act-funded HCBS. CBO officials also reported waiting lists for affordable senior housing. Among the Section 202 properties that reported information on waiting lists, waiting periods ranged from 6 months to 10 years, indicating that the existing supply of affordable units available to older adults under Section 202 and other programs was not meeting the demand. Further, Section 202 is no longer producing new units. Congress did not approve new rental assistance contracts through the Section 202 demonstration funded in fiscal year 2014 and there was no funding for new units in fiscal year 2015. Given the increasing size of the older adult population and projections that many will need assistance with their housing costs, the demand for affordable housing for older adults will likely continue to exceed the supply. The demand for nutrition services has also grown in recent years. Two CBO officials noted shortfalls in meeting the demand for nutrition services in their communities. Senior Connections representatives, who provided meals for older adults in several Georgia counties, told us that one county had more than 200 individuals on its waiting list, mainly for meals and in- home care. In a previous study, we reported that officials told us that requests for home-delivered meals were increasing as older adults were remaining in their homes longer rather than moving into assisted living facilities or nursing homes. Moreover, complicated application requirements may be impeding their access to food assistance through SNAP, which USDA and HHS officials told us may be used by the participant as a voluntary contribution toward the cost of congregate and home delivered meals for older adults, if the provider is authorized by USDA to accept SNAP benefits for this purpose (e.g. is an authorized SNAP retailer). Three USDA initiatives--the Combined Application Project, Standard Medical Deduction, and the Elderly Simplified Application Project--to allow states to simplify the application and recertification requirements for older adults have been adopted by 17, 16, and 6 states, respectively. According to a USDA official, all three initiatives include evaluation and reporting requirements, due to their status as demonstration projects, that can be viewed as burdensome by state agencies. According to the official, those evaluation and reporting requirements may deter states from applying to operate a project. CBOs in each locality also reported high demand for transportation services for older adults, but one we visited, which assisted older adults with different modes of transportation, had temporarily suspended its transportation voucher program until new funding was made available through a DOT grant. Further, local officials said that flexibility was critical in providing older adults with the right type of transportation assistance to address their needs. For example, a San Francisco mobility program manager noted that an increasing number of baby boomers living at home had dementia. She stated that there were day programs for older adults available at senior centers, but these individuals needed transportation to the centers. Some older adults who did not meet the specific requirements for paratransit required assistance that was not available through the fixed-route bus system even when subsidies made trips more affordable to them. Further, those with dementia needed more hands-on assistance in transit than was available through paratransit. To respond to this need, local officials in San Francisco said that in July 2014 the city launched its peer escort transportation service. According to the mobility manager, in this instance, the city was able to use FTA grant funds to acquire vehicles for the peer escort service, but had to find another grant to fund a small stipend for the escorts. Several transportation service providers across the localities expressed a need to reduce restrictions on the use of federal transportation grant funding. For example, CBO and local government officials told us that they would like to spend more transportation grant funds to transport older adults to recreational events. They said that some programs allowed funding for older adult transportation to hospital and other non-emergency medical appointments, but not recreational transportation, even though this was important to older adults’ quality of life. This is consistent with our findings in a previous report that when flexible transportation services exist and are accessible, older adults can more comfortably age in place in their homes and communities. In the three localities, a diverse older adult population has compounded the task of meeting increasing demand for HCBS and supports, and challenged CBOs to find ways to accommodate differences in language, culture, and customs. Representatives of a Montgomery County village told us that they served individuals who represented more than 57 countries of origin and shared a common characteristic—many were first generation Americans. One Section 202 property in the Atlanta region relied on its collaboration with an Asian community center to meet the social needs of its Korean residents, who represented 20 percent of all residents. The property had also hired a part-time language interpreter to facilitate communications with these residents. At the same time that Older Americans Act funding has been essentially flat in recent years, some local CBOs reported finding it difficult to secure from non-federal sources the funds they need to sustain the services they provide to older adults. For example, the mobility manager at the CBO which suspended its transportation voucher program told us that local fundraising was challenging in the low-income community where the CBO was located. Moreover, in addition to constraints on Older Americans Act funding, our 2014 analysis of state and local budgets suggests that states and local governments will continue to face fiscal challenges in the coming years absent substantial policy changes. Further, HHS budget documents note that states, tribes, and localities that depend on federal funds for these services have limited options to offset losses of federal funding. Developing the capacity to compete in new markets for HCBS and opportunities may be a strategy for AAAs and CBOs to address these challenges. For example, the San Francisco AAA is taking advantage of the business acumen learning collaborative formed by ACL’s Center for Consumer Access and Self-Determination. As one of the sites selected to participate in the learning collaborative in 2013, San Francisco’s AAA convened a network of 15 CBOs. The stated outcome for network members is to build their organizational capacity to contract with managed health care entities. The goal was that future contracts with health plans and managed care providers would provide revenue to the CBOs that were part of the AAA’s network. ACL’s business acumen learning collaborative is in line with the Older Americans Act, which requires AoA to provide technical assistance designed to assist state units on aging (SUA), AAAs, and service providers in serving older individuals with the greatest economic and social needs. The act also requires the establishment, directly or through AoA grants or contracts, of national technical assistance programs to fund technical assistance to SUAs, AAAs, and CBOs funded under the act in implementing home and community-based long-term care systems.federal funding is constrained, local entities may be best served by having greater opportunities for technical assistance that could help them form strategic networks and identify additional sources of non-federal financial support. Local partnerships between service providers could in turn facilitate the type of care coordination that would benefit older adults. AoA, within HHS, is the principal agency designated to carry out the provisions of the Older Americans Act. As we reported in table1 earlier, AoA and CMS fund a range of HCBS for older adults while the other agencies that fund home and community based services—HUD, DOT, and USDA, do so in their respective areas. AOA funds HCBS and related supports and has reached out to the other agencies to collaborate on selected projects. However, AoA has not yet brought all five agencies together to develop a cross-agency federal strategy for home and community-based services and related supports. The Older Americans Act directs AoA to facilitate, in coordination with CMS and other federal agencies as appropriate, the provision of services and supports in the home and community. However, AoA, CMS, HUD, DOT, and USDA fund programs that deliver HCBS and supports to older adults through individual agency efforts, for the most part. While AoA has formed collaborative projects with each of the five agencies that fund HCBS for older adults, most of the collaborative arrangements reported are between AoA and one or two other federal agencies. Table 5 below lists the HCBS and support programs for older adults covered in this report. ADRCs are located in communities. The ADRC program seeks to improve older adults’ access to HCBS. Three of the programs include projects that one of the participants has identified as an interagency collaboration, AoA has worked with USDA to allow state distribution of USDA foods in lieu of all or part of their cash allotments under the Nutrition Services Incentive Program to supplement the home-delivered and congregate meal programs funded by the Older Americans Act. AoA collaborates with CMS in implementing the ADRC program, previously discussed. The AoA officials we interviewed identified the ADRC program as the focus of the agency’s effort to improve older adults’ access to HCBS at the local level. AoA is currently working to implement the no wrong door system—the updated model of the ADRC program—throughout the aging services network.officials also reported that they collaborate with AoA in the ADRC program. DOT According to DOT officials, DOT changed its requirements to allow other federal funds to be used as the local match for DOT funds.Under the revised requirement, local agency recipients of Section 5310 grant funds could use grant funds from AoA as a match for FTA Section 5310 funds. However, as table 5 shows, the five agencies administer most of the programs independently, without involvement by other agencies at the federal level. In addition to these programs that fund HBCS for older adults, agency officials reported collaboration on projects in which AoA and one or more other agencies participate. These projects, including a housing demonstration project, development of a data base, and specification of standards for an electronic HCBS record, focus mainly on federal program development tasks, rather than front line service delivery, AoA participates in DOT’s Coordinating Council on Access and Mobility, which is a federal interagency council for transportation services, established by Executive Order. The Council oversees activities and makes recommendations intended to simplify customer access to transportation and improve the efficiency of services using existing resources. While the five agencies that fund HCBS are represented on this council, their discussions focus on better coordinating transportation funding streams, programs, and transportation services. AoA also collaborated with HUD and HHS’ Office of the Assistant Secretary for Planning and Evaluation to develop design options for a demonstration of publicly assisted rental housing coordinated with health and long-term care services and support for low-income older adults. The goal is a sustainable, collaborative system between housing and human services agencies. HUD officials also told us that AoA and HUD support contractors who are developing a database that links demographic health status and health service utilization data for older adult residents of public housing. AoA, HUD, and CMS collaborate on a housing and supportive services project known as the Housing Capacity Building Initiative for Community Living. This initiative is a series of projects that focus on strategies for providing supportive services to older adults and individuals with disabilities who live in the community. Thus far, most of the projects focus on individuals with disabilities. CMS has an agreement with the HHS Assistant Secretary for Planning and Evaluation to develop standards for an electronic record for HCBS, according to CMS officials. CMS also is working with HUD’s 10 regional offices to examine what is required to integrate Section 202 developments into the larger community. In the past year, conversations have centered on HUD’s challenge with Section 202 developments that are more isolated from other community elements. Of the three collaborations identified in table 5 earlier, plus the six described above, three involve three or more of the agencies that fund HCBS for older adults. However, only DOT’s Coordinating Council on Access and Mobility included all five agencies. While these projects represent steps toward interagency collaboration, they do not allow all five agencies to consider jointly the broad implications of their independent initiatives for older adults, their common target population. For example, three CMS programs provide incentives for state Medicaid Programs to reduce the use of institutionally-based long-term services and supports in the community. At the same time, Congress eliminated funding for capital advances under the Section 202 program. According to HUD officials, HUD is encouraging localities to look to existing affordable housing resources in the community in the absence of funding for housing construction under the Section 202 program. AoA is collaborating with HUD and CMS by helping to determine how best to provide services to older adults in multifamily housing in the community. However, as we previously discussed, while attributable not only to changes in the Section 202 program, the demand for older adult affordable housing will likely continue to exceed the supply. One implication of these simultaneous developments is that, if there is no housing available, older adults may be unable to receive services unless they reside in an institutional setting. Collaboration to develop mutually reinforcing or joint strategies could help ensure that federal resources for HCBS and supports are used efficiently and effectively. Others also have pointed out the potential consequences of the lack of collaboration among the agencies that administer programs for older adults. For example, a 2014 report prepared for the Department of Health and Human Services noted that the disconnects among Medicare, Medicaid, acute and chronic health care providers, affordable housing programs, aging programs, and home and community based services may lead to lower-quality care, premature institutionalization, and higher costs for public and private health and long term care. This study reported that the factors contributing to higher costs were premature transfers to nursing homes and residential care facilities, repeated trips by emergency medical technicians to an individual’s home, repeated trips to hospital emergency rooms, and frequent hospitalizations. Officials we interviewed at AoA, DOT, HUD, and CMS all voiced support for interagency collaboration. The AoA officials we interviewed stated that the agency believes that collaboration with other federal agencies is necessary to build a comprehensive system of home and community- based services and has taken steps to formalize some of the agency’s collaborative relationships. HUD officials also thought that all of the HHS, HUD, DOT, and USDA programs and resources directed to older adults should be aligned to better serve them, especially because of the changing demographics of the older adult population. DOT officials emphasized that all federal agencies that fund HCBS for older adults should reach beyond barriers to coordination at the federal level. They suggested that the transportation services that community based organizations operate should be connected to locally coordinated planning organizations, such as a metropolitan council of governments. They said that they hope AoA will promote the message that joint planning is needed. CMS officials reported a positive experience collaborating with ACL and HUD. They said that they were unaware of any challenges to collaboration and found that any differences in the participating agencies’ organizational cultures that exist often enhance collaboration. When asked at what point AoA plans to coordinate a more comprehensive, cross-agency approach to administering the federal programs that fund HCBS, an AoA representative said that the agency does not have adequate resources to cover the cost of such a collaborative process. While we recognize that AoA is a small agency and faces many competing priorities for its resources, our recent work on interagency collaboration found that most collaborative groups in government are not directly funded, but leverage the existing resources of the participating agencies in order to operate. As part of our work on collaboration, we previously reported on key practices to enhance and sustain interagency collaboration. In that work, we broadly defined collaboration as any joint activity that is intended to produce more public value than could be produced when the We also described how agencies can enhance and agencies act alone.sustain their collaborative efforts by engaging in eight practices, including, define and articulate a common outcome; establish mutually reinforcing or joint strategies; identify and address needs by leveraging resources; agree on roles and responsibilities; establish compatible policies, procedures, and other means to operate develop mechanisms to monitor, evaluate, and report on results; reinforce agency accountability for collaborative efforts through agency plans and reports; and reinforce individual accountability for collaborative efforts through performance management systems. These practices can serve as a framework for collaboration among the five agencies that administer HCBS that would allow them to consider and establish a cross-agency federal strategy for administering HCBS. For example, as the five agencies collaborate, CMS officials might contribute lessons learned by state Medicaid agencies that would help develop joint strategies for using HCBS to prevent frequent use of emergency medical services by older adults. More specifically, using the eight practices for collaborative efforts, a cross agency federal strategy could help the federal agencies address some of the challenges associated with funding and delivery of HCBS in the localities we visited. For example, Officials at AoA and local officials said that federal rules governing the use of funds for transportation for older adults could be more flexible or subsidize transportation for older adults for different purposes, including health care and recreation. AoA, DOT, HUD, CMS, and USDA might define common outcomes for local transportation for older adults that took into account different transportation modes and the range of transportation purposes, and incorporate these objectives into their grant awards. AoA and the Center for Consumer Access and Self-Determination, also within ACL, have taken the initiative to help develop AAAs’ and other community-based organizations’ capacity to contract with healthcare entities to provide HCBS. AoA, HUD, DOT, and USDA, could help ensure that HCBS such as affordable housing, non- medical transportation, and additional nutrition assistance are provided at the community level by first defining common outcomes for these services. AoA, HUD, DOT, and CMS also could develop lessons learned for the local networks that AAAs and CBOs form to provide these services that could contribute to efficient and effective use of federal resources. As previously discussed, although HUD provides older adults with project rental assistance for units in existing multifamily housing developments, HUD did not anticipate any new funding for Section 202 capital advances to construct new housing after 2012. On the other hand, in each locality we visited, we were told that there were lengthy waiting lists for affordable housing for older adults. Defining common outcomes for affordable housing construction and rental assistance with supportive social services, including transportation and nutrition services, by HUD, CMS, AoA, DOT, and FNS could help develop strategies for leveraging limited resources for housing construction. The diversity of the older adult population presents challenges to meeting the needs of all older adults. Cross-agency goal setting by the five federal agencies with a focus on meeting the needs of diverse populations could help AAAs and community based organizations serve their clientele more effectively. In our work on interagency collaboration, we have found that when federal support in a particular area cuts across federal agencies, as it does with regard to HCBS and supports for older adults, agency collaboration is important to ensuring that federal efforts, overall, achieve meaningful results. Each of the five agencies that fund home and community-based services and supports for older adults, however, for the most part does so independently. While AoA is well-positioned to lead federal agencies in planning a cross-agency federal strategy for the provision of home and community-based services and supports for older adults, an AoA representative indicated that the many competing priorities it has for its limited resources prevent it from doing so. Development of a cross-agency federal strategy could help provide assurance that federal resources are used efficiently and effectively to help communities meet the demand for HCBS and supports for older adults. As the older population continues to grow, communities will find it increasingly difficult to meet the demand for the HCBS and supports many older adults will need to age in their own homes and communities. Based on recent trends, federal funding at AoA, HUD, and DOT for HCBS and supports is not likely to keep pace with demand for these services and supports, making it important to ensure that the federal resources available for this purpose are used effectively and efficiently. Development of a cross-agency federal strategy could better position the federal agencies to assist area agencies on aging and community-based organizations with providing HCBS and supports in the most efficient and effective manner. Under the Older Americans Act, AoA is responsible for facilitating the provision of home and community-based services and supports for older adults in this country, in coordination with CMS and other federal agencies. As a result, AoA is well-positioned to lead collaboration among the five federal agencies covered in our review. However, because of increases in Medicaid spending and emphasis on the role of HCBS in supporting health care patients, CMS has become an even more important partner to AoA in meeting older adults’ expected demand for HCBS. Thus, it may be most appropriate for the HHS Secretary to take the initiative in developing such a cross-agency federal strategy. The Secretary of the Department of Health and Human Services should facilitate development of a cross-agency federal strategy to help ensure that federal resources from ACL, CMS, USDA, HUD, and DOT are effectively and efficiently used to support a comprehensive system of HCBS and related supports for older adults. Through such a strategy the agencies could, for example, define common outcomes for affordable housing with supportive services, non-medical transportation, and nutrition assistance at the federal level; develop lessons learned for the local networks that area agencies on aging and community-based organizations are forming; and develop strategies for leveraging limited resources. We provided a draft of this report to HHS, DOT, HUD, and USDA. HHS provided general comments that are reproduced in appendix IV. All four departments provided technical comments which we incorporated as appropriate. HHS concurred with our recommendation and stated that HHS leadership agrees with the need to continue to coordinate services to address the often complex conditions of older adults with long term services and support needs. HHS also stated that the department continually strives to improve its strategic coordination and described ways that it facilitates cross agency strategic efforts, including a community-living initiative with HUD and an interagency workgroup on Olmstead requirements.also described collaboration by HHS and HUD on policy research projects concerning housing and supportive services for older adults, including a comparison of health service utilization by older adults who live in assisted housing with those who do not and an evaluation of a demonstration in Vermont that provides services and supports to residents of HUD-assisted housing. We continue to encourage HHS to engage all five agencies—the Administration on Aging and Centers for Medicare and Medicaid Services in HHS, HUD, DOT and USDA--in development of a cross agency federal strategy for administering home and community-based services for older adults. Using the eight practices to enhance and sustain interagency collaboration that we have identified in prior work could help the five agencies address some of the challenges associated with funding and delivery of home and community-based services to older adults in the communities where they live. We are sending copies of this report to the appropriate congressional committees, the Secretaries of the Departments of Health and Human Services, Housing and Urban Development, Transportation, Agriculture, 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 website 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 can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Appendix I: Community Based Organizations Contacted, by Locality and Type Benson Manor (Department of Housing and Urban Development (HUD) Section 202) Dekalb County Senior Transportation Services (Department of Transportation Enhanced Mobility) East Point Naturally Occurring Retirement Community (NORC) Gwinnett Christian Terrace (HUD Section 202) Chevy Chase at Home Village Homecrest House (HUD Section 202) Muslim Community Center Senior Program Victory Oaks (HUD Section 202) Village Rides (Department of Transportation Enhanced Mobility) Armstrong Place (HUD Section 202) Bayview Hunters Point Multipurpose Senior Services Inc. Home & Community-Based Supportive Services Aging and Disability Resource Centers (ADRC) Aging and Disability Resource Center (Mandatory) Aging and Disability Resource Center (MIPPA) 1915(c) HCBS Waivers 1915(i) HCBS: State Plan Options Balancing Incentive Program (BIP) Money Follows the Person Demonstration (MFP) Community First Choice (CFC) Senior Farmers’ Market Nutrition Program Supportive Housing for the Elderly (Section 202)-Capital Advance and New Project Rental Assistance Contracts (PRAC) Supportive Housing for the Elderly (Section 202)-Renewals and Amendments PRACs Supportive Housing for the Elderly (Section 202) -Service Coordinators Enhanced Mobility of Seniors and Individuals with Disabilities (Sections 5310) An obligation is a legally binding agreement that results in outlays, immediately or in the future. According to Congressional Research Service, the Aging Network Services Activities program funds declined starting in fiscal year 2012 because some activities supporting older adults that were previously included under the Aging Network Support Activities program were moved to separate line items in fiscal year 2011. These included the Senior Medicare Patrol Program, ADRCs, the National Center on Elder Abuse, and the National Long-Term Care Ombudsman Resource Center. Expenditures for Medicaid programs for fiscal years 2007 – 2014 were provided by CMS from the Medicaid Financial Management Reports. Appropriations of $10 million for FY 2010 through FY 2014 for ADRCs were made under the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, §2405 124 Stat. 119, 305. Area Agencies on Aging, ADRCs and State Health Insurance programs receive funding through MIPPA to help Medicare beneficiaries apply for the Medicare Part D Extra Help/Low-income Subsidy and the Medicare Savings Program. According to USDA, obligations for the Commodity Supplemental Food Program in fiscal year 2010 were $182 million and for fiscal year 2013, $186 million. Appropriations for capital advances for fiscal years 2012-2014 were for administrative expenses related to the Capital Advance Program. No appropriations for new capital advances were made that year. Amount is significantly higher in fiscal year 2013 and beyond due to the incorporation of the former New Freedom program into the Enhanced Mobility of Seniors and Individuals with Disabilities program. Amenities and activities: HUD-funded service coordinator (and activities director), part-time language interpreter, laundry facility, 24-hour surveillance and overnight security, twice weekly shopping trips, bus excursions, terrace room (for movies, gaming, and special events), book club, free weekly swap meet, sewing and craft clubs, bingo, wellness and exercise room, fitness classes, worship services and Bible study, resident gardens, combined library and computer room. Homecrest House is a nonprofit, nondenominational community formed when HUD awarded the first Section 202 grant in 1976. This sponsor operates two Section 202 properties in Maryland. Two adjoining properties by the same sponsor opened for occupancy in 1979 and 1985, respectively. There are 235 total units. Amenities and activities: Kitchen, outdoor patio, laundry facility, community room, vending machines, wellness room, fitness center, computer room, library, sunroom, 24-hour security, and health education meetings. Bridge Housing Corp. is a San Francisco- based nonprofit housing developer formed in 1983. This sponsor operates five Section 202 properties in California. Property opened for occupancy in 2011 and has116 units (23 designated for homeless older adults) Amenities and activities: Community room with kitchen, laundry facility, assigned covered parking, courtesy patrol, landscaped courtyard and picnic area. HUD refers to community-based organizations that receive Section 202 funding to provide affordable housing to older adults as sponsors. Project H.A.N.D.S. is a Canada-based international nonprofit organization that helps needy communities through projects such as outreach clinics and education funding. In addition to the contact named above, Clarita Mrena (Assistant Director), Sara Edmondson (Analyst-in-Charge), Laurel Beedon, Bernice Benta-Jackson, John Lack, and Nhi Nguyen, made significant contributions to all aspects of the work. Also contributing to the report were Holly Dye, Sheila McCoy, John McGrail, Mimi Nguyen, Cheryl Peterson, Monica Savoy, Walter Vance, Maria Wallace, Emily Wilson, and Craig Winslow. | Research has shown that many older adults want to age in their homes and communities, and their ability to do so often depends on the availability of home and community-based services and other supports. GAO was asked to review the availability of such services. This report addresses (1) federal programs that fund these services and supports for older adults, (2) how these services and supports are planned and delivered in selected localities, and (3) agencies' efforts to promote a coordinated federal system of these services and supports. GAO reviewed federal program documents and interviewed federal officials. It also visited programs in the Atlanta, Georgia region, Montgomery County, Maryland, and San Francisco California, chosen based on efforts made to enhance their system of HCBS and supports, recommendations from federal agencies and experts, varied governmental jurisdiction, and geographic dispersion. Five federal agencies within four departments fund home and community-based services and supports that older adults often require to continue living independently in their own homes and communities. The Administration on Aging (AoA) and Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS), and the Departments of Housing and Urban Development (HUD), Transportation (DOT), and Agriculture (USDA) provide funds, often through state agencies, to local governments and community-based organizations. The Older Americans Act of 1965 (the Act) requires AoA to promote and support a comprehensive system of services. In the three localities GAO visited, local area agencies on aging, assisted by other community-based organizations, took the lead in planning and delivering services and supports for older adults, paid for with a mix of federal, state, and local funding. An Atlanta organization employed home-care aides for older adults and delivered meals. Senior housing developments across the three localities connected more frail residents to in-home services. In San Francisco and Montgomery County, grassroots organizations known as villages provided help with errands. Officials in two localities reported that flat funding of certain state funds, combined with the growing number of older adults, has resulted in waiting lists for affordable housing and in-home services. The Act requires AoA to facilitate collaboration among federal agencies; however, the five agencies that fund these services and supports for older adults do so, for the most part, independently. GAO's work on interagency collaboration has found that collaboration is important for federal efforts that involve more than one agency. HHS, through AoA, has indicated that competing priorities for its limited resources prevent it from leading development of a cross-agency federal strategy. However, developing such a strategy could help ensure that the five agencies' resources for HCBS and supports are used efficiently and effectively. GAO recommends that HHS facilitate development of a cross agency federal strategy to ensure efficient and effective use of federal resources for HCBS. HHS concurred and HUD, DOT, and USDA did not comment. |
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TSA receives thousands of air passenger screening complaints through five centralized mechanisms but does not have an agencywide policy, consistent processes, or an agency focal point to guide the receipt of these complaints, or “mine” these data to inform management about the nature and extent of the screening complaints to help improve screening operations and customer service. For example, TSA data indicate the following: From October 2009 through June 2012, TSA received more than 39,000 screening complaints through its TSA Contact Center (TCC), including more than 17,000 complaints about pat-down procedures. From October 2009 through June 2012, TSA’s Office of the Executive Secretariat received approximately 4,000 complaints that air passengers submitted by mail. From April 2011 (when it was launched) through June 2012, the agency’s Talk to TSA web-based mechanism received approximately 4,500 air passenger screening complaints, including 1,512 complaints about the professionalism of TSA staff during the screening process. However, the data from the five centralized mechanisms do not reflect the full nature and extent of complaints because local TSA staff have discretion in implementing TSA’s complaint processes, including how they receive and document complaints. For example, comment cards were used in varying ways at 6 airports we contacted. Specifically, customer comment cards were not used at 2 of these airports, were on display at 2 airports, and were available upon request at the remaining 2 airports we contacted. TSA does not have a policy requiring that complaints submitted using the cards be tracked or reported centrally. We concluded that a consistent policy to guide all TSA efforts to receive and document complaints would improve TSA’s oversight of these activities and help ensure consistent implementation. TSA also uses TCC data to inform the public about air passenger screening complaints, monitor operational effectiveness of airport security checkpoints, and make changes as needed. However, TSA does not use data from its other four mechanisms, in part because the complaint categories differ, making data consolidation difficult. A process to systematically collect information from all mechanisms, including standard complaint categories, would better enable TSA to improve operations and customer service. Further, at the time of our review, TSA had not designated a focal point for coordinating agencywide policy and processes related to receiving, tracking, documenting, reporting, and acting on screening complaints. Without a focal point at TSA headquarters, the agency does not have a centralized entity to guide and coordinate these processes, or to suggest any additional refinements to the system. To address these weaknesses, we recommended that TSA establish a consistent policy to guide agencywide efforts for receiving, tracking, and reporting air passenger screening complaints; establish a process to systematically compile and analyze information on air passenger screening complaints from all complaint mechanisms; and designate a focal point to develop and coordinate agencywide policy on screening complaint processes, guide the analysis and use of the agency’s screening complaint data, and inform the public about the nature and extent of screening complaints. The Department of Homeland Security (DHS) concurred with the recommendations and indicated actions that TSA had taken, had underway, and was planning to take in response. For example, DHS stated that TSA would review current intake and processing procedures at headquarters and in the field and develop policy, as appropriate, to better guide the complaint receipt, tracking, and reporting processes. We believe that these are beneficial steps that would address the recommendation, provided that the resulting policy refinements improve the existing processes for receiving, tracking, and reporting all air passenger screening complaints, including the screening complaints that air passengers submit locally at airports through comment cards or in person at security checkpoints. In commenting on a draft of our November 2012 report, TSA also stated that the agency began channeling information from the Talk to TSA database to the TCC in October 2012. However, DHS did not specify in its letter whether TSA will compile and analyze data from the Talk to TSA database and its other centralized mechanisms in its efforts to inform the public about the nature and extent of screening complaints, and whether these efforts will include data on screening complaints submitted locally at airports through customer comment cards or in person at airport security checkpoints. DHS also did not provide sufficient detail for us to assess whether TSA’s planned actions will address the difficulties we identified in collecting standardized screening data across different complaint categories and mechanisms. DHS stated that the Assistant Administrator for the Office of Civil Rights & Liberties, Ombudsman and Traveler Engagement was now the focal point for overseeing the key TSA entities involved with processing passenger screening complaints. It will be important for the Assistant Administrator to work closely with, among others, the office of the Assistant Administrator of Security Operations because this office oversees screening operations at commercial airports and security operations staff in the field who receive screening complaints submitted through customer comment cards or in person at airport security checkpoints. We will continue to monitor TSA’s progress in implementing these recommendations. TSA has several methods to inform passengers about its complaint processes, but does not have an agencywide policy or mechanism to ensure consistent use of these methods among commercial airports. For example, TSA has developed standard signs, stickers, and customer comment cards that can be used at airport checkpoints to inform passengers about how to submit feedback to TSA; however, we found inconsistent use at the 6 airports we contacted. For example, customer comment cards were displayed in the checkpoints at 2 airports, while at 2 others the cards were provided upon request. However, we found that passengers may be reluctant to ask for such cards, according to TSA. TSA officials at 4 of the 6 airports also said that the agency could do more to share best practices for informing passengers about complaint processes. For example, TSA holds periodic conference calls for its Customer Support Managers—TSA staff at certain commercial airports who work in conjunction with other local TSA staff to resolve customer complaints and communicate the status and resolution of complaints to air passengers—to discuss customer service. However, Customer Support Managers have not used this mechanism to discuss best practices for informing air passengers about processes for submitting complaints, according to the officials we interviewed. Policies for informing the public about complaint processes and mechanisms for sharing best practices among local TSA officials could help provide TSA reasonable assurance that these activities are being conducted consistently and help local TSA officials learn from one another about what practices work well. We recommended that TSA establish an agencywide policy to guide its efforts to inform air passengers about the screening complaint processes and establish mechanisms, particularly at the airport level, to share information on best practices for informing air passengers about the screening complaint processes. DHS concurred with the recommendation and stated that TSA would develop a policy to better inform air passengers about the screening complaint processes. We will continue to monitor TSA’s progress in implementing this recommendation. TSA’s complaint resolution processes do not fully conform to standards of independence to ensure that these processes are fair, impartial, and credible, but the agency is taking steps to improve independence. Specifically, TSA airport officials responsible for resolving air passenger complaints are generally in the same chain of command as TSA airport staff who are the subjects of the complaints. While TSA has an Ombudsman Division that could help ensure greater independence in the complaint processes, the division primarily focuses on handling internal personnel matters and is not yet fully equipped to address external complaints from air passengers, according to the head of the division. TSA is developing a new process for referring air passenger complaints directly to the Ombudsman Division from airports and for providing air passengers an independent avenue to make complaints about airport security checkpoint screening. In August 2012, TSA’s Ombudsman Division began addressing a small number of air passenger complaints forwarded from the TCC, according to the head of that division. TSA also began advertising the division’s new role in addressing passenger screening complaints via the TSA website in October 2012. According to the Assistant Administrator of TSA’s Office of Civil Rights & Liberties, Ombudsman and Traveler Engagement, the division will not handle complaints for which there exists an established process that includes an appeals function, such as disability complaints or other civil rights or civil liberties complaints, in order to avoid duplication of currently established processes. According to the Assistant Administrator, the agency also plans to initiate a Passenger Advocate Program by January 2013, in which selected TSA airport staff will be trained to take on a collateral passenger advocate role, respond in real time to identify and resolve traveler-related screening complaints, and assist air passengers with medical conditions or disabilities, among other things. It is too early to assess the extent to which these initiatives will help mitigate possible concerns about independence. TSA officials stated that the agency is undertaking efforts to focus its resources and improve the passenger experience at security checkpoints by applying new intelligence-driven, risk-based screening procedures and enhancing its use of technology. One component of TSA’s risk-based approach to passenger screening is the Pre✓™ program, which was introduced at 32 airports in 2012, and which the agency plans to expand to 3 additional airports by the end of the calendar year. The program allows frequent flyers of five airlines, as well as individuals enrolled in other departmental trusted traveler programs—where passengers are pre-vetted and deemed trusted travelers—to be screened on an expedited basis. This program is intended to allow TSA to focus its resources on high-risk travelers. According to TSA, more than 4 million passengers have been screened through this program to date. Agency officials have reported that with the deployment of this program and other risk-based security initiatives, such as modifying screening procedures for passengers 75 and over and active duty service members, TSA has achieved its stated goal of doubling the number of passengers going through expedited screening. According to TSA, as of the end of fiscal year 2012, over 7 percent of daily passengers were eligible for expedited screening based on low risk. However, the estimated number of passengers that will be screened on an expedited basis is still a relatively small percentage of air passengers subject to TSA screening protocols each year. We plan to begin an assessment of TSA’s progress in implementing the TSA Pre✓™ program in 2013. Chairman Petri, Ranking Member Costello, and Members of the Subcommittee, this concludes my prepared remarks. I look forward to responding to any questions that you may have. For questions about this statement, please contact Steve 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 statement include Jessica Lucas-Judy (Assistant Director), David Alexander, Thomas Lombardi, Anthony Pordes, and Juan Tapia-Videla. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | This testimony discusses the findings of our November 2012 report assessing the Transportation Security Administration's (TSA) efforts to improve the air passenger screening complaints processes. TSA screens or oversees the screening of more than 650 million air passengers per year at 752 security checkpoints in more than 440 commercial airports nationwide, and must attempt to balance its aviation security mission with competing goals of efficiency and respecting the privacy of the traveling public. The agency relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers focus on screening millions of passengers and pieces of carry-on and checked baggage, as well as tons of air cargo, on a daily basis. Given TSA's daily interaction with members of the traveling public, air passenger screening complaints reflect a wide range of concerns about, for example, the systems, procedures, and staff that TSA has used for screening air passengers at security checkpoints. This includes concerns related to the use of Advanced Imaging Technology and enhanced pat-down procedures. TSA screens or oversees the screening of more than 650 million air passengers per year at 752 security checkpoints in more than 440 commercial airports nationwide, and must attempt to balance its aviation security mission with competing goals of efficiency and respecting the privacy of the traveling public. The agency relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers focus on screening millions of passengers and pieces of carry-on and checked baggage, as well as tons of air cargo, on a daily basis. TSA has processes for addressing complaints about air passengers' screening experience at security checkpoints, but concerns have been raised about these processes. Also, TSA is implementing a Pre✓ program to expedite screening at security checkpoints. This statement primarily based on our November 2012 report and, like the report, discusses the extent to which TSA has (1) policies and processes to guide the receipt of air passenger screening complaints, and uses this information to monitor or enhance screening operations, (2) a consistent process for informing passengers about how to make complaints, and (3) complaint resolution processes that conform to independence standards to help ensure that these processes are fair and impartial. As requested, the statement also describes TSA's recent efforts to make the screening process more risk-based and selective through use of TSA's Pre✓ program. In summary, TSA receives thousands of air passenger screening complaints through five central mechanisms, but does not have an agencywide policy, consistent processes, or a focal point to guide receipt and use of such information. Also, while the agency has several methods to inform passengers about its complaint processes, it does not have an agencywide policy or mechanism to ensure consistent use of these methods among commercial airports. In addition, TSA's complaint resolution processes do not fully conform to standards of independence to ensure that these processes are fair, impartial, and credible, but the agency is taking steps to improve independence. To address these issues, we made four recommendations to TSA with which the agency concurred, and it indicated actions it is taking in response. Finally, TSA officials stated that the agency is undertaking efforts to focus its resources and improve the passenger experience at security checkpoints by applying new intelligence-driven, risk-based screening procedures, including expanding its Pre✓ program. TSA plans to have this program in place at 35 airports by the end of the calendar year and estimates that it has screened more than 4 million passengers to date through this program. |
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Satellites provide many significant services, including communication, navigation, remote sensing, imaging, and weather and meteorological support. Satellites support direct radio communication and provide television broadcast and cable relay services, as well as home reception. Satellite services also support applications such as mobile and cellular communication, telemedicine, cargo tracking, point-of-sale transactions, and Internet access. Satellites also provide redundancy and backup capabilities to ground-based communications, as was demonstrated after the events of September 11, 2001, when satellites provided critical communications while ground-based lines were unavailable. The commercial satellite industry includes manufacturers, the launch industry, service providers, and ground equipment manufacturers. Manufacturers design and build satellites, supporting systems, and ground stations. The launch industry uses launch vehicles, powered by rocket engines, to place satellites in orbit. Once commercial satellites are in orbit, they are operated by service providers, who lease available services. Commercial satellite service clients include telecommunication companies, television networks, financial institutions, major retailers, Internet service providers, and governments. Some companies resell leased satellite services to their clients. For example, major telecommunication companies sometimes include satellite services in their product line. Ground equipment manufacturers build and sell the items needed to use satellite services, such as ground station hardware (antennas), data terminals, mobile terminals (truck-mounted units), and consumer electronics (satellite phones). For the year 2000, the commercial satellite industry generated revenues of $85.1 billion: $17.2 billion for satellite manufacturing, $8.5 billion for the launch industry, $41.7 billion for satellite services, and $17.7 billion for ground equipment manufacturing, according to an industry association. Federal agencies also own and operate satellites. For example, the U.S. military and intelligence communities have satellites to provide capabilities for reconnaissance, surveillance, early warning of missile launches, weather forecasts, navigation, and communications. In addition, some federal civilian agencies own satellites that are used for communications, scientific studies, and weather forecasting. Further, federal agencies use commercial satellites for services such as communications, data transmission, and remote sensing. For example, DOD typically relies on commercial satellites to fulfill its communications and information transmission requirements for non–mission-critical data and to augment its military satellite capabilities. The National Defense Industrial Association (NDIA) reported in December 1998 that the government’s overall use of commercial satellites for communications and remote sensing is expected to grow significantly because of increased communications requirements. According to a DOD official, the department’s reliance on commercial satellites is expected to grow through 2020. After 2020, DOD officials anticipate that commercial satellites will provide only surge capacity, as additional military satellites are expected to be operational. In addition to the U.S. military, several civilian government agencies also rely on commercial satellite systems. Table 1 provides brief descriptions of the use of commercial satellites by four civilian agencies included in our review. Collectively, the federal government does not dominate the commercial satellite market. According to commercial satellite industry officials, the revenue provided to the satellite industry by the federal government represents about 10 percent of the commercial satellite market. However, the importance of commercial satellites for government operations is evident during times of conflict. For example, according to a DOD study, commercial communications satellites were used in 45 percent of all communications between the United States and the Persian Gulf region during Desert Shield/Desert Storm. Further, during operations in Somalia from December 1992 through March 1994, U.S. military and commercial satellite coverage was not available, so Russian commercial satellites were used. DOD currently reports approximately 50 percent reliance on commercial satellites for wideband services, which are leased through the Defense Information Systems Agency’s Commercial Satellite Communications Branch. The commercial satellite industry is a global industry that includes many foreign-owned corporations as well as partnerships between U.S. and foreign corporations. As a result, the U.S. government depends on foreign and international companies. For example, some commercial space systems of foreign origin are used by the U.S. military for imagery and communications support. NDIA reported that foreign ownership of satellites is expected to grow and predicted that by 2010, 80 percent of commercial communication satellite services could be provided by foreign- owned companies. This globalization of the satellite industry could affect the availability of commercial satellite systems to U.S. government or commercial entities through frequency allocations, tariffs, politics, and international law. A satellite system consists of ground stations, tracking and control links (commonly referred to as the tracking, telemetry, and control (TT&C) links) and data links, and satellites. Figure 1 illustrates the basic satellite system components. As the figure shows, two kinds of ground stations are associated with satellites: control stations and communications stations. Control stations perform tracking and control functions to ensure that satellites remain in the proper orbits (commonly referred to by the industry as “station keeping”) and to monitor their performance. Communications ground stations process imagery, voice, or other data and provide, in many cases, a link to ground-based terrestrial network interconnections. The links between the two types of ground stations and the satellites are referred to by their function: TT&C and data links. TT&C links exchange commands and status information between control ground stations and satellites. Data links exchange communications, navigation, and imaging data between communications ground stations and satellites. As shown in figure 1, links are also distinguished by the direction of transmission: uplinks go from Earth to space, and downlinks from space to Earth. Satellites can also communicate with each other; these links are referred to as cross-links. The final component of the system is the satellite. Every satellite has a “payload” and a “bus.” The payload contains all the equipment a satellite needs to perform its function, and it differs for every type of satellite. For example, the payload for a weather satellite includes cameras to take pictures of cloud formations, while the payload for a communications satellite includes transponders to relay data (for example, television or telephone signals). The bus carries the payload and additional equipment into space and provides electrical power, computers, and propulsion to the entire spacecraft. A satellite can serve simply as a relay between a source and a destination (for example, a communications satellite), or it can perform processing of data and communicate the data to a communications ground station (for example, an imaging satellite). Satellite systems face unintentional threats to all parts of the system; such threats can be ground-based, space-based, and interference-oriented. The probability of these threats occurring and the difficulty of exploiting these vulnerabilities vary. Table 2 displays some of these threats and the vulnerable components. Ground stations are vulnerable to damage or destruction by natural terrestrial threats such as earthquakes, floods, thunderstorms, lightning, dust storms, heavy snows, tropical storms, tornadoes, corrosive sea spray, and salt air. In addition, they could also be affected by natural conditions and environmental hazards, such as air pollution and adverse temperature environments, as well as power outages. Satellites are physically vulnerable to space-based environmental anomalies resulting from natural conditions and man-made artifacts. Space-based threats include solar and cosmic radiation and related phenomena, solar disturbances, temperature variations, and natural objects (meteoroids and asteroids). In addition, the growing number of satellites is contributing to the problem of space “junk” (spacecraft and debris). As of May 2002, DOD identified over 9,000 man-made objects in space, including active satellites. As additional satellites are developed and deployed, DOD officials stated that the threat of collisions caused by the proliferation of satellites and accompanying debris could increase. Links are vulnerable both to natural conditions (in space and in the atmosphere) and to congestion. Links can be severely degraded by the effects of solar activity and atmospheric and solar disturbances. Both orbital and spectral congestion are a threat to links (as well as to satellites). Such congestion may restrict the future use of potential orbits and frequencies and cause unintentional interference to satellite services. According to one commercial service provider, satellite service providers worldwide work together to resolve interference problems, which are common. In addition, commercial satellite interference is regulated both internationally and nationally. The International Telecommunication Union specifies interference resolution policies and procedures, including those for harmful interference. Further, within the United States, the Federal Communications Commission (FCC) has the capability to track the location of interference, at a service provider’s request. Also, service providers told us that they could locate and identify unintentional or unauthorized users through a technique called triangulation. Once an unauthorized user is located, a commercial service provider can jam that user’s signal if the user cannot be persuaded to stop using the satellite. However, according to industry officials, typically an unauthorized user would be identified, located, and contacted through a combination of industry and government resources before such jamming would be needed. In addition, satellite systems are vulnerable to many forms of intentional human attacks that are intended to destroy ground stations and satellites or interfere with the TT&C links, data links, and cross-links. According to DOD and the private sector, the probability of these threats occurring and the difficulty of exploiting these vulnerabilities vary. Table 3 shows some of these intentional threats. All types of ground stations are potentially vulnerable to threats of physical attack and sabotage. These threats could target all satellite ground components, including launch facilities, command and control facilities, and supporting infrastructures. Space-based threats to satellites are proliferating as a result of the growing availability of technology around the world. According to DOD, potential space-based weapons include interceptors, such as space mines and orbiting space-to-space missiles, and directed-energy weapons. Directed- energy weapons include ground-based, airborne, and space-based weapons that use laser energy to damage or destroy satellite services, and nuclear weapons that generate nuclear radiation and electronic pulses, resulting in direct damage to the orbital electronics by the primary and secondary effects of a detonation. Ground stations, links, and supporting communications networks are all vulnerable to cyber attacks. Potential cyber attacks include denial of service, malicious software, unauthorized monitoring and disclosure of sensitive information (data interception), injection of fake signals or traffic (“spoofing”), and unauthorized modification or deliberate corruption of network information, services, and databases. For example, malicious software (such as computer viruses) can be (1) implanted into computer systems during development or inserted during operations; (2) used to manipulate network protocols, deny data or service, destroy data or software, and corrupt, modify, or compromise data; and (3) used to attack processor-controlled transmission equipment, control systems, or the information being passed. Links are particularly susceptible to electronic interference threats capable of disrupting or denying satellite communications. These threats include spoofing and jamming. A spoofer emits false, but plausible, signals for deception purposes. If false commands could be inserted into a satellite’s command receiver (spoofing the receiver), they could cause the spacecraft to tumble or otherwise destroy itself. It is also feasible to insert false information or computer viruses into the terrestrial computer networks associated with a space system, either remotely or through an on-site connection. Such an attack could lead to space system degradation or even complete loss of spacecraft utility. A jammer emits noise-like signals in an effort to mask or prevent the reception of desired signals and can be used to disrupt uplinks, downlinks, and cross-links. An uplink jammer attempts to inject noise or some other signal into the targeted satellites’ uplink receivers. In general, an uplink jammer must be roughly as powerful as the emitter associated with the link being jammed. Downlink jamming attempts to inject noise or some other signal directly into earth terminal receivers. The targets of downlink jammers are ground- based satellite data receivers, ranging from large fixed ground sites to handheld Global Positioning System (GPS) user terminals. Since downlink jammers have a range advantage over the space-based emitters, they can often be much less powerful. Downlink jamming is generally easier to accomplish than uplink jamming, since very low-power jammers are often suitable. Since a downlink may be received by multiple earth terminals, it is often more difficult to jam more than a few earth terminals through downlink jamming than through uplink jamming, especially if the receiver terminals are dispersed across a significant geographical area. A cross-link jammer attempts to inject noise or some other signal between two satellites communicating directly with each other. Because it is considered the most complex and difficult approach to satellite jamming, according to a DOD document, cross-link jamming is considered a lower probability threat than uplink and downlink jamming. Satellite services have been disrupted or denied as a result of system vulnerabilities. Below is a list of satellite-related incidents that have been publicly reported in which services were interrupted unintentionally or intentionally because of satellites’ vulnerabilities to jamming and equipment failure: In April 1986, an insider, working alone under the name “Captain Midnight” at a commercial satellite transmission center in central Florida, succeeded in disrupting a cable network’s eastern uplink feed to the Galaxy I satellite. Although this event was a minor annoyance, it had the potential for disrupting services to satellite users. Starting in 1995, MED-TV, a Kurdish satellite channel, was intentionally jammed (and eventually had its license revoked) because its broadcasts promoted terrorism and violence. In 1997, while a GPS transmitter was being tested on the ground, it unintentionally interfered with the GPS receivers of a commercial aircraft in the area. The plane temporarily lost all of its GPS information. In 1997, Indonesia intentionally interfered with and denied the services of a commercial satellite belonging to the South Pacific island kingdom of Tonga because of a satellite orbital slot dispute. In 1998, the failure of PANAMSAT’s Galaxy IV satellite, attributable to an on-board processor anomaly, disabled 80 to 90 percent of 45 million pagers across the United States for 2 to 4 days, leaving approximately 70 percent of a major oil company’s customers without the ability to pay for services at the pump. Recognizing that our nation’s critical infrastructures, including telecommunications, energy, banking and finance, transportation, and satellites, are the foundation of our economy, national security, and quality of life, in October 1997 the President’s Commission on Critical Infrastructure Protection issued a report recommending several measures to achieve a higher level of protection of critical infrastructures. These measures included industry cooperation and information sharing, the creation of a national organization structure, a revised program of research and development, a broad program of awareness and education, and reconsideration of laws related to infrastructure protection. The report also described the potentially devastating implications of poor information security from a national perspective. The report stated that a comprehensive effort would need to “include a system of surveillance, assessment, early warning, and response mechanisms to mitigate the potential for cyber threats.” Presidential Decision Directive (PDD) 63, issued in 1998 to improve the federal government’s approach to critical infrastructure protection (CIP), describes a strategy for cooperative efforts by government and the private sector to protect critical computer-dependent operations. The directive called on the federal government to serve as a model of how infrastructure assurance is best achieved, and it designated lead agencies to work with private-sector and government entities. To accomplish its goals, PDD 63 designated and established organizations to provide central coordination and support, including the Critical Infrastructure Assurance Office (CIAO), an interagency office that is housed in the Department of Commerce, which was established to develop a national plan for CIP on the basis of infrastructure plans developed by the private sector and federal agencies; and the National Infrastructure Protection Center, an organization within the FBI, which was expanded to address national-level threat assessment, warning, vulnerability, and law enforcement investigation and response. To ensure coverage of critical sectors, PDD 63 also identified eight private- sector infrastructures and five special functions; information and communication is one of the eight infrastructures identified. Further, the directive designated lead federal agencies to work with the private-sector entities. For example, Commerce is the lead agency for the information and communication sector (the responsible organization within Commerce is the National Telecommunications and Information Administration), and the Department of Energy is the lead agency for the electrical power industry. Similarly, for special function areas, DOD is responsible for national defense, and the Department of State is responsible for foreign affairs. To facilitate private-sector participation, PDD 63 also encouraged creation of information sharing and analysis centers (ISACs) that could serve as a mechanism for gathering, analyzing, and appropriately sanitizing and disseminating information to and from infrastructure sectors and the federal government through the FBI’s National Infrastructure Protection Center. Although most of the ISACs are operated by private-sector organizations, the telecommunications ISAC is operated by a government entity, the National Coordinating Center for Telecommunications (NCC), which is part of the National Communications System. In September 2001, we reported that six ISACs within five infrastructures had been established to gather and share information about vulnerabilities, attempted intrusions, and attacks within their respective infrastructure sectors and to meet specific sector objectives. In addition, at that time, we reported that the formation of at least three more ISACs for various infrastructure sectors was being discussed. Figure 2 displays a high-level overview of several organizations with CIP responsibilities, as outlined by PDD 63. The most recent federal cyber CIP guidance was issued in October 2001, when President Bush signed Executive Order 13231, Critical Infrastructure Protection in the Information Age, which continues many PDD 63 activities by focusing on cyber threats to critical infrastructures and creating the President’s Board on CIP to coordinate cyber-related federal efforts. The Special Advisor to the President for Cyberspace Security chairs the board. In July 2002, the President issued a national strategy for homeland security that identifies 14 industry sectors, including the 8 identified in PDD 63. The additional 6 are agriculture, food, defense industrial base, chemical industry and hazardous materials, postal and shipping, and national monuments and icons. The U.S. national space policy provides goals and guidelines for the U.S. space program, including the use of commercial satellites. In February 1991, the President issued National Space Policy Directive 3, which requires U.S. government agencies to use commercially available space products and services to the fullest extent feasible. Presidential Decision Directive 49, dated September 19, 1996, provides goals for the U.S. space program and establishes space guidelines. For example, a guideline regarding the commercial space industry stated that U.S. government agencies shall purchase commercially available space goods and services to the fullest extent feasible, and that, except for reasons of national security or public safety, they shall not conduct activities with commercial applications that preclude or deter commercial space activities. Neither the National Space Policy Directive 3 nor PDD 49 specifically addresses the security of satellite systems used by federal agencies. However, PDD 49 states that critical capabilities necessary for executing space missions must be ensured. Security of satellite systems has been addressed in policy documents issued by the National Security Telecommunications and Information Systems Security Committee (recently renamed the Committee on National Security Systems). The initial policy was set forth in National Policy on Application of Communications Security to U.S. Civil and Commercial Space Systems, National Telecommunications and Information Systems Security Policy (NTISSP) No. 1 (June 17, 1985), which governed the protection of command and control uplinks for government-used satellites other than military. This policy, which applies to space systems launched 5 years from the policy date (June 17, 1985), limits government and government contractor use of U.S. civil and commercial satellites to those systems using accepted techniques to protect the command and control uplinks. In January 2001, a new policy governing satellite system security was issued, superseding NTISSP No. 1: National Information Assurance (IA) Policy for U.S. Space Systems, National Security Telecommunications and Information Systems Security Policy (NSTISSP) No. 12. NSTISSP No. 12, which focuses on systems used for U.S. national security information, aims to ensure that information assurance is factored into “the planning, design, launch, sustained operation, and deactivation of federal and commercial space systems used to collect, generate, process, store, display, or transmit and receive such information.” The policy also includes a provision addressing commercial imagery satellites that may be used to satisfy national security requirements during periods of conflict or war. The policy states that approved U.S. cryptographies shall be used to provide confidentiality for (1) command and control uplinks, (2) data links that transmit national security information between the ground and the space platforms, (3) cross-links between space platforms, and (4) downlinks from space platforms to mission ground or processing centers. A range of security techniques is available for protecting satellite systems: for example, using encryption on TT&C and data links, using robust parts on the satellites, and applying physical and cyber security controls at the ground stations. The application of these techniques varies across federal agencies and the private sector. Commercial satellite service providers typically use some of these security techniques to meet most of their customers’ security requirements, and they base their decisions on business objectives. Generally, the military applies more stringent security techniques to their satellites than do civilian agencies or the private sector. Table 4 provides an overview of security techniques by satellite system component. Techniques to protect satellite links include the use of encryption, high- power radio frequency (RF) uplinks, spread spectrum communications, and a digital interface unique to each satellite. Commercial satellite service providers, federal satellite owners and operators, and customers stated that they typically use at least one of these techniques. Usually, only the military uses spread spectrum techniques. Both TT&C and data links can be protected by encryption: generally, for TT&C links, the tracking and control uplink is encrypted, while the telemetry downlink is not. Encryption is the transformation of ordinary data (commonly referred to as plaintext) into a code form (ciphertext) and back into plaintext, using a mathematical process called an algorithm. Encryption can be used on data to (1) hide information content, (2) prevent undetected modification, and (3) prevent unauthorized use. Different levels of encryption provide different levels of protection, including encryption approved by the National Security Agency (NSA) that is used for national security information. NSTISSP No. 12 requires approved U.S. cryptographies on TT&C and data links for U.S. space systems transmitting national security information. For satellite systems transmitting non–national-security information, there is no policy that security is required for the links, but satellite service providers and federal satellite owners and operators included in our review stated that they protect tracking and control uplinks with encryption. However, NSA officials stated that not all commercial providers’ tracking and control uplinks are encrypted. Concerning the data links, customers are responsible for determining whether they are encrypted or not. Most commercial satellite systems are designed for “open access,” meaning that a transmitted signal is broadcast universally and unprotected. A second security technique for links is the use of high-power RF uplinks: that is, a large antenna used to send a high-power signal from the ground station to the satellite. To intentionally interfere with a satellite’s links, an attacker would need a large antenna with a powerful radio transmitter (as well as considerable technical knowledge). Two of the commercial providers we talked to stated that they use high-power RF uplinks as part of their satellite security approach. According to one commercial provider, most satellite operators use high-power RF uplinks for TT&C connections to block potential unauthorized users’ attempts to interfere with or jam the TT&C uplink. A third technique for protecting links is the use of spread spectrum communication, a technique used by the military and not normally implemented by commercial providers. Spread spectrum communication is a form of wireless communication in which the frequency of the transmitted signal is deliberately varied and spread over a wide frequency band. Because the frequency of the transmitted signal is deliberately varied, spread spectrum communication can provide security to links because it increases the power required to jam the signals even if they are detected. Spread spectrum communication is primarily used to optimize the efficiency of bandwidth within a frequency range, but it also provides security benefits. Finally, TT&C links can be protected by the use of a unique digital interface between the ground station and the satellite. According to one commercial satellite service provider, most commercial providers use a unique digital interface with each satellite. Tracking and control instructions sent from the ground station to the satellite are encoded and formatted in a way that is not publicly known. Officials from the commercial satellite vendor stated that even if an attacker were successful in hacking one satellite, the unique interface could prevent the attacker from taking control of an entire fleet of satellites. In addition, communication with the digital interface to the tracking and control links requires high transmission power, so that an attacker would need a large, powerful antenna. Satellites can be protected by (1) “hardening,” through designs and components that are built to be robust enough to withstand harsh space environments and deliberate attacks, and (2) the use of redundancy— backup systems and components. Commercial satellite service providers and federal civilian owners and operators told us that they do not harden their satellites to the extent that the military does. Commercial providers, federal civilian owners and operators, and the military use varying degrees of redundancy to protect their satellites. As satellites rely increasingly on on-board information processing, hardening is becoming more important as a security technique. Hardening in this context includes physical hardening and electronic-component hardening. Satellites can be hardened against natural environmental conditions and deliberate attack, and to ensure survivability. Most hardening efforts are focused on providing sufficient protection to electronic components in satellites so that they can withstand natural environmental conditions over the expected lifespan of the satellite, which could be nearly 15 years. For hardening against deliberate attacks, some techniques proposed include the use of reflective surfaces, shutters, and nonabsorbing materials. According to commercial satellite providers, commercial satellites are not normally hardened against non-natural nuclear radiation because it is too costly. The drawback of hardening is the cost and the manufacturing and operational burdens that it imposes on satellite manufacturers and providers. The use of high-quality space parts is another approach to hardening. Although all parts used in satellites are designed to withstand natural environmental conditions, some very high-quality parts that have undergone rigorous testing and have appreciably higher hardness than standard space parts are also available, including those referred to as class “S” parts. These higher quality space parts cost significantly more than regular space parts—partly because of the significant testing procedures and more limited number of commercial providers manufacturing hardened parts. According to an industry official, high-quality space parts are used by the military and are generally not used on commercial satellites. Commercial satellite providers stated that they also use redundancy to ensure availability, through backup satellites and redundant features on individual satellites. Backup satellites enable an organization to continue operations if a primary satellite fails. One provider stated that it would rather spend resources on backup satellites than on hardening future satellites or encrypting the TT&C and data links. The provider also expressed the view that a greater number of smaller, less costly satellites provides greater reliability than is provided by few large satellites, because there is more redundancy. According to an industry consulting group, backup satellites, which include in-orbit and on-ground satellites, are part of commercial satellite providers’ security approaches. When backup satellites are used, they are commonly kept in orbit; keeping backup satellites on the ground is possible, but it has the disadvantage that the system cannot immediately continue operations if the primary satellite fails. According to one provider, it could take 4 to 6 months to launch a backup satellite stored on the ground. In addition, individual satellites can be designed to have redundant parts. For example, a commercial satellite provider told us that redundant processors, antennas, control systems, transponders, and other equipment are frequently used to ensure satellite survivability. Another example is that satellites could have two completely separate sets of hardware and two paths for software and information; this is referred to as having an A-side and a B-side. In general, this technique is not used on commercial satellites, according to an industry official. Techniques to protect ground stations include physical controls as well as logical security controls, hardening, and backup ground stations. Ground stations are important because they control the satellite and receive and process data. One provider stated that providing physical security measures to ground stations is important because the greatest security threat to satellite systems exists at that location. Locations of ground stations are usually known and accessible; thus, they require physical security controls such as fencing, guards, and internal security. One provider emphasized the importance of performing background checks on employees. Civilian agencies also stated that they protected ground stations through various physical security controls: ground stations are fenced, guarded, and secured inside with access control devices, such as key cards. The commercial satellite service providers included in our review stated that they did not protect their ground stations through hardening; this technique is primarily used by the military. Similarly, most civilian agencies we talked to do not harden their ground stations. A ground station would be considered hardened if it had protective measures to enable it to withstand destructive forces such as explosions, natural disasters, or ionizing radiation. Commercial satellite providers and federal agency satellite owners and operators also may maintain off-line or fully redundant ground stations to ensure availability, which can be used if the primary ground station is disrupted or destroyed. Off-line backup ground stations may not be staffed or managed by the same company, or on a full-time basis. In addition, off- line backup ground stations are not necessarily designed for long-term control of satellites. On the other hand, one commercial service provider stated that it maintained fully redundant, co-primary, geographically separated ground stations that are fully staffed with trained operators, gated with restricted access, and capable of long-term uninterruptible power. In addition, these ground stations periodically alternated which satellites they were responsible for as a training exercise. They also operated 24 hours a day, 7 days a week, and monitored each other. To mitigate the risk associated with using commercial satellites, federal agencies focus on areas within their responsibility and control: data links and communication ground stations. According to federal agency officials, agencies reduce risks associated with using commercial satellites by (1) protecting the data’s authentication and confidentiality with encryption, (2) securing the data ground stations with physical security controls and backup sites, and (3) ensuring service availability through redundancy and dedicated services. Federal agencies rely on commercial satellite service providers to provide the security techniques for the TT&C links, satellites, and satellite control stations. However, federal agency officials stated that they were unable to impose specific security requirements on commercial satellite service providers. Further, federal policy governing the security of satellite systems used by agencies is limited because it addresses only those satellites used for national security information, pertains only to techniques associated with the links between ground stations and satellites and between satellites (cross-links), and does not have an enforcement mechanism. Without appropriate governmentwide policy to address the security of all satellite components and of non–national-security information, federal agencies may not, for information with similar sensitivity and criticality, consistently (1) secure data links and communication ground stations or (2) use satellites that have certain security controls that enhance availability. Recent initiatives by the Executive Branch have acknowledged these policy limitations, but we are not aware of specific actions to address them. For critical data, agencies primarily use different types of encryption to reduce the risk of unauthorized use or changes. For example, the military services use encryption to protect most data communicated over satellites—either commercially owned or military. DOD officials stated that the military services use the strongest encryption algorithms available from the NSA for the most sensitive information—national security information. For non–national-security information, the military services use less strong encryption algorithms, according to DOD officials. The National Aeronautics and Space Administration (NASA) also uses NSA-provided encryption for critical operations, such as human mission communications (that is, for space shuttle missions). Using NSA encryption requires encryption and decryption hardware at the data’s source and destination, respectively. The use of this hardware requires agencies and satellite service providers to apply special physical protection procedures—such as restricting access to the equipment and allowing no access by foreign nationals. For the next generation of government-owned weather satellites, the National Oceanic and Atmospheric Administration (NOAA) and the U.S. military plan to use an NSA-approved commercial encryption package that will avoid the need for special equipment and allow them to restrict the data to authorized users with user IDs and passwords. In addition, NOAA will be able to encrypt broadcast weather data over particular regions of the world. According to NASA and NOAA officials, some agency data do not require protection because the risk of unauthorized use or changes is not significant or because the information is intended to be available to a broad audience. For example, NASA uses satellites to provide large bandwidth to transmit scientific data from remote locations. According to NASA officials, the agency does not protect the transmission of these data because they are considered academic in nature and low risk. In addition, the Federal Aviation Administration (FAA) does not encrypt links between control centers or between control centers and aircraft, because the data on these links go from specific air traffic control centers to specific aircraft. According to FAA officials, if the transmissions were required to be encrypted, every aircraft would have to acquire costly decryption equipment. Further, according to National Weather Service officials, the service does not protect the weather data transmitted over commercial satellites because the service considers it important to make this information widely available not only to its sites but also to government agencies, commercial partners, universities, and others with the appropriate equipment. Federal agencies also control the security of the data ground stations that send and receive data over satellites. To protect these ground stations, federal officials stated that they use physical security techniques, such as those discussed earlier. They protect their facilities and equipment from unintentional and intentional threats (such as wind, snow, and vandalism). For example, according to FAA officials, in certain locations, FAA has hardened remote satellite ground stations against high wind and cold weather conditions. In addition, NOAA officials stated that many of their antennas are hurricane protected. Further, federal officials stated that they perform background checks on personnel. NOAA officials stated that they perform background checks on satellite technicians to the secret clearance level. Federal officials also stated that their ground stations are further protected because they are located on large, protected federal facilities. For example, military ground stations can be located on protected U.S. or allied military bases. Also, National Weather Service officials stated that the service’s primary communications uplink is located on a highly secured federal site. Further, according to DOD officials, personnel are expected to protect the satellite equipment provided to them in the field. Agencies also had backup communications sites that were geographically separated, including being on different power grids. For example, according to an official, the National Weather Service’s planned backup communications uplink site will be geographically separated from the primary site and will be on a secured federal site. Federal agencies also reduce the risk associated with using commercial satellites by having redundant telecommunications capabilities. For example, for the program that provides Alaska’s air traffic control, FAA relies on two satellites to provide backup capacity for each other. In addition to this redundancy, FAA has requested its commercial satellite service provider to preferentially provide services to FAA’s Alaska air traffic control system over other customers carried on the same satellites. Another FAA program provides primary communications capabilities in remote locations and has redundant satellite capacity that can be used if the primary satellite fails. The National Weather Service is another example. The service uses redundancy to ensure the availability of satellite services that broadcast weather data to its 160 locations by contracting for priority services that include guarantees of additional transponders or, if the satellite fails, of services on other satellites. In addition, the service plans to own and operate a backup communications center that is geographically separated from the primary site. The service performs monthly tests of the backup site’s ability to provide the communications uplink to the commercial satellites. Federal agencies rely on the commercial satellite service provider’s security techniques for the TT&C links, satellites, and satellite control ground stations. Figure 3 graphically depicts the areas not controlled by federal agencies. To mitigate the risk associated with not controlling aspects of commercial satellite security other than protecting the data links and communications ground stations, federal agencies attempt to specify availability and reliability requirements, but they acknowledge having had limited influence over security techniques employed by commercial satellite service providers. Federal officials stated that they are usually constrained by the availability and reliability levels that can be provided by their telecommunications service providers. For example, for one program, an FAA contract requires 99.7 percent availability in recognition of the satellite service provider’s limitations, though the agency typically receives 99.8 percent. However, FAA would prefer 99.999 percent availability on this program’s satellite communications, which is similar to the reliability level being received from terrestrial networks that FAA uses where available. According to one FAA official, greater satellite reliability could be gained by having multiple satellite service providers furnish communications over the same regions, but this approach is too costly. Although maintaining established or contracted reliability levels generally requires that service providers maintain some level of security, federal officials stated that their agencies cannot usually require commercial satellite service providers to use specific security techniques. Commercial satellite service providers have established operational procedures, including security techniques, some of which, according to officials, cannot be easily changed. For example, once a satellite is launched, additional hardening or encryption of the TT&C link is difficult, if not impossible. Some service providers offer the capability to encrypt the command uplinks. According to FAA officials, FAA is in the process of performing risk assessments, in compliance with its own information systems security policies, on the commercial services (including satellite services) that it acquires. Based on these risk assessments, FAA officials plan to accredit and certify the security of the agency’s program that relies on commercial satellites. Federal policy governing agencies’ actions regarding the security of commercial satellite systems is limited, in that it (1) pertains only to satellites used for national security purposes, (2) addresses security techniques associated with links only, and (3) does not have an enforcement mechanism for ensuring compliance. Although the Executive Branch has recently acknowledged these policy limitations, we are not aware of specific actions to address them. NSTISSP No. 12, the current policy governing satellite system security, applies only to U.S. space systems (U.S. government-owned or commercially owned and operated space systems) that are used for national security information and to imagery satellites that are or could be used for national security purposes during periods of conflict or war. It does not apply to systems that process sensitive, non–national-security information. Issued by the National Security Telecommunications and Information Systems Security Committee (now the Committee on National Security Systems (CNSS)), NSTISSP No. 12 has as its primary objective “to ensure that information assurance is factored into the planning, design, launch, sustained operation, and deactivation of U.S. space systems used to collect, generate, process, store, display, or transmit/receive national security information, as well as any supporting or related national security systems.” NSTISSP No. 12 also suggests that federal agencies may want to consider applying the policy’s information assurance requirements to those space systems that are essential to the conduct of agencies’ unclassified missions, or to the operation and maintenance of critical infrastructures. In addition to having a focus only on national security, the policy is further limited in that it addresses security techniques only for the links. It does not include physical security requirements for the satellites or ground stations. Specifically, for satellite systems to which it applies, NSTISSP No. 12 states that approved U.S. cryptographies shall be used to provide confidentiality for the (1) command and control uplinks, (2) data links that transmit national security information between the ground and the space platforms, (3) cross-links between space platforms, and (4) downlinks from space platforms to mission ground or processing centers. Also, there is no enforcement mechanism to ensure agency compliance with the policy. According to one NSA official on the CNSS support staff, enforcement of such policies has always been a problem, because no one has the authority to force agencies’ compliance with them. According to some agency officials, agencies typically do not test their service providers’ implementation of security procedures. According to the federal and commercial officials involved in our study, no commercial satellite is currently fully compliant with NSTISSP No. 12, and gaining support to build compliant systems would be difficult. According to commercial satellite industry officials, there is no business case for voluntarily following the NSTISSP No. 12 requirements and implementing them in the satellites and ground stations, including networks that are currently being developed. Commercial satellite service providers also raised concerns about the impact of NSTISSP No. 12 on their future commercial satellite systems. Several officials stated that if compliance were required, it would significantly increase the complexity of managing the satellites, because encryption key management is cumbersome, and appropriately controlling access to the hardware is difficult in global companies that have many foreign nationals. Also, commercial satellite service providers stated that encrypting the TT&C links could increase the difficulty of troubleshooting, for example, because the time it takes to encrypt and then decrypt a command could become significant when a TT&C problem arises. Other issues raised that make NSTISSP No. 12 difficult to implement include the following: Some satellite service providers view compliance with it as not necessary for selling services to the government, since in the past agencies have used satellites that did not comply with prior security policy. For example, DOD has contracted for services on satellites that were not compliant with the previous and existing policy for various reasons. However, at times, noncompliant satellites have been DOD’s only option. Commercial clients will likely be unwilling to pay the additional cost associated with higher levels of encryption. Significant costs would include licensing agreements and redesigning hardware for new encryption technologies. Satellite industry officials stated that their experience shows that encryption does not really provide much greater security than other techniques that protect TT&C and data links. Notwithstanding the above issues, in response to the policy’s limitations, DOD officials from the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence stated that the department had started drafting a policy that would require all commercial satellite systems used by DOD to meet NSTISSP No. 12 requirements. This draft policy includes a waiver process requiring prior approval before any satellite system could be used that did not meet the security requirements. If approved, this policy would apply only to DOD. DOD officials are anticipating that this policy will be approved by the end of 2002. In addition to DOD’s efforts, a CNSS official stated that a draft policy was developed to address the lack of national policy or guidance for the assurance of non–national-security information. Although this policy was broad in scope, covering many aspects of information assurance, this official stated that satellite security could be included in its scope. However, this official also stated that the CNSS’s efforts ended in April 2002 when it sent the draft policy to the Director of the Office of Management and Budget (OMB) for consideration, because the CNSS lacks authority in the area of non–national-security information. In transmitting the draft policy to the Director, OMB, the CNSS Chair encouraged the development of this policy as a first step in establishing a national policy addressing the protection of information technology systems that process sensitive homeland security information, as well as information associated with the operation of critical infrastructures. According to an OMB official, the draft policy is valuable input for future policy decisions related to protecting government information. Recognizing that space activities are indispensable to our national security and economic vitality, on May 8, 2002, the President’s National Security Advisor sent a memorandum to top cabinet officials stating that she plans to recommend that the White House initiate a review of U.S. space policies that have been in place since 1996. To date, we are not aware of specific actions taken in response to the draft policy sent to OMB and the National Security Advisor’s memorandum. Without appropriate governmentwide policy to address the security of all satellite components and of non–national-security information, federal agencies may not, for information with similar sensitivity and criticality, consistently (1) secure data links and communication ground stations or (2) use satellites that have certain security controls that enhance availability. As a result, federal agencies risk losing needed capabilities in the event of the exploitation of satellite system vulnerabilities. PDD 63 was issued to improve the federal approach to protecting our nation’s critical infrastructures by establishing partnerships between private-sector entities and the federal government. Although this directive addressed the satellite vulnerabilities of GPS and led to a detailed vulnerability assessment, the satellite industry has not received focused attention as part of this national effort. Given the importance of commercial satellites to our nation’s economy, the federal government’s growing reliance on them, and the dependency of many other infrastructures on satellites, not including them in our national CIP approach creates the risk that these critical components of our information and communication infrastructure may not receive needed attention. Both PDD 63 and the report of the President’s Commission on Critical Infrastructure Protection (October 1997) addressed satellite vulnerabilities of the GPS and made several recommendations to the Secretary of Transportation, including to fully evaluate these vulnerabilities and actual and potential sources of interference to the system. In August 2001, the John A. Volpe Transportation Systems Center issued a report that includes an assessment of the vulnerabilities of the GPS; analysis of civilian aviation, maritime, and surface uses; assessment of the ways that users may be affected by short- or long-term GPS outages; and recommendations to minimize the safety and operational impacts of such outages. One overarching finding was that because of the increasing reliance of transportation on GPS, the consequences of loss of the signal could be severe in terms of safety and of environmental and economic damage to the nation. Despite the focused attention on GPS, other aspects of the satellite industry have not received national attention. In PDD 63, commercial satellites were not identified as a critical infrastructure (or as part of one), and thus are not specifically included as part of our nation’s approach to protecting critical infrastructures. Further, PDD 63 does not explicitly include the commercial satellite industry as part of the information and communications infrastructure sector, nor does the newly issued national strategy for homeland security. Although there have been discussions about expanding the coverage of individual sectors (particularly since the events of September 11, 2001), National Telecommunications and Information Administration (NTIA) officials stated that there are no specific plans to build better partnerships with satellite builders and operators as part of their efforts. CIAO officials also told us that there are no specific plans to include commercial satellite companies in current national efforts. However, CIAO added that some of the current infrastructure sectors may address satellites in their plans for industry vulnerability assessments and remediation, since some of these infrastructures rely on satellites for communications or other functions, such as tracking shipments or trucks, or monitoring the condition of equipment. The telecommunications ISAC reiterated NTIA’s and CIAO’s comments that there are no specific plans to include satellites in national CIP efforts. The ISAC for the telecommunications sector, recognized by the President’s National Security Council in January 2000, is the National Coordinating Center for Telecommunications (NCC), which is operated by the National Communications System. As such, NCC is responsible for facilitating the exchange of information among government and industry participants regarding computer-based vulnerability, threat, and intrusion information affecting the telecommunications infrastructure. Also, the center analyzes data received from telecommunications industry members, government, and other sources to avoid or lessen the impact of a crisis affecting the telecommunications infrastructure. Since its recognition as an ISAC, NCC membership has expanded beyond traditional telecommunications entities to include some aerospace companies such as Boeing and Raytheon, but the ISAC does not specifically focus on commercial satellites. Officials from one of the satellite service providers told us that they would endorse an ISAC-like forum to discuss vulnerabilities to commercial and military satellites. In July 2002, we recommended that when developing the strategy to guide federal CIP efforts, the Assistant to the President for National Security Affairs, the Assistant to the President for Homeland Security, and the Special Advisor to the President for Cyberspace Security ensure, among other things, that the strategy includes all relevant sectors and defines the key federal agencies’ roles and responsibilities associated with each of these sectors. Given the importance of satellites to the national economy, the federal government’s growing reliance on them, and the many threats that face them, failure to explicitly include satellites in the national approach to CIP leaves a critical aspect of the national infrastructure without focused attention. Commercial satellite service providers use a combination of techniques to protect their systems from unauthorized use and disruption, including hardware on satellites, physical and logical controls at ground stations, and encryption of the links. Although this level of protection may be adequate for many government requirements, commercial satellite systems lack the security features used in national security satellites for protection against deliberate disruption and exploitation. Federal agencies reduce the risk associated with their use of commercial satellites by controlling the satellite components within their responsibility—primarily the data links and communication ground stations. But the satellite service provider is typically responsible for most components—the satellite, TT&C links, and the satellite control ground stations. Because federal agencies rely on commercial satellite service providers for most security features, they also reduce their risk by having redundant capabilities in place. However, national satellite protection policy is limited because it pertains only to satellite systems that are used for national security information, addresses only techniques associated with the links, and does not have an enforcement mechanism. Recent initiatives by the Executive Branch have acknowledged these policy limitations, but we are not aware of specific actions taken to address them. Satellites are not specifically identified as part of our nation’s critical infrastructure protection approach, which relies heavily on public-private partnerships to secure our critical infrastructures. As a result, a national forum to gather and share information about industrywide vulnerabilities of the satellite industry does not exist, leaving a national critical infrastructure without focused attention. We recommend that in pursuing the draft policy submitted to OMB for completion and the recommended review of U.S. space policies, the Director of OMB and the Assistant to the President for National Security Affairs review the scope and enforcement of existing security-related space policy and promote the appropriate revisions of existing policies and the development of new policies to ensure that federal agencies appropriately address the concerns involved with the use of commercial satellites, including the sensitivity of information, security techniques, and enforcement mechanisms. Considering the importance of satellites to our national economy, the government’s growing reliance on them, and the threats that face them, we recommend that the Assistant to the President for National Security Affairs, the Assistant to the President for Homeland Security, and the Special Advisor to the President for Cyberspace Security consider recognizing the satellite industry as either a new infrastructure or part of an existing infrastructure. We received written comments on a draft of this report from the Deputy Assistant Secretary of Defense, Command, Control, Communications, Intelligence, Surveillance, and Reconnaissance (Space and Information Technology Programs), Department of Defense; the Chief of the Satellite Communications and Support Division, United States Space Command, Department of Defense; the Chief Financial Officer/Chief Administrative Officer, National Oceanic and Atmospheric Administration, Department of Commerce; and the Associate Deputy Administrator for Institutions, National Aeronautics and Space Administration. The Departments of Defense and Commerce and the National Aeronautics and Space Administration concurred with our findings and recommendations (see apps. II, III, and IV, respectively) and provided technical comments that have been incorporated in the report, as appropriate (some of these technical comments are reproduced in the appendixes). We also received technical oral comments from officials from the Critical Infrastructure Assurance Office, Department of Commerce; Federal Aviation Administration, Department of Transportation; Office of Management and Budget; and United States Secret Service, Department of Treasury; in addition, we received written and oral technical comments from five participating private-sector entities. Comments from all these organizations have been incorporated into the report, as appropriate. We did not receive comments from the Special Advisor to the President for Cyberspace Security. As we agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies of this report to other interested congressional committees and the heads of the agencies discussed in this report, as well as the private-sector participants. The report will also be available on GAO’s website at www.gao.gov. If you have any questions about matters discussed in this report, please contact me at (202) 512-3317 or contact Dave Powner, Assistant Director, at (303) 572-7316. We can also be reached by E-mail at [email protected] and [email protected], respectively. Contributors to this report include Barbara Collier, Michael Gilmore, Rahul Gupta, Kevin Secrest, Karl Seifert, Hai Tran, and Jim Weidner. Our objectives were to determine (1) what security techniques are available to protect satellite systems from unauthorized use, disruption, or damage; (2) how federal agencies reduce the risks associated with their use of commercial satellite systems; and (3) what federal critical infrastructure protection efforts are being undertaken to address satellite system security through improved government/private-sector cooperation. To accomplish these objectives, we reviewed technical documents, policy documents, and directives, and we interviewed pertinent officials from federal agencies and the private sector involved in manufacturing and operating satellites and providing satellite services. To determine what security techniques are available to protect satellite systems from unauthorized use, disruption, or damage, we reviewed technical documents and policy, such as NSTISSP No. 12 and various other sources, and we interviewed pertinent federal officials from the Department of Defense (DOD); the Federal Aviation Administration (FAA); the National Aeronautics and Space Administration (NASA), including the Goddard and Marshall Space Flight Centers; the National Oceanic and Atmospheric Administration (NOAA); the National Security Agency (NSA); and the Department of Treasury’s United States Secret Service. The DOD organizations whose documentation we reviewed and whose officials we interviewed included the Air Force; the Army; the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Cheyenne Mountain Air Force Station; the Defense Information Systems Agency; the National Security Space Architect; the Navy; and the U.S. Space Command. In addition, we reviewed documentation and interviewed officials from private-sector organizations that manufacture and operate satellite systems, including Intelsat, Lockheed Martin, Loral Space & Communications, Ltd. (Loral Skynet and Loral Space Systems groups), Northrop Grumman TASC, the Satellite Industry Association, and W.L. Pritchard & Co., L.C. We identified these organizations through relevant literature searches, discussions with organizations, and discussions with GAO personnel familiar with the satellite industry. We did not develop an all-inclusive list of security techniques, but we attempted to establish the most commonly used of the security techniques available. To determine how federal agencies reduce the risks associated with their use of commercial satellite systems, we identified and reviewed relevant federal policy, including National Security Telecommunications and Information Systems Security Committee policies and applicable federal agency policies, such as the FAA’s Information Systems Security Program Handbook. We also reviewed documentation and interviewed federal officials from DOD, FAA, NASA, NSA, and NOAA. In addition, in meetings with commercial service providers holding government contracts, we discussed any special requirements placed on commercial service providers by federal agencies. To determine what federal critical infrastructure protection (CIP) efforts were being undertaken to address satellite system security, we reviewed various orders, directives, and policies, such as Executive Order 13231 and PDD 63. In addition, we interviewed pertinent federal officials from the Critical Infrastructure Assurance Office, National Communications System/National Coordinating Center for Telecommunications, and National Telecommunications and Information Administration. Further, in interviews with commercial service providers, we discussed their involvement in national CIP-related activities. We performed our work in Washington, D.C.; Bedminster, New Jersey; Colorado Springs, Colorado; and Palo Alto, California, from December 2001 through June 2002, in accordance with generally accepted government auditing standards. We did not evaluate the effectiveness of security techniques being used by federal agencies and the private sector, or of the techniques used by federal agencies to reduce the risks associated with their use of commercial satellite systems. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily E-mail alert for newly released products” under the GAO Reports heading. | Government and private-sector entities rely on satellites for services such as communication, navigation, remote sensing, imaging, and weather and meteorological support. Disruption of satellite services, whether intentional or not, can have a major adverse economic impact. Techniques to protect satellite systems from unauthorized use and disruption include the use of robust hardware on satellites, physical security and logical access controls at ground stations, and encryption of the signals for tracking and controlling the satellite and of the data being sent to and from satellites. When using commercial satellites, federal agencies reduce risks by securing the data links and ground stations that send and receive data. However, federal agencies do not control the security of the tracking and control links, satellites, or tracking and control ground stations, which are typically the responsibility of the satellite service provider. It is important to the nation's economy and security to protect against attacks on its computer-dependent critical infrastructures (such as telecommunications, energy, and transportation), many of which are privately owned. In light of the nation's growing reliance on commercial satellites to meet military, civil, and private sector requirements, omitting satellites from the nation's approach to protecting critical infrastructure leaves an important aspect of our nation's infrastructures without focused attention. |
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Combating world hunger and malnutrition is a stated objective of the Food for Peace Act, which authorizes international food assistance for developing countries. The United States has also stated its commitment to the Millennium Development Goal to halve world hunger by 2015, and it supports the Scaling-Up Nutrition (SUN) movement to provide assistance to country-led efforts to address maternal and child malnutrition. To support SUN, the United States and others initiated the 1,000 Days public-private partnership, which aims to improve nutrition for pregnant and lactating mothers and children under 2. Adequate nutrition in this critical period in a child’s life is widely recognized to have the greatest impact on saving lives, developing a child’s cognitive and physical capacity, and mitigating the risk of chronic disease. According to the USAID Policy Framework 2011-2015, USAID plans to ensure that the quality of U.S. government food aid is improved within 3 years to meet the nutritional requirements of vulnerable populations overseas, including by developing new blended products and formulations to support pregnant and lactating mothers and children under 2. We previously reported that, although Title II emergency funding is intended to address short-term food needs, more than half of the funding in fiscal year 2010 was spent on multiyear emergency programs. See GAO-11-491. In 2011, the 14 countries that received U.S. emergency food assistance every year from fiscal years 2006 through 2011 were Afghanistan, Burundi, Central African Republic, Chad, Colombia, Democratic Republic of the Congo, Ethiopia, Kenya, Nepal, Rwanda, Somalia, Sudan, Tanzania, and Uganda. In addition, 23 percent of the emergency food commodities were delivered to 15 countries that received U.S. food assistance for 3 to 5 years from fiscal years 2006 through 2011. Three percent was delivered to four countries that received emergency U.S. food aid for 1 to 2 years. percent.$207 million, which accounted for about 17 percent of total Title II emergency funding. A higher percentage of the total population in Ethiopia suffers from malnutrition than in most other recipient countries, with 51 percent of children under 5 suffering from stunting. Ethiopia, one of the four countries we visited, received about WFP is the largest provider of global food aid and procurement. The countries that received the largest amounts of specialized food products from WFP were Ethiopia, Pakistan, Kenya, Niger, and Somalia. Specialized food products are designed to meet specific nutritional needs of vulnerable groups but are more costly than traditional food products. As a result, within a fixed budget, USAID and its implementing partners must decide whether to provide more nutritious but more costly food to fewer people, or less nutritious and less costly food to more people. In other words, they face a quality-quantity trade-off. Table 1 provides illustrative examples of cost per ration for the three different types of food assistance. See appendix III for a more detailed comparison of cost differences between traditional food products and specialized food products. Targeting in food assistance programs is an iterative process that aims to ensure that food reaches and is consumed by people whose characteristics meet certain eligibility criteria, such as age, gender, income level, asset level, or nutritional status. Figure 3 presents a simplified schematic of the overall targeting process and its key phases— design, implementation and monitoring, and evaluation—and steps within each phase. As key stakeholders in the targeting process, USAID and its implementing partners, including WFP and NGOs, play an important role, as do host governments. In the design phase, implementing partners design food assistance programs and submit proposals to USAID. USAID reviews the proposals and decides whether to fund the programs. Feedback occurs within and across each of the phases—both in host countries and at USAID headquarters—and is crucial to maximizing targeting effectiveness, leading to steps within the process that may not be strictly sequential. For example, during the design phase, USAID and its implementing partners may conduct an assessment of needs to determine the basis for the design of a program; however, as needs may change or be clarified, they may retarget or make adjustments during the monitoring phase to address issues that may arise. USAID and its implementing partners face a range of in-country factors that, to varying degrees, affect their ability to effectively target food assistance to vulnerable groups. These factors include (1) the quality of data used to identify and reach recipients, (2) host government policies, and (3) sharing of rations among recipients and community members. Targeting effectiveness is reduced when data quality is poor, host government policies cause distortions in program design and implementation, and sharing prevents food rations from being consumed by the intended recipients in the intended amounts. USAID and its implementing partners take steps to mitigate such challenges by, for example, employing technology to improve data quality, coordinating closely with government officials to foster better relationships, and educating recipients about proper food usage to reduce sharing. In some cases, host governments have facilitated targeting efforts by, for example, establishing national targeting guidelines that set a common standard, or national statistical offices that assist in collecting data. Nevertheless, ensuring that food assistance reaches intended recipients remains difficult. Poor data quality—lack of timely and accurate information—may affect implementing partners’ ability to effectively identify and reach recipients. For example, in Zimbabwe, USAID and three implementing partners noted that a lack of current and reliable population data made it difficult to determine the overall number and geographic distribution of households that are in need of food assistance.partner told us that because it used inaccurate data on average In Guatemala, an implementing household size to determine the initial ration size, people who were initially identified received more food than they would have received if the data had been accurate. Although the error was later corrected, if the data had been accurate, resources could have been used more optimally to reach people in need. USAID and implementing partners we spoke with stated that sudden natural disasters or conflicts could raise security concerns for implementing partners, hindering their ability to reach the originally targeted recipients. Furthermore, gathering reliable data on transient populations is challenging. For example, USAID and an implementing partner in Ethiopia told us that in some areas of the country, it is difficult to determine the number and location of people in need of food assistance, particularly pastoralists, who move often as a traditional way of life and to cope with drought or natural disasters. As a result, it is difficult for implementing partners to accurately assess the needs in a particular geographic area and design an appropriate food assistance program. In addition, natural disasters or conflicts may raise security concerns, hindering ability to reach targeted recipients. We recently reported that security concerns prevented WFP from conducting field monitoring of food distribution to determine whether the food rations reached the originally targeted recipients in some high-risk areas of Ethiopia, Kenya, and Somalia. For example, WFP noted that it has been unable to access six districts in the Somali region of Ethiopia since May 2011. As a result, WFP’s ability to collect data to ensure that the intended recipients received their food assistance in these high-risk areas is limited. USAID and implementing partners have taken some measures to improve data quality by building capacity through technology, training, and other activities. For example, USAID funds the Famine Early Warning Systems Network (FEWS NET), which is used to monitor and prepare for changes in food assistance needs. FEWS NET monitors and analyzes vulnerability information, using multiple sources such as satellite imagery and field observations. Moreover, some countries, such as Ethiopia, have established national statistical offices that can assist in collecting data for targeting food assistance. In addition, a 2011 report on food assistance stated that implementing partners are working on increasing the speed, accuracy, accessibility, and comparability of information. Implementing partners in two countries we visited told us that they are using mobile devices, such as tablets and phones, to collect recipient and distribution data. The use of technology enables the implementing partners to better identify and track recipients throughout the program and identify needs. In the aforementioned example about excess ration size in a Guatemala program, the implementing partner used tablets to collect information on recipient consumption patterns. In this way, the implementing partner ultimately discovered the ration error and corrected the ration size for each household, freeing up resources to reach more recipients as a result. Also, implementing partners in Guatemala and Sri Lanka indicated that they train their staff and community volunteers on data collection, and work with the host governments to improve the governments’ ability to collect data. In addition, some countries, such as Sri Lanka, have conducted repeated assessments of food assistance needs over several years, which can lead to improvements in the precision of the data collected. Barrett, et al., 67. partner in Guatemala stated that data need to be improved continuously to measure outcomes and impacts of targeting, particularly for programs with a nutritional objective. Host government policies may lead to distortions, hampering targeting effectiveness, but implementing partners have made some efforts to reduce these adverse effects. We previously reported that one of the key challenges to accurately assessing the needs of vulnerable groups was a lack of coordination among key stakeholders—especially with host governments—on assessments of food assistance needs. In addition, some host country governments have been criticized for underestimating actual needs or directing implementing partners to operate only in certain geographic areas, due to political or other reasons. As a result, implementing partners may not be able to reach recipients or locations most in need of food assistance. For example, an implementing partner in Ethiopia reported to USAID that the government of Ethiopia set an artificial quota for the number of people targeted in each household that in some cases did not reflect the actual needs, and severely hampered the partner’s ability to reach vulnerable groups as a result. However, USAID and implementing partner officials in Ethiopia also told us that working with the government’s distorted figures is less challenging now than in the past, due in part to recent efforts of local and regional government officials to improve the validity and documentation of needs assessments as well as better stakeholder coordination. In some instances, however, host government policies may facilitate targeting efforts. For example, the government of Sri Lanka has worked closely with WFP to identify vulnerable groups and has supported efforts to improve both data collection and the analysis of food needs, including by supporting the research organization that partners with WFP in conducting assessments of needs for food assistance. In another example, the government of Ethiopia has published National Targeting Guidelines that are intended to standardize and improve targeting efforts.country operate under a commonly understood set of targeting policies and practices. This document helps all food assistance stakeholders in the To address host government policies that cause distortions, implementing partners undertake efforts to coordinate with stakeholders and verify information on food assistance needs. Implementing partners we spoke with told us they work with each other and with host governments in the initial phase of the targeting process to increase transparency, in an effort to encourage more accurate government estimates of actual needs. For example, in Ethiopia, USAID officials told us that to increase transparency, donors are working with the government to introduce software tools and technology that facilitate access to information and increase public awareness and thereby discourage government authorities from manipulating data on food assistance needs. Moreover, to help facilitate distribution of food assistance to intended recipients in Guatemala, implementing partners stated that it is essential to closely coordinate with government authorities at the beginning of the targeting process to obtain approval for the use of new products and to set up the appropriate distribution channels and protocol. In addition, in Sri Lanka, an implementing partner told us that it plans to use local organizations to conduct independent verification of the potential recipient list, which is largely selected by the government. Doing so would help the implementing partner ensure that only recipients who qualify for food assistance are included on the list, increasing the likelihood that food assistance reaches the intended recipients. Despite these efforts, implementing partners have limited ability to influence host government policies. Sharing within recipient households and among community members may result in food rations being consumed by unintended recipients or in unintended amounts, but implementing partners have taken some measures to reduce sharing. External assessments suggest that sharing of food rations is a widespread and established coping mechanism when insufficient food is available. The 2011 Food Aid Quality Review (FAQR) report and the 2011 WFP guidance on targeted food assistance programs acknowledge that sharing of specialized food products is a concern, and according to a 2011 USAID assessment of a food assistance program in the Somali region of Ethiopia, sharing of food rations is widespread. In addition, in countries we visited, USAID and its implementing partners told us that both CSB and traditional food products are routinely shared within and among households in some communities—a finding we previously reported in 2011. The 2011 USAID assessment also notes that sharing is an established coping mechanism for the recipient community when not everyone in the community receives food rations. When food rations are shared, the intended recipients may not consume the intended food products in the desired amounts, which may reduce targeting effectiveness by limiting nutritional impact, particularly for specialized food products that are intended for vulnerable groups. Implementing partners have made efforts to reduce the likelihood of sharing, especially of specialized food products. Specifically, implementing partners have employed various strategies to teach recipients how to use specialized food products and have monitored recipient food ration consumption. For example, one implementing partner in Guatemala requires pregnant or lactating women to attend education sessions, where they learn about the benefits of the specialized food products and how to properly prepare them, before they can receive rations. Implementing partners in Guatemala also print culturally relevant instructional images on the food packages or the canvas bags given to recipients to carry the rations. The images explain how to prepare the food products and depict the type of person for whom the products are intended—such as a pregnant woman or a child under 2 years of age. One of these implementing partners reported that it had seen an improvement in recipient participation in these education sessions and expected that these sessions would reduce sharing. In addition, implementing partners use community volunteers to monitor effectiveness or consumption of food products. For example, in Guatemala, implementing partners train “mother leaders”—mothers who are also recipients—to provide training to other recipients on how to prepare food and monitor outcomes by, for example, observing improvement in a child’s weight or overall health appearance. In Sri Lanka, another implementing partner uses health volunteers from the recipient community and coordinates with the host government to ensure that specialized food products are consumed by the children through monthly monitoring of their nutritional status at government-run clinics and weighing stations. The health volunteers also follow up with the mothers of these children, who are receiving specialized food products, if they do not bring their children to the monthly checkup. While implementing partners have taken these and other steps to address sharing, evidence of the impact of these steps has yet to be determined. Weaknesses in the design, monitoring, and evaluation phases of USAID’s targeting process hinder targeting effectiveness, although the agency is taking actions to make improvements. In the design phase of the targeting process, USAID does not provide sufficient guidance on whether and how to target specialized food products. Specifically, USAID’s guidance on design for both emergency and development programs is neither up-to-date nor complete, and does not adequately address key benefits and risks that inform decisions on whether to target specialized food products. In both USAID’s monitoring and evaluation phases, weaknesses limit targeting effectiveness and hinder decision making. USAID currently does not require monitoring of key indicators needed to determine the level of targeting effectiveness for either emergency or development programs. Furthermore, its evaluations do not systematically address targeting effectiveness. Without adequate guidance, monitoring, and evaluations, USAID cannot ensure targeting effectiveness in its food assistance programs. USAID is taking some steps to improve both guidance and monitoring. For example, USAID has a contract with Tufts University to develop updated guidance, and the agency is taking steps to improve monitoring by planning to track indicators such as detailed age breakdowns that are key to better understanding targeting effectiveness. However, these steps do not fully address the weaknesses in USAID’s targeting process. We found that USAID’s guidance for targeting is neither up-to-date nor complete for both emergency and development programs, which reduces the ability of implementing partners to make informed decisions in the design phase. USAID currently provides its implementing partners with a range of guidance and tools. Of these, the Commodities Reference Guide is USAID’s official standard reference for food assistance programs and is intended to be used by USAID and implementing partner staff in deciding how to plan, manage, control, evaluate, and use Title II- funded food products. It is available on USAID’s public website and provides information on available food products, including nutritional values, physical properties, and storage and handling guidelines. However, USAID has not updated the Commodities Reference Guide since 2006 and has not included guidance in the Commodities Reference Guide on all of the products currently used in USAID food assistance programs. The 2011 Food Aid Quality Review also noted that the Commodities Reference Guide and other USAID guidance relevant to targeting are neither up-to-date nor complete and recommended, for example, that USAID improve its guidance to enable implementing partners to better determine whether to use certain products for programs. We found that the lack of updated and complete guidance has hindered implementing partners’ ability to make better-informed targeting decisions. One participant at our roundtable, for example, told us that his organization was unable to find all of the products it was using for a program in the outdated Commodities Reference Guide. As a result, it was not able to use these products in its program. Furthermore, USAID has recently deployed some limited quantities of various new specialized products without providing official standard guidance on how to use them. We recommended in 2011 that USAID provide clear guidance on whether and how best to use new specialized food products, including guidance to its implementing partners on targeting strategies to ensure that the products reach their intended recipients. USAID concurred with our recommendation and is taking steps to develop new guidance, but has deployed new specialized food products in the interim. USAID has purchased relatively small quantities of new specialized food products over the past 2 years, including those shown in table 2 below. For example, USAID purchased just over $6.5 million worth of these products in 2011, as compared with $502 million of traditional food products and $42 million of traditional specialized food products purchased through Title II emergency program funding. In addition, USAID is planning to introduce nine new or reformulated products in the final part of 2012 and 2013, including new RUTFs and ready-to-use supplementary foods (RUSFs) (see app. IV). USAID has not issued fully updated or complete guidance for all of these products. However, it has issued some guidance on their use. Moreover, USAID officials told us that they are providing the products only on a limited basis to organizations such as UNICEF that have experience using them in controlled environments, such as clinics, and have issued their own guidance on the use of these products. USAID guidance inadequately addresses key benefits and risks of using specialized food products, according to USAID and implementing partners we spoke with during our field visits and our expert roundtable. This inadequate guidance hinders decision making on whether to use these products. As discussed earlier, the benefit of specialized food products is that, while more costly, they are also more nutritious, or of higher quality, than traditional food products. However, USAID has not quantified or clearly defined the degree of benefit that specialized food products may provide. In 2011, we reported that in recent years, nutritionists have debated the appropriateness of using fortified and blended foods to prevent and treat malnutrition in young children 6 to 24 months old, who have smaller stomachs, making it more difficult for them to eat enough of the product to obtain sufficient nutrients. As a result, the benefits of some traditional specialized food products are not clear. In addition, limited information on new specialized products is available. As we previously reported, USAID and implementing partners do not know how well new specialized food products perform in promoting nutritional health indicators, such as weight gain and growth, particularly in a program setting, or how well they perform in comparison to traditional food products.which these products promote desired outcomes, is still being studied by USAID, WFP, nutritionists, and other researchers. As a result, while USAID is building knowledge about these products, it is not providing sufficient guidance on the benefits of specialized food products to implementing partners. The efficacy of new specialized products, or the extent to USAID also lacks guidance on how to adequately address risks of using specialized food products, according to implementing partners we spoke with during our field visits and our expert roundtable. A key targeting risk is that various factors implementing partners face in-country may reduce targeting effectiveness to such a degree that the additional cost of using specialized food products outweighs the potential benefit. This trade-off becomes more significant with the higher cost of new specialized food products, for which the cost per ration can be more than triple the cost of traditional food products. Poor data quality, host government policies, and sharing may reduce implementing partners’ ability to identify and reach recipients, but USAID’s existing guidance does not adequately inform decisions on whether the reduction in targeting effectiveness is of such a degree that the use of specialized food products is no longer justified. USAID is taking some steps to enhance guidance on whether and how to use new specialized food products, but fully up-to-date and complete guidance will not be completed until at least late 2013. In response to our 2011 recommendation on improved targeting guidance, USAID stated in its official agency response in July 2011 that it would work to address our recommendations through the second Food Aid Quality Review study now under way with Tufts University. This work is expected to include cost-effectiveness analyses on new specialized food products, adding information important to help determine whether and how to use them. In addition, according to USAID documents and officials, USAID is updating and improving the Commodities Reference Guide and other guidance related to targeting, including for new specialized food products. However, this work will not be completed until September 2013 at the earliest, according to USAID officials. USAID also plans to introduce other guidance before September 2013, including updated fact sheets for individual products. According to USAID officials, this interim guidance will be released on an as-needed basis, beginning in October 2012. In addition, USAID has existing guidance that helps inform implementing partners’ decision making, including its Annual Program Statement (APS), Food for Peace Information Bulletins, and some Food and Nutrition Technical Assistance (FANTA) guidance. USAID does not require monitoring of key indicators needed to determine the level of targeting effectiveness, although it is beginning to make improvements in this area. Information on indicators that are consistent with the goals of the program is critical to determining how effectively a program targets food assistance. Targeting effectiveness can be measured by the extent to which food assistance reaches correctly targeted recipients—that is, the percentage of intended recipients that actually receive food assistance in the intended amounts (see fig. 4). Effectively targeted programs reduce the magnitude of these errors. USAID guidance states that monitoring should be used to measure progress toward planned program results. Additionally, FANTA guidance states that monitoring efforts should allow USAID and its implementing partners to assess the extent to which targeted recipients received intended food assistance. According to a USAID official, USAID field staff do consider targeting during their routine monitoring of food assistance programs. In addition, USAID requires its implementing partners to collect some data, such as the number of intended recipients for all food assistance programs, and requires other indicators to be monitored depending on the type of program—emergency or development. However, USAID does not currently require sufficient monitoring of key indicators consistent with program goals that would allow its implementing partners to report on levels of targeting effectiveness. For example, it cannot determine the effectiveness of a program targeting children under 2 because it does not monitor the age of the actual recipients in either emergency or development programs. USAID monitoring is inadequate for both emergency and development programs because it does not monitor key data on recipients that would allow USAID to measure whether food assistance is actually reaching the intended recipients. Specifically, for emergency programs, USAID collects the total number of intended recipients from its implementing partners, but does not collect the total number of actual recipients or indicators such as breakdowns of age and gender for intended or actual recipients. According to USAID, these types of more specific indicators may not be as important for some emergency programs that focus solely on rapid lifesaving. However, these indicators are important for emergency programs that do have specific targeting goals, such as reaching severely malnourished children. For development programs, USAID collects both the total number of intended and actual recipients from its implementing partners, but as with its monitoring of emergency programs, does not collect data on key indicators such as breakdowns of age and gender. Without monitoring full sets of data for both intended and actual recipients, including key indicators consistent with program goals, USAID has limited ability to learn about the magnitude of targeting errors or the degree to which its implementing partners are achieving their program goals. According to USAID and implementing partner officials, it is particularly complex to gather monitoring information on indicators related to targeting effectiveness about actual recipients, due in part to cost and data quality issues. These challenges are heightened for programs using new specialized food products, which are designed to provide nutritional benefits to very specific vulnerable groups, such as malnourished children or pregnant or lactating women. Identifying and selecting recipients for such programs requires using indicators that are more complex than those used for programs designed for the general population. Some of the indicators, such as nutritional status, are costly to measure and prone to errors. For example, implementing partners we spoke with during our fieldwork in Guatemala and Sri Lanka told us that they have difficulty in collecting data for some indicators in other, non-USAID programs using new specialized food products due to resource constraints, lack of technical capacity by some local NGO staff, or problems with unreliable data. USAID is making improvements in monitoring of some nutrition-focused development programs, for example, by planning to require implementing partners to collect data on the age of young children, a common criterion for new specialized food products. However, as mentioned earlier, indicators key to measuring targeting effectiveness are not consistently monitored across all USAID food assistance programs. According to the Standards of Internal Control in the Federal Government, program managers need to compare actual performance to planned results and analyze significant differences. Without reporting targeting effectiveness, USAID cannot compare actual targeting effectiveness to planned results. As a result, USAID may not be able to make fully informed targeting decisions for both ongoing and future food assistance programs. For example, USAID may not be able to track the performance of food assistance programs’ targeting over time or across programs and may therefore miss opportunities to identify improvements to the targeting effectiveness of these programs. USAID’s targeting evaluations are not systematic, in part, because they are not routinely conducted. USAID requires evaluations to be completed for all of its development programs but does not require them for its emergency programs. Instead, emergency programs are required to submit Annual Results Reports, which contain many of the same types of information as evaluations, but for which no baseline assessment is conducted. According to USAID officials, the difference between these requirements is due to the fact that emergency programs are by nature typically in places where there may not be the time or resources available to do a proper baseline assessment. evaluations that discussed targeting effectiveness included information on the magnitude of inclusion or exclusion errors and the level of community satisfaction with targeting. For example, USAID’s evaluation of an emergency program in Zimbabwe discussed inclusion and exclusion error, a key measure of targeting effectiveness, within a section focused exclusively on targeting. Similarly, USAID’s evaluation of an emergency program in Ethiopia mentioned the level of community satisfaction with targeting: almost 90 percent of the respondents to a survey of community members were generally satisfied with the fairness of the program’s targeting. Some evaluations, however, contained only a brief mention of targeting in general, with no mention of targeting effectiveness. For example, an evaluation of a development program in Bolivia mentioned targeting and contained tables showing monitoring indicators for the baseline compared against the final evaluation, but did not explain how the recipients were originally targeted or how the final evaluation results were verified. Other evaluations, such as a 2011 evaluation of a development program in Guatemala, did not discuss targeting or targeting effectiveness at all. USAID policy and guidance call on USAID and its implementing partners to use evaluations as opportunities to learn about past programs to inform decision making for new programs. USAID policy calls for evaluations to “systematically generate knowledge about the magnitude and determinants of program performance, permitting those who design and implement programs…to refine designs and introduce improvements to future efforts.” USAID guidance states that evaluations should assess the extent to which the program is meeting its stated objectives. For example, if a program is providing food assistance to a vulnerable subpopulation, effective targeting is an important program objective. However, USAID’s evaluations of its food assistance programs do not systematically address targeting effectiveness, and as a result, the agency’s ability to assess the extent to which a program is meeting its stated objectives is hindered, and it may miss opportunities for learning lessons that could be useful when designing new programs or improving ongoing ones. The use of specialized food products, especially some of those most recently introduced, offers the promise of providing better nutrition to the most vulnerable. However, the increased cost of these new specialized products means that their use may likely reduce the overall number of recipients receiving food assistance under a fixed program budget—a quality-quantity trade-off. Choosing more costly specialized food products over less costly traditional food products may be the optimal policy option in certain circumstances, including areas with a high percentage of children suffering from hunger and malnutrition. However, the achievement of this policy goal requires effective targeting of food assistance so that food ultimately reaches the intended recipients. If food assistance is not targeted effectively, the program may fail to achieve its nutritional goals while simultaneously feeding fewer people. USAID recognizes the need to update and broaden its guidance on the use of specialized food products, but this revision will not be completed until late 2013 at the earliest. Issuance of improved interim guidance related to food assistance targeting will help USAID and its implementing partners make better-informed decisions about whether and how to deploy the range of food products that are available, particularly new specialized products. Moreover, the monitoring and reporting of key indicators consistent with program objectives are necessary to ensure that specialized food products are, in fact, reaching intended recipients. Improved targeting—which takes an approach that is appropriate to the circumstances and conditions—would better ensure that valuable food resources are put to their most optimal use and that vulnerable groups receive the most effective assistance available to them. To improve USAID’s targeting of specialized food products to vulnerable groups, such as children under 2 and pregnant women, we recommend that the Administrator of USAID take the following two actions: As USAID continues to purchase new specialized food products without updated guidance, it should issue, as appropriate, improved interim guidance to assist implementing partners in deciding whether and how to target specialized food products. When USAID chooses to provide specialized food products to targeted vulnerable groups, it should establish and report program- specific indicators related to each targeted group to allow USAID to assess its programs’ effectiveness in reaching these groups. We provided a draft of this report to USAID, USDA, and State for comment. In its written comments, reproduced in appendix V, USAID concurred with our recommendations. USDA and State provided no written comments. We also provided relevant excerpts of this report to WFP for comment. USAID, USDA, and WFP provided technical comments that were incorporated, as appropriate. USAID strongly agreed with our recommendation on improving interim guidance to help implementing partners decide whether and how to target specialized food products. USAID provided examples of recent and ongoing efforts that are expected to contribute to improved guidance on new specialized food products. For example, USAID expects to publish on its website updated fact sheets on food products provided in its food assistance programs and will prioritize issuing those relating to specialized food products. Although USAID noted that some existing guidance is available for three of the new specialized food products it is introducing, such as CSB+, the agency also acknowledged that it expects to issue its own guidance on all new products and update the Commodities Reference Guide. USAID agreed with our recommendation on establishing and reporting program-specific indicators to allow USAID to assess its programs’ effectiveness in reaching targeted groups. USAID agreed with us on the need to develop new, program-specific indicators to assess the nutrition goals of new specialized food products for its Title II emergency programs and indicated that it would engage with partners on demonstrating impact and results. To that end, USAID indicated that it is in the process of recruiting a nutritionist to ensure that products used match their intended purpose and high-value specialized products are properly targeted. We are sending copies of this report to appropriate congressional committees, the Administrator of USAID, the Secretaries of Agriculture and State, and relevant agency heads. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9601 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Our objectives were to (1) describe in-country factors that the U.S. Agency for International Development (USAID) and its implementing partners face in targeting vulnerable groups, and (2) examine the extent to which USAID’s targeting process supports effective targeting. To address these objectives, we met with officials at USAID and its implementing partners, including the World Food Program (WFP) and nongovernmental organizations (NGOs). In addition, we met with officials at the U.S. Department of Agriculture (USDA) and the U.S. Department of State. We also spoke with academics, experts, and practitioners associated with research institutes, universities, and NGOs. We examined USAID program documents, including guidance and tools, related to food assistance targeting processes. Furthermore, we conducted fieldwork in four countries—Ethiopia, Guatemala, Sri Lanka, and Zimbabwe—and met with officials from U.S. missions, implementing partners, and relevant host government agencies. We also convened a roundtable of 10 practitioners and experts—including representatives from implementing partners such as NGOs and WFP, academia, and research organizations—to discuss in-country factors that affect the ability of USAID and its partners to target vulnerable groups, as well as the guidance and monitoring and evaluation tools that USAID and its implementing partners use to target food assistance activities (see app. II for the list of participating organizations in our roundtable). To provide context and background, we analyzed data from USAID and WFP to identify trends in U.S. funding for international food assistance and procurement data on the use of traditional and specialized food products. As these data were for background purposes, we did not assess their reliability. In addition, we reviewed data that we reported on in 2011 concerning cost information for specialized food products relative to traditional food products. We then reviewed similar data to obtain updates about the costs and relative length of feeding for these products and interviewed USAID, WFP, and Tufts University about the reliability of the updated data. We used this information to create an analysis comparing the amount of time various commodities could be provided for the cost of other commodities. We found that these updated data were sufficiently reliable for the purposes of this report, in that they demonstrated the order of magnitude of the relative cost of different types of food products used in food assistance programs. Although commodity prices may fluctuate and suggested feeding lengths may vary by program or individual recipient, the data were sufficiently reliable to demonstrate that there are large differences in the cost of feeding, depending on the products used. In addition, we reviewed various literature on the targeting process, as well as USAID guidance and tools to facilitate targeting decisions. To describe in-country factors USAID and its implementing partners face in targeting vulnerable groups, we reviewed literature on targeting and new specialized food products issued by academics, research institutes, implementing partners, USAID contractors, UN organizations involved in humanitarian assistance, and independent international organizations; spoke with in-country officials such as relevant host government officials and implementing partners; and obtained the input of our roundtable participants. To examine the extent to which USAID’s targeting process supports effective targeting, we analyzed responses and information from the general methodologies listed above. To examine the extent to which USAID provides guidance to its implementing partners on targeting, we reviewed existing USAID guidance for targeting and USAID’s contract with Tufts University and spoke with USAID and Tufts University officials about the scope of work for this contract, including the section on updating guidance. We reviewed information from USAID about the product types, costs, and tonnage of new specialized food products purchased since fiscal year 2010. We interviewed USAID about the sources of this information and also compared it to data about these products from other sources of information. These included the requests for applications that USAID provides to its implementing partners for new specialized food products, including ready-to-use therapeutic foods and lipid nutritional supplements; USAID’s commodity price calculator; and relevant legislation authorizing the use of these products. We found that the data were sufficiently reliable for the purposes of this report, in that they showed the magnitude and trends of purchases of new specialized food products with USAID funding in recent years. To examine the extent to which USAID monitors and evaluates targeting effectiveness and other related information, we analyzed monitoring information provided to us by USAID about numbers of planned recipients and actual beneficiaries for Title II food assistance programs since 2009. We reviewed current USAID policies and procedures on monitoring and evaluation. We also reviewed guidance provided by Food and Nutrition Technical Assistance (FANTA), under a cooperative agreement with USAID. This guidance covers aspects of monitoring and evaluation, such as the performance measures to be used for food assistance programs. Through searches of USAID’s website and discussions with cognizant officials, we identified a total of 30 final evaluations of USAID programs going back to 2009. Final evaluations are conducted at the end of a program. However, USAID could not assure us that it had provided all of the evaluations conducted for its development programs, and also noted that it does not require evaluations of its emergency programs. We selected 20 of these final evaluations for review based on the following criteria: we included all 3 final evaluations for the single-year programs, and selected 17 final evaluations for the multi-year programs to ensure that we had coverage by year and geographic region. We reviewed these evaluations to examine the extent to which they had addressed targeting issues. Finally, we reviewed evaluations that WFP conducted of those of its programs that were implemented with USAID funding. We conducted this performance audit from October 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. Table 3 provides a comparison of cost differences between traditional and selected specialized food products, which include both traditional specialized food products and new specialized food products. For example, to feed a child 6 to 23 months old, a traditional grain-based representative ration costs $0.02 to $0.06 per day, a CSB+ ration, $0.10 to $0.21 per day, and a ready-to-use therapeutic food (RUTF) ration, $0.42 to $0.46 per day. The cost per ration is one aspect of the relative cost of food assistance products; the length of time a product is used in a food assistance program also affects its overall relative cost. Some experts suggest that, although an individual daily ration of a new specialized food product may be relatively expensive, it may ultimately be less costly overall because it may be fed for a shorter period of time based on its suggested length of use. However, we found that some new specialized food products with a relatively shorter suggested length of use may still cost relatively more overall. For example, as shown in the table, although an RUTF’s suggested length of use (42 to 90 days) for a child 6 to 23 months old is shorter than that of a traditional grain-based ration (90 to 120 days), the RUTF may still cost more overall ($17.77 to $41.40) than the grain-based ration ($2.07 to $7.45). Despite their higher overall costs, RUTFs may be the optimal choice in certain circumstances, such as for emergencies in areas with a high percentage of children suffering from severe acute malnutrition. Table 4 illustrates the number of days that traditional food products (grain-based rations) or traditional specialized food products (CSB) can be provided for the cost of providing a new specialized food product based on its suggested length of use. For example, for the cost of providing a nutritional supplementary paste fortified ration for 180 to 545 days, a grain-based ration could be provided for 741 to 3,121 days and a CSB ration could be provided for 183 to 769 days. USAID has thus far deployed a relatively limited quantity of new specialized food products but plans to introduce the following products to address various needs: Ready-to-use supplementary food (RUSF) - Nutritionally dense and highly fortified for management of moderate acute malnutrition. Fortified vegetable oil - Fortified with vitamins A and D. Fortified milled cereals - Reformulated and standardized to improve general rations. CSB++ (WFP Supercereal+) - Formulated by WFP for children 6 to 24 months of age. CSB-14 – Reformulated CSB to be prepared with vegetable oil. In addition to the person named above, Joy Labez (Assistant Director), Carol Bray, Marc Castellano, Ming Chen, Anna Chung, Debbie Chung, Martin De Alteriis, Mark Dowling, Etana Finkler, David Schneider, and Jeremy Sebest made key contributions to this report. Sada Aksartova, Vida Awumey, Teresa Heger, Erin McLaughlin, Michael Maslowski, Julia Ann Roberts, Barbara Shields, and Phillip Thomas also contributed to this report. World Food Program: Stronger Controls Needed in High-Risk Areas. GAO-12-790. Washington, D.C.: September 13, 2012. Farm Bill: Issues to Consider for Reauthorization. GAO-12-338SP. Washington, D.C.: April 24, 2012. International Food Assistance: Funding Development Projects through the Purchase, Shipment, and Sale of U.S. Commodities Is Inefficient and Can Cause Adverse Market Impacts. GAO-11-636. Washington, D.C.: June 23, 2011. International Food Assistance: Better Nutrition and Quality Control Can Further Improve U.S. Food Aid. GAO-11-491. Washington, D.C.: May 12, 2011. International School Feeding: USDA’s Oversight of the McGovern-Dole Food for Education Program Needs Improvement. GAO-11-544. Washington, D.C.: May 19, 2011. International Food Assistance: A U.S. Governmentwide Strategy Could Accelerate Progress toward Global Food Security. GAO-10-212T. Washington, D.C.: October 29, 2009. International Food Assistance: Key Issues for Congressional Oversight. GAO-09-977SP. Washington, D.C.: September 30, 2009. International Food Assistance: USAID Is Taking Actions to Improve Monitoring and Evaluation of Nonemergency Food Aid, but Weaknesses in Planning Could Impede Efforts. GAO-09-980. Washington, D.C.: September 28, 2009. International Food Assistance: Local and Regional Procurement Provides Opportunities to Enhance U.S. Food Aid, but Challenges May Constrain Its Implementation. GAO-09-757T. Washington, D.C.: June 4, 2009. International Food Assistance: Local and Regional Procurement Can Enhance the Efficiency of U.S. Food Aid, but Challenges May Constrain Its Implementation. GAO-09-570. Washington, D.C.: May 29, 2009. International Food Security: Insufficient Efforts by Host Governments and Donors Threaten Progress to Halve Hunger in Sub-Saharan Africa by 2015. GAO-08-680. Washington, D.C.: May 29, 2008. Somalia: Several Challenges Limit U.S. International Stabilization, Humanitarian, and Development Efforts. GAO-08-351. Washington, D.C.: February 19, 2008. Foreign Assistance: Various Challenges Limit the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-905T. Washington, D.C.: May 24, 2007. Foreign Assistance: Various Challenges Impede the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-560. Washington, D.C.: April 13, 2007. Foreign Assistance: U.S. Agencies Face Challenges to Improving the Efficiency and Effectiveness of Food Aid. GAO-07-616T. Washington, D.C.: March 21, 2007. | In fiscal year 2011, USAID spent approximately $1.7 billion on food assistance reaching over 46 million people in 48 countries. USAID targets food assistance so that benefits accrue selectively to only a portion of the overall population, typically the most vulnerable. Effective targeting is important to maximize the impact of limited resources, especially as USAID begins to use more nutritious but more costly specialized food products to address hunger and malnutrition among vulnerable groups. GAO was asked to (1) describe in-country factors that USAID and its implementing partners face in targeting vulnerable groups, and (2) examine the extent to which USAID's targeting process supports effective targeting. GAO analyzed program data and documents; interviewed relevant officials; convened a roundtable of food assistance experts and practitioners; and conducted fieldwork in Ethiopia, Guatemala, Sri Lanka, and Zimbabwe. In-country, the U.S. Agency for International Development (USAID) and its implementing partners face a range of factors that, to varying degrees, affect their ability to target food assistance effectively to vulnerable groups. These factors include (1) the quality of data used to identify and reach recipients, (2) host government policies, and (3) sharing of rations among recipients and community members. Targeting effectiveness is reduced when data quality is poor, host government policies cause distortions in program design and implementation, and sharing prevents food rations from being consumed by the intended recipients in the intended amounts. USAID and its implementing partners try to mitigate such challenges by, for example, employing technology to improve data quality, coordinating closely with government officials to foster better relationships, and educating recipients about proper food usage to reduce sharing. In some cases, host governments have facilitated targeting efforts by, for example, establishing national targeting guidelines that set a common standard, or national statistical offices that assist in collecting data. Nevertheless, ensuring that food assistance reaches intended recipients remains difficult. Weaknesses in the design, monitoring, and evaluation phases of USAID's targeting process hinder targeting effectiveness, although the agency is taking actions to make improvements. In the design phase of the targeting process, USAID does not provide sufficient guidance on whether and how to target specialized food products. Specifically, USAID's guidance on design currently is neither up-to-date nor complete, and does not adequately address key benefits and risks that inform decisions on whether and how to target specialized food products. In USAID's monitoring and evaluation phases, weaknesses limit targeting effectiveness and hinder decision making. USAID currently does not require monitoring of key indicators needed to determine the level of targeting effectiveness. For example, during implementation USAID does not monitor actual recipients in its emergency programs. Furthermore, its evaluations do not systematically address targeting effectiveness. Without adequate guidance, monitoring, and evaluations, USAID cannot ensure targeting effectiveness in its food assistance programs. USAID is taking some steps to improve both guidance and monitoring. For example, USAID is updating guidance and plans to track indicators such as detailed age breakdowns that are key to better understanding targeting effectiveness. However, these steps do not fully address the weaknesses in USAID's targeting process. GAO recommends that the Administrator of USAID improve USAID's targeting of specialized food products to vulnerable groups by (1) issuing, as appropriate, improved interim guidance to assist implementing partners in deciding whether and how to target specialized food products; and (2) establishing and reporting program-specific indicators related to targeted vulnerable groups, to assess effectiveness in reaching such groups. USAID agreed with the recommendations and provided examples of recent efforts to address them. |
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The Small Business Jobs Act of 2010 (the act) aims to address the ongoing effects of the 2007-2009 financial crisis on small businesses and stimulate job growth by establishing the SSBCI program, among other things. SSBCI is designed to strengthen state programs that support private financing to small businesses and small manufacturers that, according to Treasury, are not getting the loans or investments they need to expand and to create jobs. The act did not require a specific number of jobs to be created or retained as a result of SSBCI funds. The act appropriated $1.5 billion to be used by Treasury to provide direct support to states for use in programs designed to increase access to credit for small businesses. Using a formula contained in the act, Treasury calculated the amount of SSBCI funding for which each of the 50 states, as well as the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, American Samoa, and the United States Virgin Islands were eligible to apply. This formula takes into account a state’s job losses in proportion to the aggregate job losses of all states. (See app. III for more information on available funding by location). In addition to states, the act granted permission to municipalities to apply directly for funding under SSBCI in the event that a state either failed to file a Notice of Intent to Apply for its allocation of program funds by November 26, 2010, or, after filing a Notice of Intent, failed to submit an application to Treasury by June 27, 2011. Treasury officials stated that municipalities granted permission to submit an application for program funds were generally subject to the same approval criteria and program requirements as states. Municipalities were eligible to apply for up to the total amount of their state’s SSBCI allocation, but the final approved amounts were to be apportioned based on their pro rata share by population of all applicants. Figure 1 provides a timeline of major SSBCI milestones. The act allowed Treasury to provide SSBCI funding for two state program categories: capital access programs (CAP) and other credit support programs (OCSP). A CAP is a loan portfolio insurance program wherein the borrower and lender, such as a small business owner and a bank, contribute to a reserve fund held by the lender. Under the act, approved CAPs are eligible to receive federal contributions to the reserve funds held by each participating financial institution in an amount equal to the total amount of the insurance premiums paid by the borrower and the lender on a loan-by-loan basis. Amounts in the lender’s reserve fund are then available to cover any losses incurred in its portfolio of CAP loans. For an SSBCI loan to be eligible for enrollment in a state’s approved CAP, the borrower must have 500 or fewer employees and the loan amount cannot exceed $5 million. In addition, the following types of OCSPs are eligible to receive SSBCI funds under the act: Collateral support programs: These programs supply cash collateral accounts to lenders to enhance the collateral coverage of borrowers. The accounts will cover all or a portion of the collateral shortfall identified by a lending institution. These programs can be designed to target certain regions or industries, such as equipment lending, in which a lender may be willing to fund at 80 percent loan-to-value, but a borrower may not be able to bridge the difference in cash at closing. Loan participation programs: These programs enable small businesses to obtain medium- to long-term financing, usually in the form of term loans, to help them expand their businesses. States may structure a loan participation program in two ways: (1) purchase transactions, also known as purchase participation, in which the state purchases a portion of a loan originated by a lender and (2) companion loans, also known as co-lending participation or parallel loans, in which a lender originates one loan and the state originates a second (usually subordinate) loan to the same borrower. This program enables the state to act as a lender, in partnership with a financial institution, to provide small business loans at attractive terms. Direct loan programs: Although Treasury does not consider these programs to be a separate SSBCI program type, it acknowledges that some states may identify programs that they plan to support with SSBCI funds as direct loan programs. The programs that some states label as direct loan programs are viewed by Treasury as co-lending programs categorized as loan participation programs, which have lending structures that are allowable under the statute. Loan guarantee programs: These programs enable small businesses to obtain term loans or lines of credit to help them grow and expand their businesses by providing a lender with the necessary security, in the form of a partial guarantee, for them to approve a loan or line of credit. In most cases, a state sets aside funds in a dedicated reserve or account to guarantee a specified percentage of each approved loan. Venture capital programs: These programs provide investment capital to create and grow start-ups and early-stage businesses, often in one of two forms: (1) a state-run venture capital fund (which may include other private investors) that invests directly in businesses or (2) a fund of funds, which is a fund that invests in other venture capital funds that in turn invest in individual businesses. Many factors, particularly resources and available talent, inform a state’s decision on which form to choose. For example, a state may choose to invest in a large venture fund that agrees to reinvest in that state an amount equal to that invested by the state, as opposed to trying to attract that same talent to a smaller fund capitalized with state money. Qualified loan or swap funding facilities: States may enter into qualifying loan or swap funding transactions under which SSBCI funds are pledged as collateral for private loans or credit lines. The private financing proceeds must, however, be used exclusively for the reserve or other accounts that back the credit support obligations of a borrowing CAP or OCSP. Presumably, fees paid by borrowers and lenders will provide a return to the providers of private capital. Other OCSPs: States were also able to submit an application to Treasury outlining their plans to support OCSPs that, though not able to be categorized in any of the above OCSP types, feature combinations of aspects of these eligible types. OCSPs approved to receive SSBCI funds are required to target borrowers with an average size of 500 or fewer employees and to target support towards loans with average principal amounts of $5 million or less. In addition, these programs cannot lend to borrowers with more than 750 employees or make any loans in excess of $20 million. In applying for funding, applicants had to demonstrate that their CAPs and OCSPs could satisfy SSBCI criteria. For example, applicant states had to demonstrate that all legal actions had been taken at the state level to accept SSBCI funds and implement the state programs. States were also required to demonstrate that the state possessed the operational capacity, skills, and financial and management capacity to meet the objectives set forth in the act. In addition, each applicant was required to demonstrate a “reasonable expectation” that its participating programs, taken together, would generate an amount of private financing and investment at least 10 times its SSBCI funding (that is, a leverage ratio of 10:1) by the program’s end in December 2016. Furthermore, each application had to include a report detailing how the state would use its SSBCI allocation to provide access to capital for small businesses in low- and moderate-income, minority, and other underserved communities, including women- and minority-owned small businesses. The act requires that each state receive its SSBCI funds in three disbursements of approximately one-third of its approved allocation. Prior to receipt of the second and third disbursements, a state must certify that it has expended, transferred, or obligated 80 percent or more of the previous disbursement to or for the account of one or more approved state programs. Treasury may terminate any portion of a state’s allocation that Treasury has not yet disbursed within 2 years of the date on which its SSBCI Allocation Agreement was signed. Treasury may also terminate, reduce, or withhold a state’s allocation at any time during the term of the Allocation Agreement upon an event of default under the agreement. Following the execution of the Allocation Agreement, states are required All to submit quarterly and annual reports on their use of SSBCI funds. SSBCI Allocation Agreements, the primary tool signed by Treasury and each participating state, which outline how recipients are to comply with program requirements, will expire on March 31, 2017. The program’s reporting requirements are detailed in section 4.8 of the SSBCI allocation agreement. The obligations of participating states and territories to perform and report on progress will expire as outlined in the terms of the agreement. Nearly all of the states eligible for SSBCI funds submitted applications to Treasury. Fifty-four of the 56 states and territories that were eligible to apply for program funds submitted an application prior to the June 27, 2011, deadline, although one state later withdrew its application. In total, states requested more than $1.4 billion in SSBCI funds—95 percent of the program’s appropriation—and only one applied for less than its maximum allocation. Following the application deadline for states, Treasury received five additional applications from municipalities in three states—Alaska, North Dakota, and Wyoming—by the September 27, 2011, deadline requesting a total of $39.5 million in program funds. Figure 2 illustrates the distribution of SSBCI funds applied for by states and territories. Participating states indicated that they are planning to support various new, existing, and dormant (that is, previously suspended) lending programs with their respective SSBCI allocations. According to our survey results, states are planning to support 153 different lending programs, 69 of which are new programs that were created to be supported by SSBCI funds (see fig. 3). Forty-one states indicated they are planning to support more than one program with their allocation. For example, Alabama plans to support a CAP, four loan participation programs, and a loan guarantee program, and New Jersey plans to support a loan participation program, four loan guarantee programs, five direct loan programs, and a venture capital program. According to our survey results, states are planning to support CAPs and all types of eligible OCSPs except loan and swap funding facilities (see fig. 4). Venture capital programs are to receive the largest amount of SSBCI funds of any program type. According to Treasury officials, states submitted their respective applications with plans for developing programs in response to unique gaps in local markets or the specific expertise of their staff. Consequently, there is variation in program design across states. For example, Treasury officials stated that Michigan plans to use its funds to support a collateral support program because of difficulties that manufacturing companies in the state were experiencing in obtaining credit. Specifically, Treasury officials noted that as these manufacturers’ real estate and equipment declined in value, they were facing difficulties in obtaining credit due to collateral shortfalls (see app. IV for more information on planned uses of funds by location). States indicated that they expect SSBCI funds to result in a total of $18.7 billion in new private financing and investment throughout the life of the program. In responding to our survey, officials from 39 of the states that applied for SSBCI funds indicated that they expect to achieve a private leverage ratio between 10:1 and 15:1, and 14 projected a ratio of 15:1 or greater. However, each participating state’s generation of an amount of private financing and investment at least 10 times its SSBCI allocation by December 2016 is not a requirement, and some states indicated that they believe reaching a 10:1 private leverage ratio could prove challenging. For example, officials from one state expressed some concern that the state’s final leverage ratio may ultimately fall short of the estimate included in its approved application because the state was creating a new program and, therefore, did not have prior experience operating a similar program. Treasury officials noted that a state’s mix of programs, as well as the design of each individual program, drives the leverage estimates. For example, Treasury officials stated that private leverage ratios for CAPs tend to be the highest among program types and are evident immediately because the program design is such that the SSBCI subsidy per loan is quite small and is not dependent on subsequent private financing. However, the officials noted that OCSPs tend to have lower leverage ratios initially but may see those grow in later years as program funds are recycled for additional lending over time. With the enactment of the Small Business Jobs Act of 2010 on September 27, 2010, Treasury was tasked with quickly starting up an SSBCI program office and developing processes and guidance to implement this new program. After accepting Notices of Intent to Apply from states and territories by the end of November 2010, Treasury issued an initial set of policy guidelines and application materials via its website on December 21, 2010. According to Treasury officials, Treasury received a few applications shortly thereafter and was able to review and approve them and to obtain signed Allocation Agreements with and distribute first installments of funds to two states in January 2011. In response to feedback from states, discussions with other federal agencies, such as the Small Business Administration, and current trends in the small business banking arena, Treasury determined that it needed to revise its guidelines and application paperwork to better articulate what documentation was required for both the application and review processes. As a result, Treasury issued revised guidance materials and Allocation Agreements for applicants in April 2011 as well as a reviewers’ manual for its review staff in May 2011. According to our survey of SSBCI applicants, five states submitted the final version of their application to Treasury before these documents were finalized. Treasury officials told us that although they took steps to help ensure consistent treatment of applicants, Treasury did not revisit previously approved applications once review procedures were finalized. Treasury officials said they were confident that no additional review was required, as those early applications were from states with well-established programs. However, as a result of the revisions to the Allocation Agreement made in April 2011, Treasury asked the two states that had signed the previous versions to sign an amended Allocation Agreement that incorporated the new terms. Some states reported that they delayed submitting their applications until Treasury’s final application guidance was issued. According to our survey results, 37 states did not submit their final applications for SSBCI funds until June 2011, the month that applications were due. Despite the delay in providing application guidance, applicants generally viewed Treasury officials as helpful throughout the application process—providing answers to most questions immediately and determining answers as soon as possible when not readily available. Treasury officials stated that they also hosted multiple webinars and conference calls to field questions about the application process that were highly attended by states and territories. In our review of the eight applications reviewed and approved before June 30, 2011, we found that Treasury considered each aspect of the application. Although only one of the applications we reviewed was processed under the revised application and review guidelines, we found that each application was subject to five stages of review: an initial review, a subsequent review by a quality assurance reviewer, review by the application review committee, a legal review, and final approval by the designated Treasury official. Our reviews of the applications and the experiences of the states suggest that applications were scrutinized in terms of their completeness as well as the eligibility of the programs for which states intended to use SSBCI funds. For example, Treasury reviewers noted that in one state’s application, the state proposed several modifications to its existing CAP, thereby bringing it under compliance with SSBCI requirements. Similarly, SSBCI applicants reported that Treasury scrutinized their applications. According to our survey results, 50 of the 54 applicants reported they were required to resubmit at least parts of their applications for further review after their original submissions. For example, one state noted that Treasury wanted significant changes in its application, mainly in the areas of internal controls, mix of programs, and contractor oversight. Another state noted that Treasury determined that the state failed to specify that it was to match the borrower and lender premium between 2 percent and 3.5 percent; Treasury officials asked the state to revise its application to reflect this information and submit an amended application. As required under the act, Treasury is distributing SSBCI funds to recipients in three installments. As of October 31, 2011, Treasury had provided first installments to 46 states and territories, totaling about $424 million. However, Treasury did not begin processing state requests for their second installment of funds until November 2011. According to Treasury officials, Treasury had previously not acted on these requests because they wanted to ensure that proper procedures were established to ensure all certifications made as part of the request were adequately substantiated. Specifically, they had to resolve how to determine whether 80 percent of a state’s initial disbursement of funds has been expended, transferred, or obligated as required under the act. Treasury finalized its disbursement procedures for second and third installments of SSBCI funds at the beginning of November 2011. According to Treasury officials, as of that date, no state had yet expended 80 percent of its initial disbursement to support loans or investment to small businesses. While Treasury was working to finalize these procedures, states were potentially delayed in receiving their remaining SSBCI funding. For example, officials from one state that we contacted told us they were ready for their second installment after their first installment was transferred to the accounts of their designated SSBCI lending programs, but they were told by Treasury officials that they would have to wait until the disbursement procedures were finalized. Consequently, the officials told us their state faced additional interest expenses as a result of the delay. Treasury is implementing a multi-step plan to monitor recipient compliance with SSBCI program requirements. These steps include (1) collecting and reviewing quarterly and annual reports, as well as quarterly use of funds certifications, from recipients, (2) evaluating the accuracy of recipient-level reporting on an annual basis by sampling transaction-level data, (3) monitoring recipient requests for second and third installments of SSBCI funds, and (4) contacting recipients on a quarterly basis to inquire as to their adherence with plans outlined in their respective SSBCI applications, as well as monitoring requirements. Treasury has developed a secure, online system for states to report on those data fields included in the Allocation Agreements signed by states, including (1) total amount of principal loaned and of that amount, the portion that is from nonprivate sources; (2) estimated number of jobs created or retained as a result of the loan; and (3) amount of additional private financing occurring after the loan closing. States are to provide these data to Treasury on an annual basis beginning in March 2012. Treasury officials told us they plan to sample states’ transaction-level data to help ensure the accuracy of state reporting. Specifically, the SSBCI compliance manager is to take samples of transaction-level data from all recipients in order to determine whether states are entering these data accurately, including verifying that transactions listed match the underlying loan or investment documents. Treasury officials noted that the system is to automatically flag any loans for which the data entered do not comply with program requirements. Treasury officials told us they have also assigned three relationship managers to serve as the primary Treasury contacts for the SSBCI program. These managers, who have each been assigned 15 to 20 recipients, are to hold quarterly phone conversations with recipients. During these calls, the managers are to ask a series of generic questions, as well as recipient-specific questions regarding plans the states described in their applications, such as hiring staff and monitoring the use of program funds. The Treasury Inspector General recently made recommendations to further enhance Treasury’s oversight of SSBCI recipients. In August 2011, the Inspector General issued a report describing the results of its review of SSBCI policy guidance and other key program documents, including allocation agreements.recommendations to improve Treasury’s compliance and oversight framework, including that Treasury’s guidance should clearly define the oversight obligations of recipients and specify minimum standards for determining whether recipients have fulfilled their oversight responsibilities. Treasury concurred with eight of the recommendations and has begun to take action to address them. Treasury disagreed with the Inspector General’s recommendation to make additional provisions for The report made nine states to certify their allocation agreements, stating that states certify that they are implementing their programs in compliance with SSBCI procedures as part of their quarterly reporting to Treasury. Treasury officials told us that they have not yet established performance measures for the SSBCI program. Although Treasury plans to rely primarily on the department’s overall performance measures in evaluating the SSBCI program, officials noted they are considering several draft performance measures to assess the efficiency of the program. Treasury officials described to us some of the potential measures they are considering, but we are not including them in this report because they have not yet been finalized. Treasury officials told us that they have not finalized the program’s performance measures because they have been focused on starting up the program quickly to meet statutorily required deadlines. Furthermore, officials noted that because SSBCI is a multilayered program that is implemented at the state level and dependent upon private sector entities, Treasury’s ability to influence program outcomes will be limited. Therefore, Treasury officials have been trying to develop measures that focus on the aspects of the program under Treasury’s control. According to Treasury officials they do not have a time frame for fully developing and finalizing SSBCI-specific performance measures. The potential performance measures described by Treasury do not currently include measures related to the number of jobs created or retained as a result of the SSBCI program. As required in their allocation agreements with Treasury, states are to report information on estimated jobs resulting from SSBCI programs on a per loan or investment basis. According to Treasury officials, gathering this information from the states serves two purposes: (1) it allows Treasury to track the progress of the states against the anticipated benefits articulated for their programs in their SSBCI applications and (2) it provides Treasury with a potential data point that may be useful when measuring overall program performance over time. However, Treasury’s ability to use this information moving forward could be limited, as the jobs data will be based on estimates and not actual jobs. In particular, as part of the SSBCI loan and investment application process, borrowers and investors are required to provide in their application paperwork estimates of the number of jobs to be created and retained as a result of participating in SSBCI programs. States then provide these estimates in their annual reports to Treasury. However, the states are not required to validate these jobs estimates, and they are not required to follow up with borrowers and investors to determine whether the actual number of jobs they were able to create or retain matched their original estimates. According to one lending official we spoke with, validating these estimates would be difficult and lenders could be discouraged from participating in the SSBCI program if they were required to track actual jobs created and retained. Concerned about the burden that reporting on actual jobs created and retained would place on the small businesses receiving SSBCI funds, Treasury officials told us that they elected to capture instead estimated jobs data at the time of the closing of the loan or investment. Treasury officials noted they are currently consulting with officials from the Small Business Administration to learn what methods that agency uses in measuring jobs using estimated data. The importance of performance measures for gauging the progress of programs and projects is well recognized. Measuring performance allows organizations to track the progress they are making toward their goals and gives managers crucial information on which to base their organizational and management decisions. Leading organizations recognize that performance measures can create powerful incentives to influence organizational and individual behavior. In addition, the Government Performance and Results Act of 1993 (GPRA) incorporates performance measurement as one of its most important features. Under GPRA, executive branch agencies are required to develop annual performance plans that use performance measurement to reinforce the connection between the long-term strategic goals outlined in their strategic plans and the day-to-day activities of their managers and staff. The Office of Management and Budget (OMB) has also directed agencies to define and select meaningful outcome-based performance measures that indicate the intended result of carrying out a program or activity. Additionally, we have previously reported that aligning performance metrics with goals can help to measure progress toward those goals, emphasizing the quality of the services an agency provides or the resulting benefits to users. We have also previously identified criteria to evaluate an agency’s performance measures. While GPRA focuses on the agency level, performance measures are important management tools for all levels of an agency—such as the bureau, program, project, or activity level—and these criteria are applicable at those levels as well. Among other criteria, we have identified nine key attributes of successful performance measures. These attributes include the following: (1) Linkage. Measure is aligned with division- and agency-wide goals and mission and clearly communicated throughout the organization. (2) Clarity. Measure is clearly stated, and the name and definition are consistent with the methodology used to calculate it. (3) Measurable target. Measure has a numerical goal. (4) Objectivity. Measure is reasonably free from significant bias or manipulation. (5) Reliability. Measure produces the same result under similar conditions. (6) Core program activities. Measures cover the activities that an entity is expected to perform to support the intent of the program. (7) Limited overlap. Measure should provide new information beyond that provided by other measures. (8) Balance. Balance exists when a suite of measures ensures that an organization’s various priorities are covered. (9) Governmentwide priorities. Each measure should cover a priority such as quality, timeliness, and cost of service. Given the preliminary nature of Treasury’s potential performance measures, assessing whether the measures will reflect the attributes of successful performance measures would be premature. Nevertheless, considering these attributes as it works to finalize SSBCI-specific performance measures could help Treasury to develop robust measures. Until such measures are developed and implemented, Treasury will not be able to determine whether the program is achieving its goals. In response to SSBCI’s short time frame, Treasury was able to design, implement, and execute an application process for the program in a matter of months. Appropriately, Treasury’s early efforts were focused on establishing the application process and the process for disbursing initial installments of funds to recipients as quickly as possible. Treasury is still in the process of developing performance measures for the SSBCI program. Measuring performance allows organizations to track progress toward their goals and gives managers crucial information on which to base decisions. At the program level, agencies can create a set of performance measures that addresses important dimensions of program performance and balances competing priorities. Performance measures that successfully address important and varied aspects of program performance are key elements of an orientation toward results. Effective performance measures can provide a balanced perspective on the intended performance of a program’s multiple priorities. While Treasury is considering potential draft performance measures, it has not fully developed or finalized a set of measures for the SSBCI program. Until such measures are developed and implemented, Treasury will not be in a position to determine whether the SSBCI program is effective in achieving its goals. We are making one recommendation to Treasury to improve its implementation and oversight of the SSBCI program as follows: To help ensure that the performance measures for the SSBCI program are as robust and meaningful as possible, we recommend that the Secretary of the Treasury direct the SSBCI Program Manager to consider key attributes of successful performance measures as the program’s measures are developed and finalized. We provided a draft of this report to Treasury for review and comment. Treasury provided written comments that we have reprinted in appendix V. Treasury also provided technical comments, which we have incorporated, as appropriate. In their written comments, Treasury agreed with our recommendation. Treasury noted that it will consider the key attributes of successful performance measures as it works to finalize measures for the SSBCI program. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Treasury, and other interested parties. The report is also 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 [email protected] or (202) 512-8678. 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 VI. To determine which states applied for and received State Small Business Credit Initiative (SSBCI) funds and the planned uses of the funds, we developed a Web-based questionnaire to collect information from the 54 states and territories that filed a Notice of Intent to Apply for SSBCI funds with the Department of the Treasury (Treasury) by the November 26, 2010 deadline. The questionnaire included questions on the timing of applications for SSBCI funds, the receipt of funds to date, the intended uses of funds, and the potential impacts of program funds. See appendix II for a copy of the questionnaire. To minimize errors arising from differences in how questions might be interpreted and to reduce variability in responses that should be qualitatively the same, we conducted pretests with officials in three states, both in person and over the telephone. To help ensure that we obtained a variety of perspectives on our questionnaire, we selected officials from states planning to support various types of programs with SSBCI funds. Based on feedback from these pretests, we revised the questionnaire in order to improve response quality. For instance, in response to one state official’s comment that it would be difficult for respondents to answer with confidence how many capital access programs (CAP) and other credit support programs (OCSP) have recently been in operation across all municipalities in a state, we removed the historical and specific program budget questions and clarified our focus on the planned uses of SSBCI funds. We conducted two additional pretests with other state officials to ensure that the updated questionnaire was understandable. After completing the pretests, we administered the survey. On August 4, 2011, we began sending e-mail announcements of the questionnaire to the state and territory officials that had been identified as points of contact in a list provided to us by Treasury, notifying them that our online questionnaire would be activated in approximately 1 week. On August 15, 2011, we sent a second e-mail message to officials in which we informed them that the questionnaire was available online and provided them with unique passwords and usernames. On August 26, 2011, we began making telephone calls to officials and sent them follow-up e-mail messages, as necessary, to ensure their participation as well as to clarify and gain a contextual understanding of their responses. By September 14, 2011, we had received completed questionnaires from 54 states and territories, for a 100 percent response rate. We used standard descriptive statistics to analyze responses to the questionnaire. Because this was not a sample survey, there are no sampling errors. To minimize other types of errors, commonly referred to as nonsampling errors, and to enhance data quality, we employed recognized survey design practices in the development of the questionnaire and in the collection, processing, and analysis of the survey data. For instance, as previously mentioned, we pretested the questionnaire with state officials to minimize errors arising from differences in how questions might be interpreted and to reduce variability in responses that should be qualitatively the same. In addition, during survey development, we reviewed the survey to ensure the ordering of survey sections was appropriate and that the questions within each section were clearly stated and easy to comprehend. We also received feedback from survey experts who we asked to review the survey instrument. To reduce nonresponse, another source of nonsampling error, we sent out e-mail reminder messages to encourage officials to complete the survey. In reviewing the survey data, we performed automated checks to identify inappropriate answers. We further reviewed the data for missing or ambiguous responses and followed up with respondents when necessary to clarify their responses. On the basis of our application of recognized survey design practices and follow-up procedures, we determined that the data were of sufficient quality for our purposes. In addition to the survey, we conducted interviews with Treasury officials, as well as selected state officials and financial institutions within those states either via teleconference or site visits to collect documentation that informed our understanding of states’ planned uses of SSBCI funds. We limited our selection of states to interview to those states whose SSBCI applications had been reviewed, approved, and for which the applicant had signed an allocation agreement by June 30, 2011: California, Hawaii, Indiana, Kansas, Maryland, Missouri, North Carolina, and Vermont. To evaluate Treasury’s implementation of the SSBCI program, we compared and contrasted Treasury’s SSBCI procedures and planned control activities with GAO’s internal control standards, including Internal Control in the Federal Government. We interviewed Treasury officials about the types of training it provided its staff to help ensure compliance with its procedures. We also utilized data obtained through our questionnaire to identify the dates on which states submitted their SSBCI applications and whether Treasury required resubmission. Additionally, we reviewed a nonprobability sample of SSBCI applications consisting of all eight states that had signed an SSBCI allocation agreement by June 30, 2011, to determine whether all aspects of these states’ applications were considered. We assessed whether Treasury followed its procedures and appropriately documented its decisions by analyzing the documentation of the application reviews. Because we used a nongeneralizable sample to select the applications to review, our findings cannot be used to make inferences about SSBCI applications of states that signed allocation agreements after June 30, 2011. However, we determined that the sample would be useful in providing illustrative examples on procedures and documentation practices applied by Treasury. Furthermore, we conducted interviews with Treasury officials about the type of testing the agency plans to perform of its controls to ensure compliance with SSBCI procedures, lessons learned about the review process, how they addressed problems, and their plans to follow up with states to ensure that SSBCI funds are used for the intended purposes outlined in approved applications for program funds. To review Treasury’s efforts to measure whether the SSBCI program achieves its goals of increasing small business investment and creating jobs, we discussed with Treasury their proposed performance metrics for the SSBCI program. We also interviewed Treasury officials, as well as officials from the eight states that had signed a SSBCI allocation agreement with Treasury by June 30, 2011, to collect documentation that was used to inform our understanding of SSBCI program performance and Treasury’s metrics. We conducted this performance audit from February 2011 to December 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. Table 1 below contains the amounts of SSBCI funds that have been applied for, approved, and disbursed as of October 31, 2011. This information was provided by state and territory officials who responded to a GAO survey between August 15 and September 14, 2011 and by the U.S. Treasury on October 31, 2011. Table 2 below contains information on states and territories’ plans for the distribution of SSBCI funds among eligible program types, provided by officials between August 15 and September 14, 2011. In addition to the individual named above, Paul Schmidt, Assistant Director; Pamela Davidson; Jill Lacey; Marc Molino; Patricia Moye; Deena Richart; Christine San; Jennifer Schwartz; and Chad Williams made key contributions to this report. | Congress enacted the Small Business Jobs Act of 2010 in September 2010 in response to concerns that small businesses have been unable to access capital that would allow them to create jobs. Among other things, the act aims to stimulate job growth by establishing the $1.5 billion State Small Business Credit Initiative (SSBCI) within the Department of the Treasury (Treasury) to strengthen state and territory (state) programs that support lending to small businesses and small manufacturers. Participating states are expected to leverage the SSBCI funds to generate an amount of private financing and investment at least 10 times the amount of their SSBCI funds (that is, a leverage ratio of 10:1). The act also requires GAO to audit SSBCI annually. Accordingly, this report examines (1) which states applied for SSBCI funds and the planned uses of those funds; (2) Treasury's implementation of SSBCI; and (3) Treasury's efforts to measure whether SSBCI achieves its goals. GAO surveyed state SSBCI applicants (for a 100 percent response rate), analyzed data from Treasury case files, and interviewed officials from Treasury and eight participating states. Fifty-four of the 56 eligible states and territories submitted applications requesting a total of about $1.4 billion in SSBCI funds. According to GAO's survey of SSBCI applicants, states plan to support 153 lending programs nationwide with SSBCI funds, 69 of which are new programs being created because of the SSBCI program. These lending programs include a variety of capital access programs and other credit support programs, with venture capital programs receiving the largest amount of funds among eligible program types. SSBCI applicants anticipate that their SSBCI funds will allow them to leverage up to $18.7 billion in new private financing and investment. Some applicants, however, expressed concern that achieving a 10:1 leverage ratio of private financing and investment to program funds could ultimately prove challenging, especially for states creating new programs. Treasury's procedures for SSBCI have evolved throughout its implementation of the program. Treasury began approving applications for SSBCI funds in January 2011 in accordance with guidance it issued in December 2010. However, Treasury did not finalize its application guidance and review procedures until April and May 2011, respectively. Some states indicated they delayed submitting their applications until Treasury's guidance was finalized, with 37 states not submitting an application until June 2011--the deadline for applications. In addition, Treasury did not finalize its procedures for disbursing subsequent installments of funds to states until November 2011, citing potential different legal interpretations of the act's disbursement requirements as the cause for the delay. Treasury is implementing a plan to monitor states' compliance with program requirements, which will include sampling transaction-level data to evaluate the accuracy of the states' annual reports. The Treasury Inspector General made recommendations in August 2011 to improve the tools Treasury will use to monitor state compliance. Treasury has not yet established performance measures for the SSBCI program. Treasury officials noted they are considering several draft performance measures to assess the efficiency of the program. However, Treasury has not finalized its plans for measuring the SSBCI program's performance. GAO and others have recognized the importance of using performance measures to gauge the progress of programs. GAO has also identified key attributes of successful performance measures. Given the preliminary nature of Treasury's potential performance measures, assessing whether the measures reflect the attributes of successful performance measures is premature. Nonetheless, considering these attributes as it works to finalize the SSBCI-specific performance measures could help Treasury to develop robust measures. Until such measures are developed and implemented, Treasury will not be able to determine whether the program is achieving its goals. GAO recommends that Treasury direct the SSBCI Program Manager to consider key attributes of successful performance measures when developing and finalizing SSBCI-specific performance measures. Treasury concurred with the report's recommendation. |
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The United States began providing limited assistance to the Soviet Union in December 1990 to support the reform effort and then increased assistance after the Soviet Union dissolved in December 1991. In October 1992, the Freedom for Russia and Emerging Eurasian Democracies and Open Markets Support Act of 1992 (P.L. 102-511), commonly known as the Freedom Support Act, was enacted. It further increased assistance to the former Soviet Union and established a multiagency approach for providing assistance. It also called for the designation of a coordinator within the Department of State whose responsibilities would include designing an assistance and economic strategy and ensuring program and policy coordination among federal agencies in carrying out the act’s policies. The Freedom Support Act sets forth the broad policy outline for helping former Soviet Union countries implement both political and economic reforms. It also authorized a bilateral assistance program that is being implemented primarily by USAID. In January 1994, the State Department Coordinator approved the first overall U.S. assistance strategy for the former Soviet Union, and in May 1994, the Coordinator approved the strategy specifically for Russia. This strategy has three core objectives: (1) help the transition to a market economy, (2) support the transition to a democratic political system, and (3) ease the human cost associated with the transition. As of December 1994, USAID had obligated $1.4 billion and spent $539 million for programs and projects in Russia since fiscal year 1990. (See app. I.) USAID’s assistance to Russia has focused on 13 sectors, such as health care and housing, that support the three U.S. objectives. Hundreds of U.S. contractors and grantees are responsible for implementing individual projects in the 13 sectors. The 10 projects we reviewed showed mixed results in meeting their objectives. Two projects—coal industry restructuring and housing sector reform—met or exceeded their objectives. Five projects—voucher privatization, officer resettlement, small business development, district heating, and agribusiness partnerships—met some but not other objectives. Three projects—health care, commercial real estate, and environmental policy—met few or none of their objectives. Three of the 10 projects we examined were contributing significantly to systemic reform—that is, they were making fundamental structural changes. These projects were effecting change because they had sustainability—benefits that extend beyond the project’s life span—built into their design and they focused on issues on a national or regional scale. The housing sector project helped Russian ministries and agencies implement 38 laws, regulations, and decrees to reform housing policies and practices. The Urban Institute, which implemented the project, also completed a series of pilot projects related to housing maintenance, mortgage lending, rent reform, and property rights. Many of the activities affect the entire country or could be replicated in additional cities. The project helped create new institutions, strengthened existing ones, and distributed procedural guides and manuals to local governments as a way to sustain the reforms. The contract for implementing the voucher privatization project called for Deloitte & Touche to establish 35 voucher clearing centers in cities throughout Russia. This project encountered some difficulty in meeting its initial time frames and establishing all the centers, but overall the project was successful. The active centers handled 70 million voucher transactions as part of Russia’s unprecedented privatization program, and over half the centers participate in ongoing capital market activities. Partners in Economic Reform (PIER), which implemented the coal restructuring project, has facilitated movement toward the transformation of the entire coal sector. PIER helped build a consensus for reform among the Russian government, mine labor unions, and mine management. It was also instrumental in facilitating a World Bank review that could lead to a restructuring loan. To sustain the project’s contribution to systemic reform, PIER helped establish long-term business relations between the Russian and U.S. coal industries, formed a consortium of U.S. coal-related business, and is involved in social safety net and new job-creation activities. Finally, PIER helped facilitate the sale of U.S. equipment in Russia. Seven projects we examined did not contribute significantly to systemic reform because they either did not meet their objectives, were narrowly focused, or lacked sustainability. The University of Alaska sought to help develop small businesses by establishing American Russian Centers in four cities across the Russian Far East. The centers’ purpose was to help train entrepreneurs, help form new businesses, and build lasting business ties between the region and the United States. To become self-supporting after USAID stopped funding, the centers planned to develop partnerships with counterpart institutions. However, the centers have so far been unable to attract alternative funding. CH2M Hill International Services, Inc., signed a contract in September 1993 for an environmental policy development and technology project. The contractor had difficulty filling critical staff positions in Russia and providing required work plans for the activities. Of the work plans due in November 1994, one was approved in May 1995, while the other was still being revised as of June 1995. The project to provide health care financing training in the United States to Russian health professionals was implemented by Partners for International Education and Training (PIET), several training institutions, and USAID. Although PIET and the institutions provided the training as required, the Russian participants did not have the authority, expertise, or resources to make systemic changes. In addition, changes in Russia’s health reform plans have made the training irrelevant. A commercial real estate project, implemented by International Business & Technical Consultants, Inc. (IBTCI), was intended to create a standard approach for increasing the availability of commercial real estate in six Russian cities. The project design called for a pilot project/roll-out concept, but IBTCI did not roll out the pilot in any of the cities and used a different approach in each city. Also, Russian officials said the project had little or no effect on the availability of commercial real estate in their cities. The district heating project, which USAID recommended we review, was implemented by RCG/Haggler Bailly and met its objectives primarily by conducting energy audits and training as well as providing energy efficiency equipment to two Russian cities. However, as of February 1995, some of the equipment in one of the cities had not been installed. Russian officials said the equipment may never be installed because Russian authorities never certified it. USAID had not monitored the use of the equipment or followed up on the impact of the studies produced for the project. Consequently, we found no indication that the project contributed to systemic reform in the energy efficiency area. The agribusiness partnerships project, implemented by Tri Valley Growers, helped two U.S. companies establish joint ventures in two Russian cities. Although the involvement of U.S. companies increased the probability that the business ventures would be sustained, the limited scope of the partnerships makes it unlikely that they will have a significant effect on reforming Russia’s agricultural sector. USAID has discontinued the entire agribusiness partnerships project in Russia. The Russian officer resettlement pilot project was not intended to be sustainable after its completion, but instead was motivated by the United States’ desire to encourage the withdrawal of Russian troops from the Baltic countries. The $6-million pilot project objective was to construct 450 housing units to resettle demobilized officers by July 1994. As of February 1995, 422 units were either occupied or available for use, so in that sense the project was successful. Successful projects (1) had strong support and involvement at all levels of the Russian government, (2) had a long-term physical presence by U.S. contractors in Russia, and (3) were designed to achieve maximum results by supporting Russian initiatives, having a broad scope, and including elements that made them sustainable. A critical element to a project’s success was the degree to which Russian officials were committed to reform in the particular sector. Russians at both the federal and local levels demonstrated a strong commitment to the projects that were contributing to systemic reform. The Russian government also provided financial or in-kind support, and Russian nationals held leadership roles in the projects. For example, PIER’s approach to implementing the coal project included working with officials in the Ministry of Fuel and Energy, Fund of Social Guarantees, and the federal coal company; academic institutions; oblast’ and city officials in the two targeted regions; local mine management; and representatives of two labor unions. Russian nationals served as codirectors, and PIER staff received free apartments and office space. To accomplish the housing sector reform project, the Urban Institute worked closely with officials in the Ministries of Finance and Economy and the State Committee on Architecture and Construction at the federal level, the Moscow city government, various maintenance firms, banks, and grass-roots condominium associations. Although office space in Moscow is expensive and scarce, the Institute received free office space. In addition, Russian nationals played a key role on the Institute’s staff. In contrast, many less successful projects lacked the buy-in of Russians at either the local or federal level and had little Russian involvement or contribution. For example, the State Committee of the Russian Federation for the Management of State Property (GKI), Russia’s federal agency overseeing the privatization effort, was instrumental in designing the voucher clearing and commercial real estate projects. However, in some cities, local officials were not involved in designing the projects and had little interest in them; as a result, these projects were not fully successful. The officer resettlement project established housing in several cities, but not in Novosibirsk, where city officials reneged on a previous administration’s commitment to provide needed infrastructure support. Because officials at the federal and oblast’ levels were not involved in the initial agreements, they had no authority to require the new city administration to fulfill the contract, nor were they willing to provide additional funding for the project. The district heating project was not completed in Yekaterinburg because local officials did not allow monitoring equipment to be installed. They said the proper Russian authorities had not certified the equipment. The successful projects usually had long-term advisers living in Russia, which enabled the advisers to build trust, learn about local conditions and plan accordingly, monitor progress closely, and correct problems as they occurred. In addition, successful projects involved contractors that had appropriate experience to carry out the project. For example, the Urban Institute has had two long-term advisers living in Moscow since 1992 who maintained close contact with Russians involved in housing reforms. PIER’s project director had lived in Moscow for 3 years. Other members of its American staff had lived in Kemerovo and Vorkuta, the key cities of the major coal mining oblasts, since 1993 and 1994, respectively. The two field staff have years of experience as coal mine engineers. Russian officials at all levels (1) praised PIER’s staff; (2) described PIER’s assistance as timely, well-targeted, and beneficial; and (3) wanted the project to continue and expand. Contractors implementing many of the less successful projects did not have staff living in the Russian cities being assisted. For example, neither IBTCI nor RCG/Haggler Bailly had permanently assigned American staff in the cities being assisted. IBTCI’s consultants would fly in, make rapid diagnoses, deal with problems quickly, and then leave. Many U.S. officials, Russians, and contractors said that relying on “fly-through” consultants rather than permanent staff was an ineffective approach. Successful projects—the housing reform, voucher privatization, and coal industry restructuring—were designed to be sustainable, have a widespread effect, and support existing initiatives. Each project supported ongoing Russian efforts at widespread reform, considered local conditions, and contained elements to sustain the effects of the project beyond its life span. In contrast, some projects were not designed to maximize their potential impact. For example, the project design required RCG/Haggler Bailly to provide energy efficiency equipment and audits but did not include methods to replicate the project in other cities, or extend monitoring efforts to determine how the equipment or studies were used. The USAID Inspector General reported that other projects did not include any follow-up steps to ensure that the assistance provided was used. In addition, projects focusing on health care training and commercial real estate leasing did not consider local needs and conditions and thus had limited impact. Several projects did not adequately identify outcomes or measurable results. For example, the Tri Valley Growers’ contract with USAID did not stipulate how many agribusiness partnerships were to be established. The design of the coal project also did not adequately identify outcomes or measurable results, but PIER developed an effective project nonetheless. The USAID Inspector General found similar problems when reviewing many projects in the region. It is widely acknowledged that the Russian people themselves will determine the ultimate success or failure of political and economic reforms. Without their involvement and commitment to change, outside assistance will have a limited effect. For example, the support and involvement of Russian federal agencies, such as GKI in the privatization effort and the ministries related to housing, ensure that projects in those sectors are likely to have a wide and sustained effect. The coal project’s impact depends on Russia’s commitment to restructure the coal industry. In several sectors, a Russian commitment to reform remains elusive. Powerful factions in the Russian legislative branch strongly oppose land reform, and the Ministry of Health has not demonstrated a commitment to health care reform. This lack of commitment raises concerns that projects in the agriculture and health sectors will not have widespread benefits. USAID is now working with the Ministry of Environmental Protection and Natural Resources, but the level of support from other important federal ministries, including the Ministry of Finance, is still questionable. Other domestic conditions will also influence a project’s success. Russia’s commitment to breaking up monopolies and its ability to attract capital for modernizing outdated equipment, restructuring existing state enterprises, and starting new businesses will affect the pace and scope of Russia’s transformation to a market economy. Moreover, projects such as introducing mortgage lending will depend on macroeconomic policy and land reforms. Russia is counting on foreign capital to help move the transition process forward, but such factors as the unstable economic situation, a poor and uncertain tax structure, an undeveloped financial market infrastructure, and an increased crime rate make foreign investors hesitant to invest. USAID responded quickly to assist Russia in undertaking its political and economic reforms, as called for in the Freedom Support Act. However, to respond quickly, USAID made certain exceptions to its normal procedures and processes. Although USAID provided a quick and flexible response to a fluid, unpredictable situation, we identified several management problems in addition to design problems that occurred, in part, because of the quick response. USAID officials agreed that management problems occurred, but they said the risks associated with not responding quickly were high. The large size of USAID’s program, the vast geographic area receiving assistance, and staff limitations have prevented adequate monitoring in some cases. We found that USAID officials were unaware of positive and negative aspects of the projects implemented by IBTCI, RCG/Haggler Bailly, and PIER. USAID officials had not visited some projects, and USAID did not have representatives located outside Moscow. USAID expected its Russian staff to conduct field monitoring, but the Russian nationals lacked the necessary training. USAID officials said they considered but rejected the idea of establishing field offices outside Moscow. Without adequate staff, USAID relied mainly on contractors’ written and oral reports to monitor the projects, but some contractors did not report all problems. The USAID Inspector General also found shortcomings in the reporting process: contractors were not required to report on their progress toward specific objectives or indicators. Moreover, USAID did not enforce some of its reporting requirements. For example, Deloitte & Touche did not provide the required lists of equipment purchased with USAID funds and brought into the country, and USAID did not enforce the requirement. Although the State Department allowed USAID/Moscow to increase U.S. direct-hire personnel and personal services contractors from 27 in fiscal year 1993 to 66 in fiscal year 1995, USAID officials said even more staff were needed to adequately monitor the program. However, State would not allow the USAID mission to grow further because, among other reasons, the USAID assistance program is scheduled to end by the end of the decade. In some cases, USAID had not determined the relative success or failure of projects so that it could apply lessons learned to other efforts. It did not conduct the required periodic assessments/evaluations of the coal and agribusiness projects. The omnibus contracts do not require an evaluation of the individual tasks, but instead evaluations are to be done at the end of the contracts, according to USAID officials. The omnibus contracts for USAID’s private sector initiatives alone have obligated approximately $200 million and are not scheduled to terminate until 1996, too late to apply lessons learned. In addition, an evaluation that was conducted was not accurate. A contractor evaluated the district heating project in June 1993 and gave it high marks. Our 1995 review of the project found major shortcomings, such as equipment still in boxes after being delivered in 1993, even though the evaluation report said the equipment had been installed and was being used. The USAID Inspector General also found that evaluations had not been conducted and that the quality and impact of some project evaluations were questionable. The devolution of management and monitoring responsibility from USAID’s Washington office to a rapidly growing Moscow office has not been smooth, and several problems have developed as a result. First, as USAID’s Moscow office assumed more management responsibility, contractors had to begin dealing with another layer of management review. This caused delays and confusion among some contractors. Second, there were tensions between the Washington and Moscow offices because of differences regarding program implementation. For example, the offices disagreed about which reformers and Russian government agencies to work with. Third, the USAID/Moscow office lacked some essential documents to enable officials to carry out their duties. We found that key contract and financial documents were not available in Moscow, a problem also reported by the USAID Inspector General. The State Department Coordinator opposed giving greater authority to USAID/Moscow because he believed USAID/Washington needed to maintain a more prominent role. He said that because assistance to Russia is an important foreign policy issue, key decisions should not be delegated to the field. State and USAID/Washington officials said they needed quick access to important project data for reporting purposes, but quick access to data could not be ensured when projects were managed by the USAID/Moscow office. USAID has not yet developed a good management information system for its Russia program. The USAID Inspector General reported that USAID lacked an information system with baseline data, targets, time frames, and quantifiable indicators by which to measure program progress and results. USAID’s Bureau for Europe and the New Independent States was exempted from a new agencywide management system because the program was intended to be short term and regional rather than long term and country-specific. USAID officials said the pressure to provide assistance quickly meant forgoing the traditional project design process, which included developing progress indicators. Part of USAID’s assistance strategies was to focus on areas where reformers were willing to make changes. USAID believed this would help create a synergy that could stimulate the overall impact of the projects. Some contractors were not aware of each others’ activities. USAID’s management information system did not list contractors by region, and USAID sometimes did not tell new contractors about other contractors’ activities. In some cities, contractors contacted each other on their own and started coordinating their efforts. However, this was being done on an ad hoc basis. In Vladivostok and Yekaterinburg, U.S. Consuls General facilitated contractor coordination. The USAID Inspector General found that many projects with similar goals were not linked to one another. Poor coordination reduced the opportunity to achieve synergy and targeted impact and gave some Russians the impression U.S. assistance was fragmented and uncoordinated. We recommend that the USAID Administrator focus assistance efforts on projects that (1) will contribute to systemic reforms; (2) are designed to be sustainable; (3) are supported by all levels of Russian government; and (4) whenever possible, use American contractors with an in-country presence. In commenting on a draft of this report, USAID said the three projects that we had deemed to have not met their primary objectives did produce some positive benefits or it was too early to tell the impact the projects would have. USAID also said it was aware of the problems that have occurred and has taken steps to correct them or terminate activities that could not be fixed. USAID pointed to a new computerized monitoring system that is expected to produce its first report in November 1995. USAID agreed with our recommendation regarding the focus of its assistance projects and said it was taking steps to implement it. In addition, USAID said it was taking corrective action to address the management problems we identified. However, it stressed that its assistance has had a positive impact and occurred in a difficult operating environment. USAID indicated that it had made progress in setting up its own monitoring, reporting, and evaluation system. It should be pointed out, however, that in November 1994, the USAID Inspector General reported that the system was still far from able to measure program results. USAID said that our report would have provided a more balanced and accurate view of the systemic impact and sustainability of a project’s activities if we had considered the activity in the context of the whole program. USAID stated that, in nearly every case, the individual projects we focused on were part of a larger project or program that would have substantial impact on reforming Russia’s economy. USAID is correct that the projects we examined were usually one component of a larger sector program; however, USAID is incorrect in its assertion that we evaluated projects in isolation and without considering the context of the whole program. The overriding objective of USAID’s program in Russia is to contribute to reforming both the political and economic systems. This is also the objective of the assistance program for each sector and, with few exceptions, of each project that supports a sector program. Our examination focused on the individual building blocks that support sector programs and ultimately support the reform effort in Russia. In some cases, we found that the individual building blocks will not contribute to systemic reform in the sector or in Russia overall. Even though this does not mean that an entire program, of which a less-than-successful project is a part, will fail in its systemic reform objective, it does mean that an unsuccessful project is not contributing to a program’s success. We also disagree with USAID’s assertion that significant systemic reform has resulted from USAID activities in all sectors. For example, the agribusiness partnerships project, including components reviewed by the USAID Inspector General, comprises most of the USAID funding going to the sector but is not expected to contribute significantly to systemic reforms. Only a limited degree of systemic reform has occurred in other sectors as well, including the health care and the environmental sectors. We believe that a sector evaluation, although useful in its own right, would not have allowed us to draw conclusions about the role and contribution of individual projects. USAID provided other comments that we incorporated into the report where appropriate. The full text of USAID’s comments is reprinted in appendix IV. We judgmentally selected 10 individual projects from 6 sectors to review as case studies. We selected projects based on their geographic distribution, focusing on regions where several projects were concentrated. We also considered the level of obligations and expenditures; the type of assistance provided (e.g., training, technical assistance, and product delivery); and the type of contracting vehicle (e.g., cooperative agreements, grants, and contracts). We generally did not review projects examined by the USAID Inspector General, although we analyzed its work to assess whether common themes emerged. (See app. II for a list of the 10 projects we studied and USAID Inspector General reports we reviewed.) We analyzed USAID and project documents and interviewed USAID and other U.S. government officials, U.S. contractors, Russian counterparts, and beneficiaries. We visited project sites in Western Russia, Siberia, and the Russian Far East in November 1994 and February 1995. Appendix III provides a detailed analysis of the 10 projects in our case study. We conducted our work from September 1994 to April 1995 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce this report’s contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Secretary of State, the Administrator of USAID, and other interested congressional committees. Copies will also be made 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 V. In his January 1995 annual report, the State Department Coordinator reported about $2.9 billion in obligations and $1.8 billion in expenditures for Russia through December 1994. (See table I.1.) Between fiscal years 1990 and 1994, the U.S. Agency for International Development (USAID) allocated assistance to the New Independent States (NIS) as a region. During that time, most projects spanned different countries and USAID did not track how much money was obligated or expended by country. Thus, USAID country attributions are estimates and should be treated as such. In fiscal year 1995, USAID began keeping country accounts. We reviewed 10 projects in depth as part of our review. In addition, we reviewed various reports that USAID’s Inspector General has issued on management issues and projects in Central and East Europe and the former Soviet Union. The 10 projects and the USAID Inspector General reports we reviewed are listed in table II.1. Coal project/Partners in Economic Reform Small business development/American Russian Center, University of Alaska Environmental policy & technology/ CH2M Hill International Services Health care training/Partners for International Education and Training Commercial real estate/International Business & Technical Consultants, Inc. The following are the USAID Inspector General reports GAO reviewed. Audit of the Bureau for Europe’s Technical Assistance Contracts (Report No. 8-180-93-05, June 30, 1993). Audit of the ENI Bureau’s Monitoring, Reporting and Evaluation System (Report No. 8-000-95-002, Nov. 28, 1994). Audit of ENI’s Strategy for Managing Its Privatization and Restructuring Activities in Russia (Report No. 8-118-95-009, Mar. 17, 1995). Audit of Selected Privatization and Restructuring Activities in Russia (Report No. 8-118-95-007, Mar. 10, 1995). Audit of the Reestablishment of Vaccine Production Activity Under the New Independent States Health Care Improvement Project No. 110-0004 (Report No. 8-110-94-004, Feb. 25, 1994). Audit of the Medical Partnerships in Russia and Health Information Clearing House Activities Under the New Independent States Health Care Improvement Project (Report No. 8-110-94-005, Feb. 28, 1994). Audit of the Distribution of Emergency Medical Supplies to the New Independent States Under USAID Cooperative Agreement With the People-to-People Health Foundation “Project Hope” (Report No. 8-110-94-006, Mar. 17, 1994). Audit of the Vulnerable Groups Assistance Program in Russia Under Project No. 8-110-0001 (Report No. 8-110-93-08, Sept. 24, 1993). Audit of Activities to Improve Crop Storage Systems in the New Independent States (Report No. 8-110-94-014, Aug. 31, 1994). Audit of the ENI Bureau’s Cooperative Agreement With World Learning, Inc., for Support to Non-Governmental Organizations in the New Independent States of the Former Soviet Union (Report No. 8-110-95-008, Mar. 10, 1995). Audit of the Department of Commerce’s Special American Business Internship Training Program in the New Independent States (Report No. 8-110-93-10, Sept. 24, 1993). Audit of the Department of Commerce’s Consortia of American Businesses in the New Independent States Program (Report No. 8-110-93-11, Sept. 24, 1993). Audit of the Nuclear Regulatory Commission’s Technical Assistance Activities in Russia (Report No. 8-118-94-012, June 28, 1994). Audit of the Department of Energy’s Nuclear Safety Technical Assistance Activities in Russia and Ukraine (Report No. 8-110-95-001, Oct. 7, 1994). The following provides a detailed analysis of each project that we reviewed. We selected one project in each of the following areas: (1) housing policy reform, (2) voucher privatization, (3) coal, (4) small business development, (5) environmental policy and technology, (6) heating, (7) health care, (8) commercial real estate, (9) agribusiness partnerships, and (10) officer resettlement. Each summary contains information on the problems in the sector, USAID’s project objectives for the selected contract, and the project approach used by USAID or the contractor. We also provide our assessment of the contractor’s performance, the impact on systemic reform, and USAID’s management of the contract. The projects are presented on the basis of their capacity to contribute to systemic reform. The Urban Institute housing project was successful. It supported reforms already underway, used an experienced contractor with staff in country, installed local nationals in high-level positions, focused its efforts on both the federal and local levels, and contained elements that made it sustainable. Therefore, this project will likely have sustained benefits as legislation is implemented and new Russian institutions expand the pilot projects into other areas. Russia’s housing sector has been beset by housing shortages, production inefficiencies, maintenance problems, and deterioration. This situation occurred primarily because the state had a monopoly on housing. For example, it (1) used standardized apartment buildings constructed by state-owned companies, (2) controlled apartment construction and maintenance, (3) financed all state housing from state assets, (4) almost totally subsidized housing and maintenance, (5) guaranteed low-cost housing, and (6) distributed housing through waiting lists. In addition, because the Soviet government had not raised rents since 1928, rents covered less than 5 percent of the cost of operating the apartments in 1990. The problem was exacerbated when the Russian Federation government stopped paying for maintenance cost of apartments and they fell into disrepair. In addition, the Federation devolved the housing assets and responsibilities to municipalities as a way of relieving itself of the burdens associated with managing the apartments. Russia initiated housing reforms in 1991 when it allowed its citizens to privatize their apartments at little to no cost. This action set the stage for establishing a private housing sector. USAID signed its first contract for housing sector reform with the Urban Institute in September 1992 for $5.8 million. This 2-year contract required the Institute to provide draft legislative and financial advisers to help Russia develop market-oriented housing programs and legislation. Other Institute advisers were expected to conduct pilot projects on (1) rent reforms and housing allowances for the poor, (2) privatized housing maintenance, (3) condominium associations, and (4) mortgage lending. It was also expected to provide targeted training to those implementing reforms and develop local institutions to sustain and expand the reforms. Specific objectives and milestones were incorporated into the project design. A USAID team that included Institute representatives met with their Russians counterparts in early 1992 to determine their reform priorities. From 12 to 15 meetings at both the national and municipal levels in Moscow were needed to clarify Russian reform priorities. To help focus Russian priorities, the team used a “menu” of reforms based on experience in housing reforms in Hungary and developing countries, and then focused on one or two priorities to demonstrate results quickly and build confidence. The Russian priorities were formalized through agreements signed in March 1992 with USAID, the City of Moscow, the State Committee on Architecture and Construction, the Ministry of Finance, and the Ministry of Economy. The team sought joint agreements with the three ministries agencies to (1) ensure it would not become captive to any one ministry, (2) ensure broad-based agreement on reform priorities, and (3) reduce governmental impediments to reform. The Russian counterparts showed their support for the project by providing the Institute with free office space, which is highly unusual due to the scarcity of office space in Moscow. The team’s strategy was to work at the national level to help draft legislation that would shape and codify reforms. In addition, it planned a series of local demonstration projects to determine the effectiveness of the designs in the Russian context. The team augmented these efforts by providing training in Russia and the United States. A key strategy was to take advantage of the Russian reforms already underway and try to create “win-win” situations for the government and its citizens. The Institute’s staffing policies were also important to its approach. It provided two long-term resident advisers, including the Program Director, who were located in Moscow. The Director said using advisers who were permanently located in Russia rather than “fly-through” consultants helped establish trust with their Russian counterparts and enabled them to respond immediately. The Institute also employed five Russian housing experts. Short-term U.S. advisers were used on an as-needed basis. The Director said that using local Russians in key positions was critical to establishing trust with the Institute’s Russian counterparts. The large Russian staff also was less expensive than U.S. consultants. The Institute achieved its objectives of helping to develop housing legislation. According to the Russian Federation Housing Director, the Institute’s assistance was critical in drafting the 38 laws, decrees, and regulations that have been implemented. These included laws and regulations on property rights, housing finance, rent reform, housing allowances for the poor, privatized maintenance, condominiums, and mortgage lending. The Institute is now the government’s principal housing adviser. The Institute also achieved its objectives of establishing pilot projects in four areas: rent reform and housing allowances for the poor, privatized maintenance, condominiums, and mortgage lending. The Institute helped the City of Moscow develop a program that would raise rents over a 5-year period until they covered all the costs of operating the apartments. To reduce resistance to rent increases, it tied maintenance improvements to the increases so citizens would see an immediate improvement in their housing conditions. In 1994, the Federation initiated a national 5-year program to increase tenant payments to cover the full operating costs. The Institute also helped the Federation structure a program in which the municipalities began providing housing allowances to the poor. The Institute helped introduce competitive private maintenance for municipal housing. It conducted training sessions, organized the competition to select private firms, and conducted a study tour to the United States so officials could see private maintenance activities. In March 1993, three private maintenance firms assumed management of 2,000 apartments in Moscow, and in October 1993, Moscow’s mayor extended the program to all areas of the city. By 1994, over 60,000 apartments were under privatized maintenance, far surpassing the project’s goal of 2,000. The Institute’s goal for the condominium pilot was to lay the legal and procedural groundwork by 1994. However, it surpassed this goal and helped to create 24 functioning condominium associations in Ryazan’. The regulations it helped develop were instrumental in registering the first condominium association in Moscow. To address mortgage-lending problems, the Institute developed mortgage-lending facilities at several banks; limited lending has begun. For example, the Institute helped Mosbusinessbank, Russia’s third largest commercial bank, to make home mortgage loans and provided assistance in all phases of operations, including legal documentation, underwriting, loan servicing, mortgage loan instrument development, and risk management. The Institute then expanded its work to eight other banks and provided the necessary materials to other banks to expand and sustain mortgage lending. However, hyperinflation has precluded lending to most Russians. The Institute’s critical assistance helped transform Russian priorities into workable legislation and pilot projects. Although the Russians are responsible for the pace of reforms, the Institute has helped effect systemic changes in Russia’s housing sector. It helped pass far-ranging laws that have codified reforms. The program to raise rents and provide subsidies for the poor, which is being implemented across the country, is a fundamental change for the government and its citizens. The project has a strong sustainability component. Over the next several years, it plans to institutionalize the reforms by expanding the number of demonstration projects and developing private maintenance organizations, condominium associations, and mortgage banks. In addition, it created procedures manuals, explanatory guides, and other necessary documentation on implementing rent increases, beginning privatized maintenance, creating condominium associations, and developing mortgage lending. The Institute has distributed more than 25,000 of these documents, mostly to local governments. The project has won high praise from USAID and Russian officials. The USAID Mission Director in Moscow called the project one of the most successful ones he had ever seen. A USAID official in Washington said that, for the money, no USAID project has had more macroeconomic impact. The Russian Federation Housing Director noted the Urban Institute’s tremendous influence on the government, and Russian citizens working in maintenance, condominium associations, and mortgage lending also praised the project. Despite the program’s progress, most Russians have yet to benefit from the reforms. This is because the reforms are relatively recent, are tremendously complex, and face opposition by antireformists; they are also being implemented in a country with no tradition of market-based decisions. Private land ownership rights are still generally uncertain, housing and construction mortgages are generally unavailable, additional laws and regulations are needed, and most apartment buildings are still maintained by state organizations. In addition, factors beyond the housing sector, such as macroeconomic and political instability, slow the transformation to a fully developed privatized housing sector. USAID successfully managed the contract. It determined the Russians’ reform priorities, incorporated these into its reform plan, and listed these in its contract. USAID selected a contractor with experience in both the sector and region and is effectively monitoring the reforms through regular contacts with the contractor and Russian counterparts. Both USAID/Washington and USAID/Moscow agreed on the housing strategy. USAID also had the contractor develop measurable goals in its annual work plan. USAID then measured the contractor’s progress by comparing its task orders to the deliverables. As part of Russia’s privatization effort, Deloitte & Touche established a national system of centers to process millions of vouchers that Russians received and used in the privatization process. Overall, the Deloitte & Touche voucher privatization project was successful, with a few exceptions. The project focused on national reforms, but some areas had lower Russian participation than expected. Deloitte & Touche kept USAID and the State Committee of the Russian Federation for the Management of State Property (GKI) informed of project progress but did not meet some of its reporting requirements. Deloitte & Touche met its amended objective of setting up 30 centers, but many were underused. Several factors contributed to the overall success of the project. The Russian GKI helped focus assistance efforts and identified problems when USAID had minimal field presence. Further, the omnibus contract system allowed the contractor to institute a rapid roll-out as well as adjust the scope of work when warranted. In addition, using existing Russian agencies and using staff and equipment for follow-on activities increased the project’s effects and sustainability. Because the state controlled Russian enterprises, which were generally large and monopolistic, the private sector was virtually nonexistent. The legal and regulatory framework to create the new system was not in place; few citizens had entrepreneurial experience or exposure to western management, accounting, and marketing concepts; and no capital market infrastructure existed. In August 1992, President Yeltsin announced plans to privatize Russia’s large and medium-size state-owned enterprises. Within weeks, distribution of privatization vouchers began, with each Russian citizen eligible to receive one voucher. The sale of the enterprises was expected to reduce the need for massive state subsidies, begin to reduce inefficiencies, and eventually lead to higher productivity and innovation as shareholders demand profits. Voucher privatization was the initial step in the overall privatization process and was used to transfer ownership from the state to private individuals. Unlike the approaches used in some Central European countries, Russia chose to privatize enterprises before restructuring them.The process is therefore not complete: restructuring must still take place before the enterprises can function in a market economy. This may be difficult because management and workers received a majority of shares and can resist taking the painful steps necessary for restructuring. The voucher-clearing centers allowed individual Russians and investment fund managers to more easily buy shares via electronic transfers in enterprises located in remote areas. Without the centers, people would have had to physically transport vouchers to other parts of the country. There was also a fear that regions would not let outsiders, including foreigners, buy shares in highly visible enterprises, thereby allowing insiders and local bureaucrats to control the process. The specific objectives of the project required Deloitte & Touche to establish 35 functioning centers in various Russian cities to verify, process, and cancel voucher receipts. The project was carried out under two separate contracts at a total cost of $4.1 million. The initial contract (as amended) required the contractor to establish 20 centers by the end of 1993, and a task order under the omnibus contract required 15 more before March 1994. This would give citizens enough time to process their vouchers before the privatization program ended in July 1994. USAID and GKI, the Russian agency overseeing the national privatization effort, hoped that many of the centers would develop into institutions, such as registrars and depositories, in the capital market infrastructure. The number of vouchers the centers were to process was not defined. USAID worked closely with GKI on project design, which called for Deloitte & Touche to develop 4 pilot centers and then establish 16 more after successfully setting up the pilot sites. To provide broader geographic coverage, USAID and GKI decided to extend the project and have Deloitte & Touche set up 15 more centers. Consultants from another USAID contractor, the Harvard Institute for International Development, worked with GKI to design and monitor the project. Deloitte & Touche established a permanent office in Moscow in June 1990 and opened a separate office for this project in early 1993. It worked closely with GKI in Moscow and GKI’s local offices in various Russian cities to identify appropriate cities for the centers and suitable partners. Deloitte & Touche then imported computer equipment, established accounting systems, and installed the software and telecommunications systems needed to facilitate voucher transactions. Teams of Deloitte & Touche staff then traveled to the cities to train center staff, install and test the equipment, and test the software and telecommunications systems. The contractor hired Russians to assist with these efforts and usually supplemented the work of Russian agencies, typically banks, already working in related fields. Under the first contract, Deloitte established all 20 centers before its deadline. Under the second contract, USAID and GKI reduced the number of centers from 15 to 10 and extended the deadline by 3-1/2 months because of implementation delays. The delays took place because of problems with equipment procurement and Russian government customs clearance; difficulties locating viable agencies to act as centers; and problems at the local level. For example, some centers collapsed when their leadership changed or chose not to participate on a national scale for local political reasons. Both parts of the project were completed under budget. Of the 30 centers Deloitte & Touche set up, only 23 were used, and many of these experienced relatively little activity. The lack of use was attributed to delays in setting up some centers; limited public awareness (centers were not responsible for advertising their services); limited local interest in voucher auctions in other areas; Russian reluctance to use electronic transfers; and a lack of compatibility between the project goals and individual center goals. Deloitte & Touche was responsive to GKI requests for project changes. The task order was revised once it became clear that all 15 centers would not be needed. In some cases, Deloitte & Touche went beyond the required tasks at GKI’s request. Deloitte & Touche generally kept USAID and GKI informed with monthly reports on progress and problems. However, some reports were not filed as required, and Deloitte & Touche did not provide an adequate inventory of the equipment it procured, which would have ensured the accountability and tracking as required by the company’s contracts. The project is considered a success although not cost-effective. A functioning national system was created in a short time, and according to GKI, it handled over 70 million vouchers, nearly half the vouchers processed in the program. People were able to buy shares in enterprises located in remote areas. GKI noted that over half of the centers have evolved into institutions that are now active in capital market activities, such as share registrars and depositories. Our visits to three centers verified that center staff and equipment are being used in follow-on activities. These centers intend to become self-financing on a fee-for-service basis when USAID assistance ends. The scope of voucher privatization in Russia was unprecedented in scale and speed. According to Russian and U.S. officials, USAID’s support of GKI and other Russian institutions involved in privatization activities was crucial to this phase of the program. The Russian Privatization Center estimated that 14,000 large and medium-sized enterprises were privatized by July 1994; they employed over 60 percent of the industrial workforce. Nevertheless, the overall effect of the privatization program on Russia has yet to be determined. Enterprise restructuring has only begun, monopolies still exist, and inadequate tax legislation makes foreigners reluctant to provide badly needed capital investment. USAID used an omnibus contract to plan and implement projects quickly. It allowed USAID to respond quickly to emerging needs through task orders that included specific objectives for narrowly focused, short-term projects. USAID officials said this gave them the flexibility to change directions quickly, move money into areas and projects making rapid progress in reform, and adjust projects to meet emerging needs. Omnibus contracts also allowed USAID to obligate a large amount of funding. Deloitte & Touche has an omnibus contract for $41.5 million, with subcontractors performing some of the work. However, the individual task orders lacked an evaluation requirement. USAID officials said an evaluation is planned only at the end of the omnibus contract, which ends June 30, 1996. We identified several USAID management problems. For example, USAID did not design the project with quantifiable indicators to measure progress. Although Deloitte & Touche set up 30 voucher clearing centers, the project design did not specify the amount of activity expected at each center or on a national scale. USAID/Moscow had limited information on the project, such as key documents on Deloitte & Touche’s initial contract or task order, and accurate financial data for the project. USAID officials said key documents had not been transferred to Moscow when management moved to Moscow from Washington. Also, the physical distances involved, the geographic distribution of project activities, and the lack of staff to visit the sites left USAID uninformed about some Deloitte & Touche activities. USAID officials said they relied heavily on GKI and Harvard consultants to help monitor the project. Finally, USAID did not require Deloitte & Touche to provide adequate inventory data on the $1.1-million worth of equipment purchased with USAID funds. Not having this data hindered USAID from using surplus equipment in other projects as planned. The coal project is achieving its primary objective of facilitating the restructuring of Russia’s coal industry and is opening the industry to American technology and companies. The Russian beneficiaries expressed appreciation for the assistance and found it useful. Due to the size and cost of the restructuring, however, the Russian government must complete the effort. If the World Bank approves a $500-million sector loan, this project will have played a key role in restructuring the coal sector. Although the project is meeting its objective, USAID did not provide adequate oversight, did not fully understand the beneficiaries’ needs or opinions about USAID assistance, and did not know the extent to which the project was meeting its goals. Coal is an important component of Russia’s economy. However, Russia’s coal sector suffers from declines in production and serious environmental and safety liabilities, in large part because of the centralized structures, subsidized pricing, Soviet-style management, and state allocation system. To solve these problems, the coal industry needs to be restructured. The process of restructuring is both a problem and a solution because it creates new challenges. The major areas that need to be addressed in restructuring Russia’s coal industry and transitioning from a centrally planned to a market economy include reducing the numbers of mines and miners as well as the amounts of coal produced and government subsidies. In addition, the coal monopoly must be broken up, mines must be privatized, and new relationships and agreements must be established between management and labor. Efforts to restructure the coal industry are complicated because the state-subsidized coal mines provide many social services and may be the only source of energy or employment in the areas where they are located. Coal industry restructuring will take a heavy toll on miners and their families as the industry streamlines its operations, mines are closed, and miners lose their jobs. These same miners, who could lose their jobs as a result of the Yeltsin reform program, were instrumental in bringing Yeltsin to power in 1991. The mining community in Russia is still considered a politically powerful force. President Yeltsin took a major step toward restructuring Russia’s coal industry in July 1993 when he freed coal prices. Since that time, the industry has made some progress. For example, approximately 72,000 of the 914,000 coal miners and others employed by the coal sector in 1992 left the industry between January 1993 and June 1994. In addition, coal production decreased by approximately 41 percent from 1988 to 1994. The government also reduced subsidies to the coal industry by approximately 20 percent in real terms (i.e., taking inflation into account) between 1993 and 1994. Finally, the Russian coal industry closed 2 of its approximately 273 mines, was in the process of closing 14 more mines in 1994, and is preparing to close 40 more in the future. As part of USAID’s broader effort to assist Russia’s energy sector, USAID signed a cooperative agreement with the Partners In Economic Reform (PIER), a private, nonprofit organization established to assist the coal industries in Russia, Ukraine, and Kazakstan. USAID signed the agreement with PIER for $6.9 million in June 1992 and has increased funding since then to $8 million. The project’s main objective is to facilitate the transformation of the centrally planned and controlled coal mining industry to an industry capable of operating in a market economy. The cooperative agreement did not specify any measurable goals or deliverables. In 1989, U.S. coal representatives visited some of the coal regions of the Soviet Union where miners were starting to form independent unions, and between 1989 and 1991, groups of independent miners met with leaders of the U.S. coal industry labor and management in the United States. In June 1991, a memorandum of understanding, pertaining to continued assistance, was signed by U.S. and Russian coal industry representatives. During 1991, circumstances changed drastically. Boris Yeltsin was elected President of Russia in June, the communists mounted a failed coup attempt in August, and the Soviet Union dissolved in December. These changes opened the door for a broad U.S. technical assistance program in Russia. As part of this effort, the State Department announced the coal project in a January 23, 1992, press release and signed a cooperative agreement on June 25, 1992. The coal project gained early acceptance because PIER targeted the project at a problem (i.e., coal industry restructuring) that the Russians had already identified and were struggling to address. In addition, PIER established good working relationships. For example, PIER established a coordinating office in Moscow and cooperation and development centers in the Russian cities of Kemerovo and Vorkuta. An American director heads the coordination office, and an American director and a Russian codirector head the cooperation and development centers. In addition, because the American staff lived in Russia, they were able to develop and maintain long-term relationships with the Russian government, coal industry management, and labor unions. The Russians further demonstrated their support by donating rare office space for the coordination offices and cooperation and development centers and donating apartments for the American directors in Kemerovo and Vorkuta. PIER staff worked closely with representatives from the Russian government, coal industry management, and labor to (1) reduce the number of mines and miners, (2) develop new sources of employment in coal-producing regions to absorb displaced laborers, and (3) develop a social safety net for those miners left unemployed during and after the transition. PIER has cultivated cooperative efforts between government, management, and labor to address problems associated with coal industry restructuring. In addition to these efforts, PIER staff has helped build commercial links between the Russian and American coal and coal-related industries. PIER made progress in facilitating the restructuring of Russia’s coal industry and opening the Russian market to U.S. mining technology. Specifically, PIER worked closely with the World Bank to evaluate Russia’s coal industry and develop a restructuring plan; conducted detailed studies of employment, unemployment, and social programs; government subsidies; labor demand; a social safety net, job creation, and mine planning; and enterprise debt in the Russian coal industry; established a coal-bed methane recovery center; mediated discussions between U.S. and Russian officials on equipment certification in an effort to open the Russian market to U.S. high-tech safety equipment; established a program to facilitate U.S. private sector investment; hosted approximately 150 representatives of the Russian government and coal industry in the United States where they participated in meetings and negotiations with World Bank officials, training seminars, and meetings with U.S. coal industry representatives; provided training material and conducted seminars in Russia concerning mine safety, labor-management relations, mining and mine management in a market economy, and small business development in Russia; implemented a transition assistance program focused on developing a viable social safety net and creating new jobs; and provided $200,000 worth of U.S.-manufactured mine health and safety equipment to Russian miners. The Russian beneficiaries (i.e., government, labor, and management) we contacted in Russia stated that the coal project was well-targeted, timely, and beneficial. In addition, they all wanted the project to be continued and expanded. PIER has made several contributions to systemic reform. One of the clearest contributions is its work in facilitating a $500-million World Bank loan. By providing U.S. coal industry experts, PIER facilitated the World Bank’s work in Russia; contributed extensive analysis of the coal industry’s problems; built consensus among Russian government, management, and labor representatives; and brought representative Russian delegations to the United States to negotiate with the World Bank. The World Bank acknowledged PIER in its 1994 report for contributing to the Bank’s work in Russia. PIER helped establish relationships between Russian and U.S. coal mining and equipment-manufacturing firms. According to the beneficiaries, these relationships will help Russia attract capital investors and gain greater access to U.S. expertise and technology so that it can begin to produce coal efficiently and compete in a market economy. PIER also facilitated the sale of millions of dollars of non-USAID-funded U.S. mining equipment in Russia. PIER formed a consortium of U.S. industry representatives to help create a viable private coal industrial sector. The consortium is to assist coal managers and technicians in operating in a market economy, identify ways that private U.S. firms can participate in restructuring the coal industry, establish NIS-U.S. joint ventures, and promote the consortium’s services so it can become self-sustaining. Finally, PIER worked with Russia’s Fund for Social Guarantees to implement a transition assistance program focused on developing a viable social safety net and creating new jobs. PIER also brought in U.S. experts to provide small business education to miners and helped mining communities develop business proposals that can be presented to the Russian-American Enterprise Fund, Russian banks, and other sources for eventual financing. USAID started to implement the coal project before it had established a USAID mission in Moscow; consequently, the USAID project officer in Washington managed the project. Since the coal project was established through a cooperative agreement, without quantifiable indicators, PIER designed and implemented the project without direct oversight and control by USAID. PIER provided the required monthly program performance reports, annual work plans, and annual progress reports to USAID, which then reviewed them. PIER’s staff communicated regularly with USAID and felt they had a good reciprocal working relationship. Despite some success with the project, USAID did not meet its monitoring and evaluation requirements. Although the USAID staff should have regularly monitored the project, they visited the Russian project sites three times between June 1992 and February 1995. Two of the visits occurred after we began our review. USAID officials said a lack of staff prohibited more frequent visits. In addition, USAID did not conduct the annual assessments or midterm evaluation as required and thus lacked an objective basis for evaluating PIER’s activities and accomplishments. This, coupled with a lack of quantifiable indicators, hindered USAID’s ability to independently determine the project’s impact on coal sector restructuring. The University of Alaska met most of its project objectives while encouraging systemic reform, but to date the project has not become self-sustaining. The American staff live in Russia and have built trust with Russian officials and institutions, and Russians support the project with personnel and in-kind contributions. New enterprises are a major source of new jobs for most economies. However, the development of new enterprises in Russia has been hampered by years of central control of the economy, excessive rules and procedures for establishing a business, and the lack of entrepreneurial skills. To help promote the growth of small, private businesses and alleviate unemployment, the United States supported the creation of multipurpose business development centers in several Russian cities. These centers provided training and advisory services to small businesses and worked with local governments to create a hospitable environment for private business growth. USAID’s goal is that the centers eventually be operated by trained Russians on a self-financing, fee-for-service basis. The American Russian Center (ARC), established by the University of Alaska in Anchorage through an USAID cooperative agreement, was one of the first contractors in USAID’s program to establish new businesses. The program’s two phases, conducted over 2 years, cost about $5.1 million. The agreement called for ARC to provide small business training, develop Russian business activities in specific geographic areas, and develop business ties between the Russian Far East and the United States. ARC’s initial objectives were to establish a headquarters at the University of Alaska and two field centers, as well as to train a specific number of people. A subsequent work plan called for ARC to establish two more centers while expanding its program in the two original centers. Specific objectives included increasing (1) the number of Russians trained in modern business methods, (2) the number of viable Russian small businesses, (3) access to both U.S. and Russian technologies, (4) U.S.-Russian business ties through ARC field and business information centers, and (5) U.S. business activity in the Russian Far East. Creating Russian institutions that would be sustainable after USAID assistance ended was also an objective. From its headquarters at the University of Alaska, ARC worked closely with Russian partners to establish business training centers in four Russian cities. In each city, ARC had a local educational or academic institution as a partner. This partnership was reflected in the American and Russian codirectors and staff at each center and in-kind contributions such as free office space from the institutions. ARC’s American staff have had a long-term commitment to Russia. Full-time staff spoke Russian fluently, lived in the cities where the centers were located, and had business experience in the region. They were complemented by short-term American teachers who taught a 1- or 2-month course as well as by itinerant teachers who taught a 1-week or weekend course in one city and then moved to another city. These courses were taught with interpreters. ARC’s core program was an evening course that taught such skills as accounting, marketing, and management that were necessary to write a business plan. This course lasted 1 or 2 months, depending on the center, the time of year, and the targeted clientele. It was supplemented by short seminars in the host cities and extension seminars in outlying cities and was targeted at specific business sectors, such as bankers lending to small businesses. Russians and Americans, both resident and visiting, taught the courses and seminars. The centers also provided business counseling for Russians trying to set up their own small businesses. The training centers charged a relatively low fee for its courses and seminars. Participants who excelled in the training center programs were invited for advanced training in Anchorage. They were selected, in large part, through the business plans they wrote during their core course. In Anchorage, they attended a 5-week course that explored topics from the earlier training in more depth, and toured stores, manufacturing facilities, and offices in the Anchorage area. The 5-week course was followed by 2 weeks of either internships in local small businesses or more extensive business tours tailored to the participants’ interests. ARC successfully fulfilled its first year’s work plan targets, and then received $3 million for a second year’s activities (fiscal year 1994) from USAID after a March 1994 evaluation of the initial $2.1-million project. USAID also stipulated that, in fiscal year 1995, ARC must match USAID’s funding. ARC established business training centers in four Russian cities: Yuzhno-Sakhalinsk, Yakutsk, Khabarovsk, and Magadan. It established the Yuzhno-Sakhalinsk and Yakutsk centers in the fall of 1993 and Khabarovsk and Magadan centers in the fall of 1994. In May 1995, USAID agreed to provide ARC with an additional $1.5 million, even though ARC had not raised any matching funds. Between the fall of 1993 and January 1995, ARC’s Yuzhno-Sakhalinsk and Yakutsk Business Training Centers offered four cycles of evening courses, lasting 1 or 2 months, that trained 211 Russians—thereby exceeding the first year’s work plan goal of 200 participants. The two centers also provided individual business counseling to 300 Russians; the work plan’s goal was 200. In addition, the two centers offered 7 extension seminars to 103 Russians in outlying cities. The training centers in Khabarovsk and Magadan had only recently completed their first evening courses. ARC sponsored 19 technical assistance seminars, meeting the first year’s work plan goal of 15 to 20 seminars. Four seminars on banking drew 180 Russian bankers, and 8 seminars on hair salon management drew 250 women from throughout the Russian Far East. Forty construction managers from Yakutsk participated in training on cold weather construction methods. This seminar led to the government of Yakutsk testing American-manufactured plastic piping to replace its existing steel piping. Between the fall of 1993 and January 1995, 71 Russians completed the advanced business training courses at the University of Alaska. This exceeded the first year’s work plan goal of 50. In total, ARC trained 1,646 Russians in its USAID-financed programs through January 1995. On a more systemic level, ARC developed a database of U.S. and Russian businesses in the Russian Far East and provided assistance or information to U.S. and Russian businesses working throughout the region. ARC generally coordinated its activities with other U.S. government programs located in cities of the Russian Far East, but there were a few exceptions, particularly when contractors worked in separate sectors. For example, in Khabarovsk, where ARC established a center in late 1994, the local American codirector did not know the local environment project director until we visited. ARC officials in Anchorage were, however, working with CH2M Hill staff to link the projects. The ARC project will contribute to systemic reform on a regional basis if it can become financially self-supporting. USAID recognizes that creating small businesses in the region will push the Russian government to be more responsive and further develop the area’s nascent capitalist economy. The centers help Russians who come to Anchorage from their relatively isolated cities to meet each other and develop business contacts with other Russians as well as Americans. By drawing entrepreneurs from cities throughout the Russian Far East, ARC has helped build a network of private small businesses that can generate business for one another and for the region. Once the USAID funding ends, ARC’s partnerships with Russian institutions will be the key ingredient to sustaining its work. The directors of the Russian institutions plan to continue the program. For example, the Rector of the Far Eastern State Transport Academy, ARC’s partner in Khabarovsk, plans to establish a permanent school based on the activities of the project. Kray and oblast’ government officials are also highly supportive of ARC. However, despite the Russians’ desire to continue the program, most of these institutions currently lack the means to support an entire local ARC operation. Further, in an April 1994 evaluation report, USAID questioned whether ARC would be able to support itself. Other donors have not yet stepped forward to replace USAID. According to ARC’s director, the problem lies in the newness of the project and the project’s focus on Alaska and its businesses. The ARC director said the project plans to include more business internships and tours in the rest of the United States. The director believes that this expanded scope will increase ARC funding because large U.S. institutions and enterprises have the funds and business interests in Russia to provide long-term support. If USAID assistance had ended with fiscal year 1994 funds, the U.S. side of ARC would have been curtailed and U.S. personnel in Russia would have been withdrawn. USAID officials played a significant role in designing the project. Because the University of Alaska had no previous USAID contract experience, USAID sent an official from Moscow to Anchorage to help with the project’s design, which has proven to be effective. Under a cooperative agreement, USAID has relatively limited management and monitoring responsibility. ARC provided good progress reports to USAID. USAID/Moscow has adequately managed and monitored the project. USAID/Washington has maintained a duplicate document set so that it can respond to U.S. inquiries. When it was considering further funding for ARC, USAID sent an evaluation team from Moscow to Yakutsk, Yuzhno-Sakhalinsk, Khabarovsk, and Anchorage in March 1994. The team’s report became the basis for USAID’s continued funding of ARC. Within the amendment that provided the fiscal year 1994 funding, USAID included a clause stating that USAID would provide $1.5 million in fiscal year 1995 if ARC raised $1.5 million in matching funds. However, in May 1995, USAID agreed to provide the $1.5 million even though ARC had not raised the matching funds. CH2M Hill is an integral part of USAID’s $35-million environmental policy and technology program. In September 1993, USAID awarded CH2M Hill a contract to serve as the program’s core contractor and provide the technical support for its environmental activities in Russia, Kazakstan, and Ukraine. In April 1994, an initial delivery order was signed to provide support for activities in Novokuznetsk and the Russian Far East. Detailed delivery orders were signed for these activities in September 1994. CH2M Hill also serves as the contractor or subcontractor on various components of the program. Although the environmental policy and technology project is still ongoing, USAID officials said its progress so far has been disappointing. Progress has been slow because CH2M Hill did not fill critical staff positions in Russia in a timely manner, and it relied on staff located in the United States to manage the projects. The expanded scope of the Far East component further contributed to the delay. Further, USAID field staff lacked authority and information to expedite project implementation. The projects’ expected contributions to systemic reform and long-term benefits are not likely to be significant. Severe environmental degradation threatens the physical health and socioeconomic well-being of people throughout Russia and deters economic and political restructuring efforts. Environmental problems range from nuclear safety issues; to pervasive mismanagement of natural resources; to some of the worst air, water, and land pollution problems in the world. The breadth and magnitude of the economic, health, and ecological costs are difficult to quantify, although remediation activities alone are expected to cost billions. Environmental problems are exacerbated by many factors, including inattention to environmental consequences, a lack of economic and political incentives to use resources efficiently, the inability of nongovernmental agencies to participate in environmental decision-making, and the inability of governmental institutions to effectively regulate state-owned monopolies and curb illegal economic activities. Our analysis focused on CH2M Hill’s performance as the core contractor and two projects where it serves as the primary contractor—the Multiple Pollution Source Management project in Novokuznetsk and the Sustainable Natural Resources Management and Biodiversity Protection project in the Russian Far East. Both projects are to run from September 1994 to September 1997. The objectives of the $7.4-million core contract are to coordinate all activities under the core contract, monitor and evaluate the activities and deliverables, and provide support functions as needed. The objectives of the Multiple Pollution Source Management project are to reduce pollution-related health risks and promote environmentally sustainable economic development; improve public health; reduce pollutant emissions from industries and cities; assist industries in restructuring in an environmentally sound and sustainable manner; and strengthen institutions and train individuals to continue improvements initiated during the project. The $13.4-million delivery order included $6.3 million for the Novokuznetsk project along with two other projects. The Sustainable Natural Resources Management project was expanded from a narrowly focused $3-million, 3-year project focused on fire prevention and control to a $16.7-million, 5-year project focused on sustainable forest management and biodiversity protection. This expansion responded to the Gore-Chernomyrdin Commission’s recommendations. Specific project objectives are to promote sustainable forest management in the Khabarovskiy and Primorskiy Territories and protect endangered species and critical habitats in the Khrebet Sikhote-Alin’ mountain region. To address these objectives, the contract specifies 25 tasks for CH2M Hill and multiple subcontractors. USAID approved a $9.4-million delivery order for CH2M Hill to implement and coordinate these activities. CH2M Hill worked mainly with local and oblast’ government officials to design and manage the programs. CH2M Hill consultants spent short periods of time in Russia to design the project proposals and then returned to the United States to complete the project design. Although USAID and CH2M Hill established rapport with local and oblast’ authorities in the affected cities, the Ministry of Environmental Protection and Natural Resources was only involved in the initial selection of project activities and their locations. Subcontractors, U.S. nongovernmental organizations, and other federal agencies helped implement parts of the project. The project approach includes providing technical assistance, demonstration projects, training seminars, and limited commodities. Several components in both projects continued efforts initiated by the U.S. Environmental Protection Agency, World Bank, and the City of Pittsburgh. CH2M Hill staff in Washington manage the project, and a regional director and site managers in Russia handle the day-to-day activities and coordinate with other implementers. CH2M Hill plans to hire and train Russian employees who can eventually manage the activities without assistance from its U.S. office. Project progress to date has been mixed. CH2M Hill met the requirements of its core contract by establishing field offices, monitoring project implementation, and providing support functions to its field staff. Even though it has made some progress toward addressing the Novokuznetsk project objectives, it has been slow to implement the Far East project. CH2M Hill has missed critical milestones for both projects. In Novokuznetsk, CH2M Hill established an air pollution database for the 180 heating plants in the city and developed a strategic plan to address particulate pollution from the heating plants. It also upgraded the city’s air pollution program, trained Russian counterparts in environmental auditing, and completed environmental audits of two large steel mills. CH2M Hill is currently assessing local water monitoring activities and has recommended laboratory improvements to more accurately measure the quality of drinking water. CH2M Hill is working with the Novokuznetsk Development Fund and local government officials to develop a strategic plan. However, CH2M Hill has not provided an acceptable work plan, which was due on November 30, 1994. The current work is based on the delivery order specifications. In the Far East project, CH2M Hill has been even slower getting started and, according to USAID and Russian officials, had produced almost no quantifiable results as of February 1995. Several factors have hindered the project’s implementation, including its increased complexity; the size of the geographic area; and the large numbers of governmental officials, local interest groups, and subcontractors involved. The project covers 2 large regions and will involve at least 16 implementing organizations, including 2 U.S. federal agencies, subcontractors, and U.S. nongovernmental organizations. Several problems have delayed the effective implementation of both CH2M Hill projects. One problem was that CH2M Hill experienced problems filling critical staffing positions in Washington and Moscow and at the field office level. Although the core contract was awarded in September 1993, the regional director did not arrive in Moscow until February 1994. Other positions in Moscow funded in September 1994 delivery orders were still being filled as of January 1995. The contract to implement field support functions in Novokuznetsk and the Far East was awarded in April 1994, but on-site managers did not arrive until September and October 1994, respectively. The Far East project manager position was authorized in September 1994, but the manager did not move to Russia until February 1995. CH2M Hill officials had difficulty finding qualified staff who were willing to relocate to these areas because of the acute environmental problems and remote locations. USAID and CH2M Hill officials agreed that the on-site presence is essential for making progress. USAID/Moscow officials said staffing delays and delays in producing an acceptable work plan have hurt the credibility of the program in the region. CH2M Hill also had difficulty developing acceptable work plans that define how and when the scope of work will be implemented. CH2M Hill was required to submit the work plans for both the Novokuznetsk and the Far East projects within 60 days after signing the contract on September 30, 1994. USAID approved the work plan for the Far East project on May 8, 1995, but the work plan for the Novokuznetsk project was still being revised as of June 1, 1995. According to an USAID official, the work plans originally submitted were incomplete and lacked specific indicators or other factors necessary to evaluate the activities. Additionally, USAID officials said CH2M Hill had done a poor job of providing them with the appropriate reporting documents for these activities. USAID expressed concern over CH2M Hill’s failure to provide timely delivery of tracking materials, such as monthly summaries of financial status by project, monthly presentations of progress on select tasks, and weekly briefings on overall project progress. According to USAID officials, CH2M Hill addressed their concerns and has recently improved its reporting. As of February 1995, the CH2M Hill projects had contributed little to systemic reforms, and they will not generally be sustainable without outside funding support. This limited contribution is due largely to the vast environmental needs in Russia and the massive amounts of capital investment needed to modernize or purchase equipment for restructuring Russia’s environmental sector. Also, USAID and CH2M Hill officials said that Russian monitoring and enforcement procedures will be extremely difficult to change and are not addressed in these projects. Finally, the Ministry of Environmental Protection and Natural Resources was not involved in designing the project, thus reducing the likelihood the project could be duplicated on a wider scale. USAID officials said the project will attempt to address systemic reform through efforts to maintain and restock the forestry base. Some components of the Novokuznetsk project are likely to address environmental sector restructuring. CH2M Hill expects to work with Novokuznetsk’s industry, citizens, and local government to develop a strategic plan and provide recommendations for creating an environmentally safe city by 2010. However, these recommendations could require large capital investments. For example, CH2M Hill recently conducted industrial audits for two steel companies. After spending 6 weeks and using 7 U.S. advisers and 25 Russian counterparts to conduct the audits, company officials said the audits did not provide any new information on major pollution sources. Further, the companies do not have the funding to make the recommended improvements and will have difficulty obtaining it. According to one steel mill executive, the environmental audit allowed the mill to fulfill a condition for a World Bank loan. The Novokuznetsk project places a considerable emphasis on the contractor delivering studies and does not establish any indicators to measure progress in reducing actual pollution. Some components of the Far East project are designed to address the region’s need to maintain and restock its important forestry base. Efforts are planned to (1) strengthen polices and develop an adequate environmental regulatory structure, (2) create economic and political incentives to use resources efficiently, (3) increase the participation of nongovernmental agencies in environmental decision-making, (4) promote U.S.-Russian partnerships, (5) promote the export of timber products made by Russian workers, and (6) conserve biodiversity. USAID’s decision to use a core contract and delivery orders has caused delays and excessive paperwork reviews for both CH2M Hill and USAID staff. Under this system, USAID must prepare delivery orders and CH2M Hill must submit detailed work plans for each project component within 60 days. The decision to expand the Far East program has also delayed project design and implementation. The expansion covers a larger geographic region and greatly increased the scope of work, including the number of activities and subcontractors involved. The division of responsibility between USAID/Washington and USAID/Moscow has affected the agency’s ability to manage the project. USAID/Washington maintains overall management authority, but has given USAID/Moscow increased monitoring and program responsibility. However, USAID/Moscow officials said they still had minimal authority to manage the project or make changes. USAID/Washington must approve all program decisions, including minor ones, such as country clearances for visitors and all purchases exceeding $500. In April 1995, USAID/Moscow submitted an initial request, which remained under review as of June 1, 1995, for delegation of authority to the field. USAID has had difficulty monitoring the projects. USAID staff said they have not regularly visited the project sites because of the difficulty of traveling to the sites and the lack of adequate staff. The USAID/Moscow project officer keeps apprised of the project activities primarily by talking to project staff over the telephone or in informal meetings and by reviewing reports by the contractor or visiting teams. The district heating project is one component of USAID’s Energy Efficiency and Market Reform Project for the NIS. The project began in January 1992 and is considered the first economic development effort undertaken by the United States in the region. With $5.3 million in funding, the project was designed to improve district heating systems in six countries: Armenia, Belarus, Kazakstan, Kyrgyzstan, Russia, and Ukraine. Although the contractor, RCG/Haggler Bailly (RCG/HB), met most of its objectives, we found no indication that the project was having a significant impact on the sector. Most of the Russian work was concentrated in two Russian cities, Yekaterinburg and Kostroma, and the project was not completed in Yekaterinburg. Because USAID did not adequately monitor the project, it was unaware of (1) problems that prevented the completion of the project and (2) any long-term benefits, if any, to the beneficiaries. An evaluation conducted by a consultant did not identify obvious problems, and USAID did not address the recommendations in this evaluation. Fuel and energy are an important part of Russia’s economy. The subsidies provided by the former Soviet government to Russian energy consumers, both residential and industrial, created artificially low prices and promoted the inefficient use of highly polluting energy. Since the dissolution of the Soviet Union, Russia has implemented several policies, including increasing or freeing coal, oil, and gas prices, to reform its energy sector. Although still below world market levels, the cost of domestic oil and oil products in Russia doubled in 1993 and 1994. Such increases in energy prices have a significant influence on inflation and social conditions. As energy prices increase, consumers must find ways to use energy more efficiently. In February 1992, RCG/HB was awarded a contract for $550,000 to complete the project in Russia. The project was amended in August 1992, increasing the total cost to $1.3 million. The project had five objectives: (1) foster improved management of energy use in heating plants by identifying and implementing cost-effective “low cost-no cost” energy efficiency improvements; (2) transfer energy auditing and management techniques, including financial and economic analysis techniques; (3) provide equipment support to implement low-cost options, improve monitoring and energy management, and identify additional energy efficiency opportunities; (4) support the World Bank’s efforts to reform Russia’s energy pricing policies; and (5) promote the emergence of an energy efficiency industry in Russia. RCG/HB and USAID worked with representatives from the Russian Ministry of Fuel and Power, the Commission for Humanitarian and Technical Assistance of the Russian Federation, nongovernmental organizations concerned with energy efficiency and conservation, municipal governments, and industrial enterprises. The two primary Russian cities selected for the project were Yekaterinburg and Kostroma. In these cities, extensive energy audits were conducted of the district heating facilities, and three sites (i.e., hospitals, apartment buildings, and heating plants) in each city were selected as demonstration sites for U.S. energy efficiency equipment, including flow meters, temperature sensors, and thermostatic control valves. The value of the equipment supplied to the demonstration sites was approximately $172,000. The project sites were intended to demonstrate the savings in using no-cost or low-cost technologies and also serve to promote American-made equipment. In addition, RCG/HB conducted energy audit training seminars and provided energy audit equipment to technicians in Yekaterinburg, Kostroma, Irkutsk, Moscow, Murmansk, and St. Petersburg. To complete its work, RCG/HB contacted more than 250 U.S. equipment manufacturers to determine their interest in conducting business in Russia. The 12 companies that responded participated (at their own expense) in “wrap-up” seminars in four Russian cities when the project ended. The information obtained at these seminars was published in a lessons learned document. RCG/HB completed most of the objectives stipulated in its contract. The products delivered to complete the objectives included energy audits in two cities, energy audit training and distribution of energy audit equipment, a study of natural gas pricing in Russia, and an energy efficiency industry development effort. It also produced a video about the project that was shown on Russian television. RCG/HB was also required to identify, purchase, and install low-cost energy efficiency equipment manufactured by U.S. companies. RCG/HB purchased this equipment; however, due to problems with local conditions, some of the equipment was not installed in Yekaterinburg. An RCG/HB official said that in June 1993, a Russian subcontractor assured RCG/HB that it would install the equipment in Yekaterinburg by the end of 1993. We visited three sites in Yekaterinburg in February 1995 and found all the equipment at one site was still in shipping containers. Russian officials said the equipment at the other two sites only began operating in September 1994 and January 1995, respectively. According to an RCG/HB official, the company had not paid the subcontractor and would not pay until the installation was completed. However, USAID had already paid for the equipment, valued at $8,000. Officials in Yekaterinburg stated that the equipment had not been installed in 1993 for two reasons. First, in two cases, the sites (a hospital and an apartment building) were under construction and the construction plans had to be altered to accommodate the equipment. Second, at the other installation site (a district heating facility), the equipment had not been installed, and most likely will not be installed, because the proper Russian authorities had not certified it. Officials in Yekaterinburg stated that it would be illegal to install and operate the equipment before it was certified. They explained that although the equipment can be used for demonstration purposes at consumer locations (e.g., apartment buildings), a public utility cannot use the equipment and the information (e.g., energy consumption data) it produces as a basis for charging customers. Similar equipment was installed in Kostroma, according to USAID and RCG/HB officials, even though it had not been certified. USAID officials told us that city officials were willing to install the equipment because they realized the potential benefits. We found no indication that the project had contributed to systemic reform in the area of energy efficiency. Most of the work was concentrated in two cities, and the project was not completed in either city. In addition, USAID did not adequately monitor the project and could not be certain of any long-term benefits. USAID used an independent consultant, Management Systems International, to evaluate the NIS district heating project, including RCG/HB’s work in Russia. The evaluation, published in July 1993, reported no serious problems and declared the project a success. Specifically, the study indicated that total equipment costs for the four cities in Russia amounted to $418,000 and would produce an annual savings of $1.4 million. It also noted that the equipment would reduce pollution. Furthermore, as a result of the energy efficiency industry development effort, 12 U.S. companies had sent representatives to the various countries to participate in seminars held at the end of the project. We found that the consultant’s evaluation was deficient. The evaluation did not mention the equipment installation problems in Yekaterinburg or the need to have foreign equipment certified by the Russian government. Instead, the evaluation stated that “by April 1993, all of the equipment was installed and operating.” In addition, USAID did not specifically direct Management Systems International to assess the products RCG/HB was required to produce, such as the natural gas pricing study for Russia or the lessons learned from the energy efficiency industry development effort. The evaluation did not discuss the quality of either of these products. USAID officials stated that the natural gas pricing study had been completed in a collaborative effort with the World Bank, which used it in its work pertaining to loans made to Russia’s natural gas sector. However, the consultant’s report contradicted USAID’s statement by noting that the World Bank did not make a serious attempt to involve RCG/HB in its work in Russia. Finally, the evaluation did not discuss the training seminars conducted by RCG/HB in Irkutsk, Moscow, Murmansk, and St. Petersburg, or the energy audit kit instrumentation supplied to technicians in these cities. The continued use of these deliverables is an important factor to consider when evaluating the success and sustained benefits of this project. USAID officials were not aware of the problems we identified in Yekaterinburg nor the shortcomings of the evaluation. They stated that in June 1993, an official from USAID/Washington visited all the NIS sites except Yekaterinburg. They stated that equipment had been installed at the sites visited. A local national employee from the USAID mission in Moscow also visited Yekaterinburg in June 1993 but did not report any problems at that site. USAID officials discovered the problems we found when they accompanied us to Yekaterinburg. USAID said it would take corrective action. Also, USAID has no mechanism to monitor various outcomes of the project, including (1) the success of U.S. industry in entering the NIS market, (2) policy reforms written into law, and (3) the rate of adoption of new technologies. Although USAID said that the installed equipment would produce annual savings at project sites, it did not record these savings during the 1993 or 1994 heating seasons. Furthermore, USAID had not determined the savings generated by either the energy audit kits provided to technicians in six cities or the energy audits conducted in Yekaterinburg or Kostroma. USAID initiated the NIS Exchange and Training program in the spring of 1993 to train NIS leaders about free-market economies and democratic governance. USAID hoped that training the participants in the United States would provide them with the technical skills and attitudes required to create similar policies, programs, and institutions in their own nations. We reviewed the health care training provided to Russians in late 1993. Our analysis indicated that the health care training had little likelihood of contributing to systemic reform and that USAID now considers the training to be irrelevant after Russia changed its direction for health care reform. The training’s primary objective—to facilitate Russia’s transformation to a democratic free-market system—was unrealistic for a 2-week training course. USAID did not follow up with participants to determine the training’s impact on systemic reforms. Although USAID officials said that most participants have been involved in follow-on projects, only 25 percent are slated for follow-on activities planned in 1995 and 1996. According to USAID, Russia’s health care industry has a number of problems. These problems include the virtual collapse of the pharmaceutical and medical supply industry, poor quality of care due to training and technical gaps, serious funding shortfalls, and a centralized system devoid of incentives for efficiency and cost control. Although Russian policies have produced an educated workforce with more doctors per capita than the United States, the workforce lacks many of the basic skills and institutions necessary to function in a democratic, free-market context. USAID contracted in June 1993 with its worldwide training support contractor, Partners for International Education and Training (PIET), to conduct training in the United States for 200 NIS leaders and professionals at a cost of $2.6 million. The training objectives were to facilitate the region’s rapid and sustainable transformation from authoritarian, centrally controlled regimes to pluralistic, democratic countries with free-market economies; provide participants with new skills and knowledge to contribute to economic and social development; promote the value of democratic decision-making; provide an understanding of U.S. programs; and lead to long-term relationships with U.S. institutions. USAID also hoped that participants would share their new skills and perceptions with their counterparts. Under the PIET contract, USAID missions identified the training topics and selected the participants. USAID/Moscow selected the participants based on their positions in oblast’ health care systems and their planned inclusion in follow-on projects. According to USAID, participants went to the United States before participating in follow-on projects so they would be more receptive to reforms. The training project encouraged missions to link training, if appropriate, to ongoing or planned developmental assistance by USAID and others. After course topics and participants were selected, PIET was expected to arrange training courses in the United States and provide administrative and logistical support for international travel, living expenses, medical insurance, tuition, books, and other needs. PIET was also expected to (1) ensure that training programs at U.S. training institutions were functioning properly, (2) monitor the participants’ progress, (3) provide USAID status reports, and (4) evaluate each training program. PIET subcontracted with Management Sciences for Health to provide the training in the United States; 42 Russians were trained in health finance and 20 were trained in pharmaceutical management. USAID subsequently contracted with the Academy for Educational Development to make training arrangements. PIET met its contractual requirements by providing training, transportation, and logistics, according to USAID officials. The participants we spoke with in Russia praised PIET’s support and assistance as well as the quality of the training they received in the United States. Our review of sample course assessments showed that other participants generally gave high marks to the training. For example, in the evaluation conducted by the USAID mission, most participants were satisfied with the course and believed it was applicable to their work conditions. PIET also met its monitoring and reporting requirements. PIET maintained contact with the training institutions, called a random sample of participants once a week, contacted the trainers on an as needed basis, and helped participants with general adjustment problems. PIET also provided all the required reports, including regular status reports and course assessments. USAID/Washington officials were satisfied with the quality of PIET’s support and monitoring during the training. USAID was unable to provide any evidence that the training will help Russia’s democratic or economic transformation. Although the training may have met some secondary goals, without follow-on activities, fulfilling these objectives will not likely result in systemic reform. USAID/Washington officials agreed that the training could not meet all of the contract’s objectives. They said that a 2-week training course could only “facilitate” reaching these objectives but not actually attain them. Further, they provided the training quickly as a political imperative to respond to the opening in the NIS, and they recognized training alone has limited usefulness. USAID was unable to substantiate that any of the 62 participants contributed to any reforms, partly because the participants lacked the authority, expertise, or resources to influence reforms. However, the participants who had taken PIET health-related courses said the training helped them understand U.S. programs and they had shared their training with others. USAID officials in Moscow and Washington said that training alone would not influence systemic change and that subsequent training was better integrated into follow-on activities. They said that the main purpose of the PIET training was to make participants receptive to follow-on reform projects, which USAID thought would occur. However, USAID later dropped plans for follow-on activities in Central Russia because the oblasts were not reform-minded and the contractor reported that only 25 percent of the Siberian participants would participate in follow-on activities. The Russians did not see health reform as a priority when the early training took place, and Russia has only recently begun to consider the direction of reforms, according to USAID/Washington officials. Further, this early training is now irrelevant because it was based on Russian policy directions that were later discarded as unworkable. The mission was forced to move much more quickly than it desired because it was under extreme congressional pressure to quickly establish the training program, according to USAID officials. As a result, the health care training was initiated before it could be integrated into follow-on projects more likely to facilitate systemic change. Further, because the Russians were unclear about what reforms they wanted, the mission had trouble targeting the training. The Russian officials began exploring reform options with the mission in December 1994. USAID/Moscow officials assessed the training after participants returned to Moscow; however, they have had no contact with the participants since then. They did not know which participants, if any, would be involved in any of the follow-on activities planned in Siberia. The International Business & Technical Consultants, Inc. (IBTCI) project did not achieve its goal to increase the availability of commercial real estate to small enterprises, although it did provide potentially useful technical assistance in three cities. The project did not contribute to systemic reform and was not sustainable. IBTCI did not replicate the pilot project—a project objective—in part because the roll-out cities were poorly chosen. IBTCI was responsible for choosing appropriate cities, but its short-term consultants lacked sufficient knowledge of Russia and local conditions to determine what cities would have cooperative officials and could benefit from the project. Much of Russia’s commercial real estate is still owned by the government. Rather than divesting its ownership rights, the central government has decentralized those rights to local governments, both regional and municipal. Although this practice is quite common among other countries in transition, Russia is different because local governments (1) have a virtual monopoly on commercial real estate and (2) have not moved toward commercial real estate leasing using market mechanisms. Highly inefficient users occupy valuable commercial space, contributing very little to local budgets, while private sector development is blocked by the unavailability of property. USAID and GKI recognized this problem and signed a task order with IBTCI to develop a solution. The $2-million task order for the rapid diagnosis pilot project and roll-out project was part of IBTCI’s $13.3-million omnibus contract. The initial deadline of May 1994 was extended to December 1994, but without any increase in the cost or level of effort required. The general purpose of the task order was to significantly increase the availability of commercial property in Russian cities. The specific goals of the task order were to examine the causes of limited access to retail space, implement a pilot project in a selected city, and then replicate the pilot project in other oblasts. IBTCI was to (1) deliver a report on the root causes of and solutions to the problem of commercial property access for one city; (2) design an implementation plan to address these issues, including procedural, legal, administrative, financial, policy, and other measures; (3) replicate the pilot project in at least five other oblasts; and (4) produce and nationally distribute publicity and instructional materials for local state property committees, local authorities, and entrepreneurs on how to increase the availability of retail property. IBTCI used a subcontractor, Boston Consulting Group (BCG), to perform the rapid diagnosis phase and conduct the pilot project in the City of Perm’.The goals of the pilot project were to (1) design and test a method for increasing the amount of commercial real estate available to small and start-up businesses and (2) identify any constraints or impediments that might exist. The pilot was intended to serve as a model for instituting the program in five other Russian cities. IBTCI instituted the roll-out in Irkutsk, Tver’, Novgorod, Yekaterinburg, and Vladivostok. Because it had previously worked in Perm’, BCG used staff who already had a relationship with municipal officials when it began the diagnosis and pilot phases of the project. In contrast, IBTCI relied on consultants who made short visits to the other cities to research, plan, and implement the roll-out. During the rapid diagnosis phase in Perm’, BCG identified three feasible ways of improving access to commercial space: convert residential premises to commercial use, develop a secondary real estate market, and optimize the leasing process. BCG, IBTCI, USAID, and GKI selected the leasing optimization method because they thought some concrete results were possible during the study period, even though it was predicted that this alternative would have limited support and low potential impact. Lease optimization means, among other things, (1) moving toward market-determined rents, (2) removing bureaucratic discretion in space allocation, and (3) creating incentives to sublease unused space. BCG conducted the rapid diagnosis and pilot phase of the project from November 1993 to March 1994 in Perm’. BCG devised a two-track auction system for making municipality-controlled real estate available to private businesses. The first track was an auction for the right to lease specific commercial real estate properties (i.e., a one-time premium). The second track was an auction for the rental rate at which a property would be leased. The purpose of this system was to introduce market mechanisms into the allocation and pricing of commercial real estate. Under this system, bidding for the right to lease and the rent to be paid replaced government bureaucrats with market mechanisms. The results of the first auction, which occurred on March 1, 1994, were not promising. In the first track auction, three properties were available. The right to lease them was sold for each property. In the second track auction, 15 properties, all basements, were available. Bids were made on only 3 of the 15, and each received only one bid. The rental rate for the three properties did not exceed the rent that started the bidding. The results of a second round of auctions, which occurred in May 1994, were also disappointing. In the first track auction, 10 properties were available, but the right to lease was sold for only 4 properties, although several parties bid on them. In the second track auction, three properties were available, but only one received a bid, and that was the starting bid. These results were not perceived to have significantly increased the amount of commercial real estate available in Perm’. IBTCI started work on the roll-out in mid-February, before the Perm’ pilot was completed or its results evaluated. IBTCI soon found that none of the five cities chosen for the roll-out had conditions that approximated, let alone duplicated, those in Perm’. The roll-out cities seem to have been chosen more for their geographic and population distributions than for any existing economic, political, and regulatory conditions that might make the Perm’ model replicable. Because of these differences, IBTCI had to deviate from the Perm’ model and basically develop five new pilot projects; nonetheless, it still experienced problems. Irkutsk officials were not cooperative with IBTCI and declared the information needed to assess the commercial real estate situation a state secret. Local officials were not ready to participate in the project. In Tver’, an auction system had been functioning between June 1992 and December 1993. The original investment tender process used in the auction was challenged in court and hopelessly compromised. IBTCI introduced a new tender process in Tver’, but the new system’s effectiveness has not yet been demonstrated. The Novgorod officials opposed conducting right-to-lease auctions because they feared losing future revenue and the city had experienced poor results from a similar auction in November 1993. IBTCI focused on establishing a market for municipal, oblast’, and private commercial space by creating a real estate listing center, developing a secondary market, and encouraging officials to allow increased and legalized subletting. The listing center’s effectiveness has not yet been demonstrated. In Yekaterinburg, an effective auction system has been in place since 1992. City officials were not interested in IBTCI’s original task of increasing the use of commercial leases. Instead, they wanted assistance in how to use retail and commercial space efficiently and increase the city’s revenues from property leases. Although IBTCI submitted some analyses and recommendations addressing their concerns, city officials told us that IBTCI came to town on different occasions, spent little time there, did not speak to the appropriate local officials, and presented an academic report that was of little use to them. Vladivostok city officials were interested in privatizing commercial real estate, but were unable to devise a method that would use mortgages to provide substantial revenue for the city. IBTCI devised a mortgage instrument that allowed the city to continue receiving income by holding the mortgages and allowed small business owners to bid for a property and provide as little as 5 percent of the final cost as a down payment. The city auctioned one property in August 1994 for under $7,000, but local officials doubted they would use an auction again because the city did not not have any more excess property. By the time IBTCI had completed its work in the five cities, none of the cities had participated in any activities that remotely resembled the Perm’ model. As a result, the objective of replicating the pilot project in other cities was not achieved. There were various reasons for IBTCI’s inability to replicate the Perm’ model. First, tensions between IBTCI and BCG caused some problems. BCG performed both the rapid diagnosis and the pilot phases, but IBTCI determined that BCG’s approach was not adequate. Russian officials monitoring the project were aware of tensions between IBTCI and BCG early in the project, but IBTCI was obligated to fulfill the contract and replicate the model. The tensions between IBTCI and BCG resulted in little continuity of personnel from the pilot to the roll-out phases. Second, a provision of Russia’s 1994 State Privatization Program Act and its implementing regulations caused problems in the Perm’ pilot. The provision gave lessees who obtained their leases competitively (i.e., at an auction) the right to buy the property at the end of the leases. The implementing regulation set an extremely low selling price for such privatized properties. IBTCI said that the act’s provision and the implementing regulation stopped the Perm’ model because city officials did not want to lose revenue from leases and did not want to be forced to sell leased property for extremely low prices. Even though reports identified the problem as early as January 1994, USAID, GKI, and the Russian Privatization Center took no effective action to address the issue. Third, although officials at the federal level agreed earlier that the project should be done and that the Perm’ model was viable, local officials in the roll-out cities did not agree with the Perm’ model or its usefulness in their cities. Fourth, although the consultants used by IBTCI for this project had some experience in Russia and some spoke Russian, Russian authorities questioned the level of some IBTCI consultants’ professional experience. In addition, the consultants did not have enough knowledge of the Russian localities and local politics to choose roll-out cities well. IBTCI staff did not reside in the cities during the roll-out. Instead, they would fly in, do a few days work, then leave. Thus, they were unable to identify what cities would be the best candidates for replicating the Perm’ model. Even BCG had problems carrying out a successful pilot, despite its knowledge of and relationships in Perm’. The project was not sustainable and did not contribute to systemic reform. Although IBTCI’s final report provided solutions to specific problems, the project did not implement the pilot or develop a method that could be replicated in other cities. USAID officials and the Russians who were in charge of disseminating the report did not know whether or where the IBTCI “solutions” had been applied in any but the six cities. City officials we interviewed in Yekaterinburg and Vladivostok were not using the concepts of the project. GKI and the Russian Privatization Center had originally proposed the project, which suppported a federal initiative. However, an existing GKI act and its implementing regulation potentially forced local governments to sell leased property at low prices to anyone who bought the lease at an auction. This regulation contributed to the poor results of the project. USAID managed this project—from Washington with limited help from USAID/Moscow—jointly with GKI and the Russian Privatization Center; it relied on consultants from the Harvard Institute for International Development and the Center to help monitor the project. Nonetheless, USAID did not monitor the project adequately. Even though IBTCI filed the required reports, these reports failed to describe how much the roll-out deviated from the Perm’ model. Center officials said they first became aware that the pilot was not being implemented in other cities in late May 1994, long after the roll-out could be redirected to other cities. When problems were known in some cases, USAID did not take any corrective action. For example, a Harvard consultant who visited some sites raised questions about the cities selected for the roll-out, but USAID took no corrective action. Similarly, the problem with the State Privatization Program Act and its implementing regulations was mentioned in reports in January 1994, but no action was taken to resolve it. Finally, USAID officials said they were aware of the tensions between BCG and IBTCI, but simply told IBTCI to work the problem out themselves. USAID/Moscow officials said they did not have enough staff to intervene when problems arose, visit the project sites, and talk with beneficiaries about how the project was progressing. The lack of quantifiable objectives or time frames in the Tri Valley Growers’ (TVG) project design makes it difficult to measure the project’s success. TVG helped to facilitate the work of two agribusiness partnerships in Russia; nevertheless, USAID concluded that TVG did not perform adequately. It is too early to determine the long-term economic viability of the partnerships; however, the involvement of U.S. companies increases the likelihood the partnerships will be maintained. The partnerships will probably not have any measurable effect on Russia’s agricultural sector because of their limited size and number. Agriculture plays an important role in the Russian economy. Although estimates vary, Russia has approximately 27,000 large state and collective farms, which cultivate approximately 90 percent of Russia’s arable land. Approximately 270,000 private farms cultivate 5 percent of the arable land. The remaining 5 percent is made up of private garden plots. The total farming population comprises about 26 percent of the country’s population. Subsidies and income transfers to the agricultural sector represent 25 percent of Russia’s public expenditures. Some of these subsides could be expected to be eliminated if the agricultural sector were privatized. Russian agriculture is a low-productivity sector. For example, milk cows and potato and grain crops yield about half of western levels, and labor productivity is probably as low as one-tenth. In addition to low productivity, Russia has been plagued by losses of up to 50 percent in its storage and handling systems. Finally, Russia’s food processing system suffers from poor management and a lack of quality produce, additives, ingredients, and packaging materials. Although the Russian government has begun reforming the agricultural sector, the actual transformation of farms and agribusiness enterprises into market-oriented, productive entities is moving slowly. In 1992, it reorganized state and collective farms and agricultural input and output distribution enterprises into joint stock companies. However, most farms have not altered their operations to increase productivity and competitiveness. In August 1992, USAID developed the agribusiness partnerships project as the cornerstone of its Food System Restructuring Project. The agribusiness partnerships project was designed to create efficient systems for providing inputs to agriculture and for processing and distributing agricultural products. USAID intended to catalyze NIS private sector activity by facilitating the involvement of private U.S. agribusinesses. Between January and May 1993, USAID signed cooperative agreements with three agribusiness cooperatives: Citizens Network for Foreign Affairs (CNFA), TVG, and Agricultural Cooperative Development International. We reviewed USAID’s cooperative agreement with TVG, which had obligated $5.2 million for the region. To achieve the project’s objective, TVG was to facilitate partnerships between American and NIS private agribusiness-related enterprises. However, the agreement did not specify the number of partnerships or the related time frames. TVG established an office in Moscow staffed by one American director and three Russian nationals. This office was supported by several TVG headquarters staff in California. The American director did not have an agribusiness background but was responsible for managing the office, identifying potential Russian and American agribusiness partners, reviewing partnership proposals, and submitting the proposals to USAID for final subgrant approval. According to TVG officials, TVG identified potential Russian agribusiness partners through a network of contacts at the Ministry of Agriculture, Association of Individual Farms and Agricultural Cooperatives of Russia, World Bank, European Bank for Reconstruction and Development, Peace Corps, investment funds, and regional and local administrations. To identify American partners, TVG canvassed its members in the United States, advertised in agricultural publications, contacted agribusinesses via telephone, and looked for firms already operating in Russia. Once identified, TVG worked with the American and Russian partners to develop proposals for USAID’s approval. After receiving USAID approval, TVG awarded subgrants to U.S. agribusinesses working in Russia primarily to provide technical assistance and agricultural training to help create efficient food systems. The American agribusiness partner was required to provide at least 2.5 times the level of funding provided by USAID, to ensure its commitment to the partnership and the long-term economic viability and sustainability of the joint venture. The items purchased with the USAID subgrants are referred to as “additionality” components, or those components that might otherwise not be included in the joint venture without USAID funding. Additionality components include additional training and facility expansion. TVG established six partnerships in five NIS countries, with two in Russia. As of March 1995, one additional partnership in Russia was awaiting USAID approval. The first partnership established in Russia was with Petoseed Company, Inc., and is located in Krasnodar. Petoseed produces vegetable seeds that will be sold in the NIS and internationally. During the 1994 growing season, Petoseed produced 11,000 pounds of seed in Russia. The second TVG Russian partnership involves CTC Foods Company, which is building a potato processing facility in Pushchino. If finished, the facility will produce dried potato flakes that will be sold primarily to hospitals and schools. The two American agribusiness partners exceeded the required level of partnership funding in both partnerships. Contributions by USAID, U.S. agribusiness partners, and Russian beneficiaries to the TVG partnerships in Russia are shown in table III.1. TVG had difficulty identifying partnerships. TVG staff had difficulty beginning work in Russia because of poor telecommunication and office facilities, the chaotic Russian business environment, the limited number of American firms willing to invest in Russia, limited funding, and a small staff. According to a TVG official, Petoseed and CTC Foods contacted TVG to participate in the project. However, both companies were already working in Russia before USAID had established the agribusiness project and located Russian partners on their own. He said they would have invested in Russia without USAID involvement. An official at the Association of Individual Farms and Agricultural Cooperatives of Russia told us that the Association tried to work with TVG to identify Russian partners but received only “empty promises.” Although USAID never specified the number of partnerships that it wanted to establish within a given time frame, it concluded that TVG had not performed adequately. Between May and December 1993, USAID expressed concern about the number of partnership proposals TVG was submitting and the quality of the proposals. A February 1995 USAID review of the agribusiness project stated that TVG required more support by USAID staff and was less committed to the project than CNFA. TVG closed its office in Moscow in August 1994 and has stopped the Russia part of its program because USAID terminated the agribusiness partnerships project in Russia. Nevertheless, USAID’s review noted that the partnerships to which TVG had made subgrants were doing well. However, a TVG official told us in May 1995 that because of financial problems, CTC Foods may not be able to continue its work in Russia. Consequently, the processing facility in Pushchino may never be constructed. According to a USAID official, TVG’s Moldova office now monitors the Russian subgrants. The agribusiness partnerships developed by TVG in Russia have not been operating long enough to adequately judge their impact. However, due to their limited scope, it is unlikely that the partnerships will have a significant effect on reforming Russia’s agricultural sector. USAID/Washington designed the agribusiness partnerships project in 1992, before the USAID/Moscow mission was opened. USAID/Washington and USAID/Moscow split the oversight responsibilities: Washington was primarily responsible for TVG’s compliance with the cooperative agreement and Moscow was responsible for subgrant proposal evaluation. Final grant approval was a joint Moscow/Washington effort. Although USAID/Moscow raised continued concerns about the agribusiness partnerships project’s ability to influence systemic reform, the project proceeded. USAID/Moscow officials called for a review of the project as early as November 1993, and they developed a statement of work for an evaluation team. However, USAID/Washington told USAID/Moscow to “forget the assessment and get on with the job.” Consequently, no assessment was conducted. According to USAID officials, an evaluation is planned for June 1995. According to USAID officials, the agency wanted to implement the project quickly and demonstrate results. TVG’s Moscow director stated she was pressured to submit proposals quickly because USAID was being pressured by Congress. However, both CNFA and TVG officials complained that USAID’s subgrant approval process was arduous and lengthy. They said it took several months for USAID to accept or reject a proposal and added that USAID/Washington caused most of the delay. USAID/Washington officials said the delays were caused by the time required to research legal issues, conduct environmental audits, and work through the Washington bureaucracy. The cooperative agreement with TVG called for quarterly program performance reports and annual progress reports. An independent accounting firm was to audit TVG’s financial statements. Although USAID officials said that TVG met all of its reporting requirements, our review indicated that TVG had not submitted annual reports. According to USAID officials responsible for the project in Russia, USAID staff visited only half the project sites established by TVG, CNFA, and Agricultural Cooperative Development International between May 1993 and November 1994. USAID was required to annually assess the performance and program direction of the cooperative agreement and contract for an independent external evaluation. As of March 1995, it had done neither. However, CNFA completed an evaluation of the agribusiness partnerships project in August 1994 at USAID/Moscow’s request. It reported that the project had not started agribusiness partnerships quickly, had not made a significant contribution to sectoral reform, and had little to show for the “additionality” purchased with USAID funds. CNFA’s internal evaluation did not address TVG’s performance. USAID completed an internal review in February 1995, but the review did not cover the additionality components. The review stated that it was unrealistic to expect the overall project to have a significant, measurable impact on the food system in the NIS. USAID has discontinued the agribusiness partnerships project in Russia and, as of September 1994, stopped accepting proposals for Russian agribusiness partnerships. In addition, USAID has decided not to obligate any additional funds for the project. Agency officials stated that the project itself cannot adequately address the obstacles of reforming the agricultural sector and indicated that other projects, such as the Russian-American Enterprise Fund, were better vehicles for financing joint ventures. The Russian officer resettlement pilot project has been successful in providing the required housing units, although not within the original time frames. The project’s secondary objectives—to provide job skills training for demobilized officers and to help facilitate housing sector reform—were only partially met. By implementing a pilot program, USAID was able to test the viability of a housing construction project and apply lessons learned to the $160-million follow-on project. Planning and Development Collaborative International (PADCO), the contractor tasked to provide construction management services, was successful in part because it (1) had experience in working on housing sector reform in Russia, (2) established a physical presence in Moscow and in the field, (3) obtained at least some buy-in and involvement from the local Russian government, and (4) employed Russian staff to oversee construction activities. The Russian Ministry of Defense has traditionally provided qualifying retired and demobilized military officers with a dwelling unit or plot of land and some job skills training. After the Soviet Union dissolved, between 200,000 and 350,000 officers needed housing; approximately 42,000 were located in the Baltic Republics of Estonia, Latvia, and Lithuania. However, since the dissolution, the Russian government has lacked the housing stock to resettle all the demobilized military officers. Further, Russia’s severe economic problems, housing shortages, and lack of “social guarantees” for these retired officers has delayed troop withdrawals. President Clinton announced the Russian officer resettlement program at the Vancouver Summit in April 1993. Later, in July 1993, he stated at the G-7 Heads of State meeting in Tokyo that the program should encourage rapid withdrawal of demobilized Russian officers from the Baltic Republics. The Russian Officer Resettlement Initiative is being conducted in two phases—a $6-million pilot and a $160-million follow-on project. The pilot’s primary objective was to construct 450 housing units by July 1994 for the resettlement of demobilized Russian military officers. The follow-on project was to provide up to 5,000 units (2,500 constructed and 2,500 voucher certificates) by November 30, 1996, for officers demobilized in the Baltics or other countries outside Russia. The pilot project’s secondary objectives were to provide job skills training, experiment with new housing technologies, assist private firms in housing development and construction, and expand the scope of housing choices. To implement the pilot project, USAID contracted with PADCO for construction management services. It also awarded fixed-price contracts to five Russian builders and one private voluntary agency to construct housing units in five cities. Finally, it provided a grant to the International Catholic Migration Commission for training. According to project officials, PADCO assisted the project design team that included officials from USAID/Washington and USAID/Moscow. This team visited potential project sites, evaluated projects, and negotiated construction contracts. PADCO was responsible for managing the construction activities and monitoring contractor performance. U.S. officials said the design team created the pilot with only minimal input from the Ministry of Defense or the Ministry of Construction. USAID officials added that the design team conducted its own field assessment to select participating cities and worked almost exclusively with the local authorities in these cities. The local authorities were to provide infrastructure services such as heating, water, and road access for the housing units. USAID relied on the Russian Ministry of Defense to select the officers to receive the housing. The initial design for the pilot program did not stipulate where the officers should come from, but as a result of the Tokyo G-7 meetings in July 1993, USAID established criteria that gave priority to demobilized officers living in the Baltics. The criteria also included housing for officers from other areas outside Russia because two cities were reluctant to provide infrastructure for officers exclusively from the Baltics. Under this criteria, officers demobilized in other areas would be included. USAID’s compromise with these cities allowed some demobilized officers from their own jurisdictions to receive housing. In Nizhniy Novgorod, half the officers could come from its jurisdiction, while in Volgograd, 40 percent of the officers could come from its jurisdiction. USAID and PADCO officials said beneficiary composition would also be an issue in the follow-on project. PADCO’s project staff established a long-term presence in Moscow and traveled regularly to the various building sites. It also hired and trained Russian construction specialists to supervise the construction in each city. USAID officials said PADCO’s experience in Russian housing issues helped facilitate this project. PADCO and Russian contractors generally met the program’s primary objective of providing housing units, although not within established time frames. As of July 1994, only 94 (21 percent) of the 452 units were completed, although as of February 15, 1995, the project had provided 422 units (93 percent) through a combination of construction and voucher certificate activities. (See table III.2 and figs. III.1 and III.2.) Of the 10 project sites in 5 cities, USAID terminated 3: one because newly elected local officials refused to meet the previous administration’s commitments to provide infrastructure support to the housing units and 2 because contractors defaulted on their building commitments. In Novosibirsk, USAID and PADCO officials said federal and oblast’ officials were not involved in the initial agreements. Therefore, they had no authority to require the local administration to abide by the contract, and they would not allocate additional funds for the infrastructure. In Lipetsk, the contractor was a private voluntary agency that subcontracted with a local Russian construction firm to execute the work. When the subcontractor defaulted, the agency was unable to find a replacement to complete the work. At the Nizhniy Novgorod 50-unit project site, project officials said the Russian contractor ran into financial problems and stopped work, claiming that the $8,500 per unit allowed in the contract was not enough to cover costs. Although the city offered several incentives, including a $300,000 letter of credit and land for additional construction, USAID and PADCO officials said the contractor was unwilling to spend his own funds and the contract was terminated by USAID. USAID officials said the contractor at the 128-unit Nizhniy Novgorod site was concerned that $8,500 per unit was not enough to cover the cost of construction. The contractor had completed almost 70 percent of construction when increased construction costs, caused by rapidly rising inflation (9 percent a month) and the devaluation of the ruble, forced him to stop work. According to USAID officials, because the contractor had done a good job, used his own funds from other projects, and was well-connected with city and oblast’ officials, he negotiated an agreement so that the oblast’ and USAID would cover the increased costs of the 128 units. To ensure the project’s completion, USAID and the oblast’ administration each provided an additional $700,000, thus increasing the per unit price to $19,500. Because contracts were terminated months after they were awarded, USAID developed a method to meet the housing requirements quickly. It awarded a contract to the Urban Institute to implement a voucher certificate program, which allowed officers to purchase existing local housing in a participating area or housing under construction. Because of increased construction costs, the inclusion of land, and infrastructure costs, the vouchers were increased from the $8,500 per unit in the construction program to a maximum of $25,000 per unit. According to USAID officials, using voucher certificates allowed the pilot program to provide housing units much quicker than through direct construction. As of January 30, 1995, 80 vouchers had been disseminated to the officers, and 76 (95 percent) of the them had been used to purchase units, which were turned over to the officers. The International Catholic Migration Commission’s efforts to address one of the project’s secondary goals of job skills training has shown limited results, according to USAID housing officials. As of December 1994, it had arranged training for 46 beneficiaries who attended business courses in Pskov, Novgorod, and Volgograd. The USAID official said construction delays and the subsequent delays in officers relocating to their respective cities affected start-up activities. Further, the official said the Commission did not adequately identify the officers’ training needs and failed to recognize that many of them were not interested in training. Project officials said only minimal progress was made in addressing other secondary goals, such as demonstrating new housing technologies, expanding customer choices, and implementing more stringent quality control standards. For example, in Tula, contractors constructed 14-, 16-, and 30-unit duplexes, which took as long or longer to build than traditional high rise structures. (See fig. III.2.) PADCO field representatives worked with local builders to ensure that quality control measures were introduced and achieved. The officer resettlement pilot project accomplished its objective of providing housing to demobilized officers. The project was not designed to address systemic reform or to be sustainable, and it did not do so. PADCO officials said the attempts to sustain the effects of the project’s secondary objectives were short-lived, although the lessons imparted by PADCO—new housing technologies, housing choices, and quality control measures— may have some positive effect on the building industry and contractors. USAID and Urban Institute officials said the lessons learned from implementing the voucher certificate activity by the banks, realtors, and local governments may be used to facilitate the local governments’ transition to a private housing market. As a result of the pilot project, USAID incorporated the lessons learned as it designed the $160-million follow-on initiative to provide 5,000 units to officers from the Baltics. The primary changes included (1) obtaining total support, involvement, and buy-in from all three levels of Russian government; (2) using the voucher certificate program to expedite the relocation of 2,500 officers; (3) stipulating that a maximum of 10 percent of the demobilized officers could come from local jurisdictions; (4) using a U.S. construction management firm as the prime construction contractor and subcontract to the individual builders; (5) using only experienced, well-connected Russian builders; (6) selecting partially completed buildings and sites with existing infrastructure; (7) using a traditional Russian housing design; and (8) providing a more realistic per unit cost ($25,000 versus $8,500). According to USAID officials, these changes are expected to allow the follow-on project to proceed more quickly and efficiently than the pilot. USAID/Moscow had management responsibility for the project and generally did a good job of managing, monitoring, and overseeing it and coordinating with USAID/Washington. PADCO officials said USAID/Moscow actively assisted the contractors in reaching acceptable compromises with government officials and contractors. The USAID/Moscow project team reviewed project status reports, visited project sites, and held regular meetings with contractors. Finally, AID terminated work when problems could not be overcome. The following are GAO’s comments on USAID’s letter dated June 1, 1995. 1. We have incorporated these comments into the report where appropriate. 2. Although we noted project shortcomings, we also recognized the contribution Deloitte & Touche made toward the privatization process and considered the project a success. Moreover, we recognized USAID’s positive contribution to the overall privatization effort. 3. We conducted a detailed review of Tri Valley Growers’ performance, one of the three contractors responsible for implementing the agribusiness partnerships project, to determine whether this expenditure of funds had any sustainable impact. We concluded that it did not. Although we did not draw any conclusions about the agribusiness partnerships project as a whole, our analysis casts doubt on whether the project can have a systemic impact if the individual partnerships are not having an impact. (See comments 29 and 30 for additional discussion.) 4. It is too early to know whether USAID’s prediction concerning the outcome of ongoing activities in the energy sector will result in significant sector reform. Many of these projects are just starting and must overcome many obstacles. For example, in our September 1994 report on nuclear safety, we reported that there are no guarantees that the international assistance effort will result in safer reactors or expedite the closure of the riskiest reactors. In fact, in the absence of a commitment to close down the reactors, the assistance may encourage their continued operation. We noted that donor countries face formidable challenges in promoting the closure of the Soviet-designed reactors because the countries operating them depend on the nuclear power to meet their needs for domestic energy and export income. 5. We agree that the new evaluation system is promising in that it should provide an improved basis to evaluate USAID’s programs in the NIS. However, since the first report is not due until November 1995, it is too early to know whether the system will fulfill its promise. The value of the system will depend on the indicators selected, the reliability of the data, and the subjective judgments of USAID officials preparing the reports. For the system to have credibility, USAID will have to be able to identify shortcomings as well as successes. 6. We have modified the report to reflect this information. 7. We were able to reconcile obligations and expenditures in the USAID financial report with other USAID documentation. Accordingly, we have deleted the examples from the report. 8. Our draft report included information on the work of the Consuls General. We have modified our report to update the information on increased site visits. 9. Although market forces played a role in the limited use of some of the centers, the lack of local support as well as other factors also caused the low activity levels at some centers. More importantly, it is questionable whether USAID should spend funds on activities without a market unless it has a strategy to create demand for the product it is financing. 10. We visited only one site (in Siberia during February) because of the limited amount of time we had in country. Vorkuta can be reached by plane in the winter. USAID can visit the sites at other times during the year. We believe that three site visits—two occurred after we began our audit—in 31 months is inadequate for monitoring purposes. Day-to-day contacts with PIER staff are important; however, they do not substitute for site monitoring or provide USAID with an objective basis for evaluating the project’s success. 11. The accomplishments noted in our report are those that have had the greatest impact. PIER did not provide us with any statistics that indicated increased mine safety or productivity. Moveover, a September 1994 study produced by the U.S. Department of the Interior indicates that mine safety in Russia is actually getting worse. The beneficiaries we spoke with indicated that they were implementing new mining methods introduced by PIER; however, they did not mention any measurable increases in productivity. In addition, although productivity and efficiency are important, overall production for the coal sector is still too high. Finally, PIER’s Moscow director stated that this project has had the greatest impact in the areas of restructuring, private sector involvement, and social safety net development. 12. Our report does not state that an interim evaluation is imminent and may lead to activities being redirected. Our report states that “USAID management admitted that no annual assessments or midterm evaluations were conducted,” even when required by the cooperative agreement. 13. USAID’s new procedures did not affect the program during the time frames we reviewed. Also, the work plan example should be taken in the context that several iterations of the plan have been submitted and revised since November 1994. 14. Our draft report did not recommend that more authority be delegated. 15. Our report was modified to show that the Ministry of Environmental Protection and Natural Resources was involved in the initial selection of project activities. However, the Ministry did not participate in designing the projects as USAID suggests. USAID acknowledges the almost immediate shift of its relationship from the central to the local government once the projects were selected. We remain concerned over the lack of federal involvement, especially regarding the provision of resources and the limited potential for replicability. We believe that without outside funding or support from the federal level, sustainability and replication will be difficult. 16. As indicated in the report, we found that as of February 1995, the Far East project had contributed little to systemic reform and is unsustainable without outside funding. The report discusses the project’s attempt to address systemic reform through efforts to maintain and restock the forestry base. 17. As indicated in the report, the deliverables identified in the delivery orders generally cited reports and studies as the results. We are unable to verify USAID’s statements regarding the project’s results. 18. Although we recognize that this project was only one of many in the energy sector, we found that the project is unlikely to contribute to systemic reform because of its design and the lack of monitoring and follow-up by USAID. 19. USAID suggested that we select this project in part because USAID represented it as a success, based on an independent evaluation. We visited only Yekaterinburg for two primary reasons: USAID suggested that it was a good site to visit and it was one of only two cities where equipment was installed and extensive energy audits and training were provided. However, as we reported, the equipment had not been installed. USAID’s assertion that our conclusion is based almost entirely on the site visit is wrong. Our conclusion is also based on discussions with representatives from RCG/Haggler Bailly, Joseph Technology, Honeywell, and USAID officials responsible for the project and our review of numerous documents on the entire project. 20. We did not make statements or draw conclusions about other projects in the program or about the overall program. We noted that there was no indication that the project we reviewed had contributed to systemic reform. The energy efficiency audits and demonstration sites can only have an impact on systemic reform if USAID ensures that (1) equipment is installed; (2) equipment and training is used; (3) the recommendations in the energy audits are implemented; (4) the results of the project are monitored, recorded, and publicized; (5) appropriate personnel have access to the demonstration sites; and (6) problems such as lack of equipment certification are corrected. At the time we conducted our fieldwork, USAID was not ensuring any of these elements because the project did not include any mechanisms for long-term monitoring or replicating the project. USAID, in its comments, acknowledged that the project alone is unlikely to have an impact on systemic reform. 21. We agree that the dollar value of the uninstalled equipment constitutes a relatively small percentage of all the equipment purchased. The fact that USAID was unaware of the problems in Yekaterinburg and had not monitored whether any cost savings had been achieved and did not know whether any systemic improvements had resulted from the equipment, energy audits, and training provided is the issue. 22. The consultant’s evaluation indicated that all of the equipment was installed in April 1993. The documents we reviewed indicate that the equipment was provided in April and May 1993. If the equipment did not arrive until June 1993 as USAID suggests, USAID should have known the evaluation had problems when it indicated that all the equipment was installed 1 or 2 months before the equipment ever arrived. 23. We contacted individuals who were identified as participants by USAID/Moscow. 24. Our conclusion that the training was irrelevant was not based on our discussions with the participants of the PIET training courses. It was based on statements by various USAID officials, including the USAID/Moscow Mission Director and the Chief of USAID/Washington’s Europe and the Newly Independent States/Health and Population Office. For example, USAID officials told us that a 2-week training course without follow-on activities could not be expected to result in any systemic reform. In addition, as we also noted in the report, because USAID had not conducted any long-term monitoring of the participants, it had no evidence that any of the participants instituted systemic changes based on the training. The opinions and views of the participants we interviewed were used to provide insight as to why no systemic changes had occurred. 25. Contrary to USAID’s comments, we referred to the course evaluations in our draft report. We stated that “. . . most participants were satisfied with the course and believed it was applicable to their work conditions.” However, our assessment was not concerned with whether the participants were satisfied with the course but with whether the goals of the PIET contract and the Freedom Support Act were fulfilled. 26. We question USAID’s assertion about the actual positive impact of the training and follow-on assistance. First, at the time of our review, follow-on assistance was not planned to begin for another 6 months and no assessment had been completed to confirm or deny USAID’s assertion. Second, despite repeated USAID statements that the Siberian participants were involved in follow-on projects, USAID project officials did not know how many were actually involved. When the contractor compiled this data for us, the USAID project official in charge of the program was surprised that 75 percent of the participants in Siberia were not involved with the planned follow-on activities. Finally, USAID health officials we spoke with were unanimous in their assessment that the follow-on project’s progress to date has been a disappointment. 27. Contrary to USAID’s assertion, we met with the Russian Privatization Center (RPC) official responsible for the project. This official questioned the competence of some of the consultants. We also believe that the characterization of this project as a qualified success is an overstatement. Project task orders were never modified, thus the focus of the project remained to increase the availability of commercial real estate. However, after project completion, large amounts of commercial real estate continued to be leased in the selected cities under conditions that encouraged inefficient use, and the municipalities failed to maximize revenues. At our most recent meeting, on June 2, Jay Kalotra presented a preliminary draft of the wrap-up memo for the project. At that time, I reminded Jay several times that deviations from the Perm’ model would have to be rigorously defended to both USAID and the senior management of the RPC. Jay’s response was that IBTCI deviated from the Perm’ model in large part because the model was ill-suited to the chosen roll-out cities. To a considerable extent, this may be true. However, this obviously does not exonerate IBTCI, since their task was to find cities where a pure roll-out could be performed. [underscoring supplied] In its most recent memos, IBTCI suggests that they told us at the outset they would adopt a broader approach than BCG took in Perm’. While it is true that IBTCI states some very ambitious goals, it is disingenuous to suggest that we agreed to replace the Perm’ model with something else. . . . . . . However, as noted above, even three weeks ago IBTCI was maintaining the pretense of Perm’-style results. And it was only when we actually visited the project sites that we could see the extent to which deviations had occurred. It is not realistic to expect the agribusiness partnerships program to have a significant, measurable impact on overall food systems in the NIS. The limited number of partnerships being supported suggests such national level impacts are unlikely during the life of the activity, if ever. USAID/Moscow staff stated that the agribusiness partnerships project could not by itself influence systemic reform. 31. Although TVG has established three partnerships in Russia, only one (Petoseed) is functioning. According to TVG staff, CTC Foods has run into financial problems; consequently, its potato processing facility may never be constructed. Finally, the third partnership (Big Sky Foods Trading, Inc.) has only recently been approved, and it is too early to determine whether this project will be successful. 32. USAID staff in Moscow and Washington characterized the project as discontinued because no more partnerships can be introduced and no more funds will be obligated. 33. USAID/Moscow staff said TVG had not performed adequately and had not identified appropriate partnerships. The documents we reviewed also indicated that TVG was not performing well. 34. Our report includes examples of the causes for delays in the approval process, including the need to deal with legal issues. 35. We modified the report to reflect this foreign policy goal. However, the primary objective for the pilot project announced in April 1993 did not focus on relocating officers from the Baltics. The announcement made in July 1993 focused the program on the removal of officers from the Baltics. 36. USAID is incorrect in stating that the oblast’ was involved in signing the memorandum for Novosibirsk. It was only signed by USAID and the municipality of Novosibirsk. Louis H. Zanardi Eugene D. Beye Edward J. George, Jr. Peter J. Bylsma David M. Bruno Jodi McDade Prosser 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 Agency for International Development's (AID) assistance projects in Russia, focusing on whether: (1) individual AID projects met their objectives and contributed to systemic reforms; (2) the projects had common characteristics that contributed to their successful or unsuccessful outcomes; and (3) AID adequately managed the Russian projects. GAO found that: (1) some of the projects reviewed fully met or exceeded their objectives, while other projects met few or none of their objectives; (2) three AID projects contributed to fundamental structural changes in Russia because they had sustainability built into their design and they focused on national or regional issues; (3) the successful projects had broad and strong support from all levels of the Russian government, U.S. contractors with long-term physical presence in Russia, a broad scope to maximize benefits, and specific sustainability objectives, and complemented or supported Russian initiatives; (4) Russian officials' commitment to reform in certain sectors was critical to project success; (5) the unsuccessful projects were poorly designed and implemented and often had little or no impact on problems; (6) AID made certain exceptions to its normal procedures and processes in its desire to respond quickly to assist Russia; and (7) AID failed to adequately manage some projects because of problems in delegating management and monitoring responsibility to the Moscow AID office, inadequate staff, and inadequate management information systems. |
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Payroll taxes are the main source of financing for Social Security— which includes OASI and DI—and for the HI program in Medicare— also referred to as Medicare part A. The payroll taxes for these programs are levied on wages and on the net self-employment income of workers under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). Although Social Security is often discussed as a retirement program, Social Security (OASDI) is a social insurance program that provides cash payments to persons or families to replace income lost through retirement, death, or disability. Workers make “contributions” in the form of payroll taxes that are then credited by the Treasury to the Social Security trust funds. Once individuals have worked a sufficient time to qualify, they become eligible for benefits under the program. enrollees (about 25 percent of total annual funding) and appropriations of general funds (about 75 percent of total funding). While both the Social Security OASDI and Medicare HI are overwhelmingly financed by payroll taxes, those trust funds receive some general revenues in the form of income taxes paid on a portion of the Social Security benefits of upper-income retirees. Collection of the payroll taxes that fund OASDI and Medicare HI is administered by IRS. However, because these payroll taxes are earmarked to fund specific retirement, disability, and medical benefits for which workers become eligible through their qualified employment, they are fundamentally different from income taxes, which are imposed on certain segments of the population and which are not earmarked for any specific purpose. HI tax is 2.9 percent, divided evenly between the employee and the employer. Until 1994, the wage base for HI was identical to that for OASDI. Since 1994, however, the HI tax has been imposed on all of a worker’s wages and self-employment earnings. Figure 1 illustrates the flow of payroll taxes into the Social Security and Medicare trust funds. income wage earners replace a larger portion of their earnings than do the payments to higher wage earners. As with retirement benefits, a number of rules apply in determining who is eligible for disability benefits. Generally, a disability is defined as the inability to engage in “substantial gainful activity” by reason of physical or mental impairment. Workers who have become fully qualified for OASI benefits and who become disabled are also generally qualified for disability benefits. Workers who become disabled before becoming fully qualified for OASI benefits may nevertheless qualify for disability benefits under certain circumstances. Payments to disabled individuals, like those to retirees, take into account personal work histories and wages earned. As with retirement benefits, lower wage earners have a larger portion of their wages replaced than do higher wage earners. individual. For certain types of medical services, patients may be required to pay deductibles or additional charges. Under current law, employers withhold OASDI and HI payroll taxes from employees’ pay along with federal and state income taxes, if any. Both the employees’ and the employers’ shares of FICA taxes are deposited—along with other federal taxes—to a designated Federal Reserve bank or other authorized depository. All federal taxes are then deposited in the Treasury. Treasury credits the Social Security and HI trust funds for the applicable amounts. Neither eligibility for benefits nor the amount of benefits is based on the amount of taxes paid by an individual, and neither IRS nor the Social Security Administration (SSA) directly credits to the individual the annual and cumulative FICA taxes paid by or on behalf of each individual. Cumulatively, the OASDI and HI taxes collected represent dedicated receipts. They are accounted for in earmarked funds: the Social Security OASI trust fund, Social Security DI trust fund, and Medicare HI trust fund. These trust funds hold funds in the form of special nonmarketable U.S. Treasury securities that are backed by the full faith and credit of the U.S. government. They are an asset to the trust fund and a legal claim on—or an obligation of—the general fund of the Treasury. When benefits are to be paid, securities sufficient to fund those benefits are redeemed, and benefits are paid by the Treasury. trust funds earn interest on the funds lent to the Treasury. This interest is paid in the form of additional Treasury securities. Until 1983, program revenues and expenses were closely matched, and the reserves were modest. After the 1983 Social Security Commission recommendations were enacted, balances grew. As a result, interest credits have become a more important source of revenue for the OASDI trust funds. As we have reported, both Social Security and Medicare face serious financing challenges. Today, taxes paid into the trust funds exceed benefits paid out. However, as more and more of the “baby boom” generation enters retirement, this will change. The combination of a larger elderly population, increased longevity, and rising health care costs will drive significant increases in health and retirement spending when the “baby boom” generation begins to retire. Over the long term, the trust funds are not solvent. SSA projections show that, absent a change in the structure of the program, the OASDI trust funds will only be able to pay full benefits through 2037. However, as we have reported, because a trust fund’s accumulated balance does not necessarily reflect the full future cost of existing government commitments, it is not an adequate measure of the fund’s solvency or the program’s sustainability. The cash flows for these programs will create pressure on the federal budget long before these so-called trust fund exhaustion dates. securities and pay benefits, the government would have to raise taxes, cut spending for other programs, increase borrowing from the public, or retire less debt (if there is a surplus)—or some combination of these. As the Comptroller General testified last month, our long-term simulations show that, absent a change in the design of Social Security and Medicare, ultimately the government would do little more than mail checks to the elderly and their healthcare providers. The EITC is a refundable tax credit established by Congress in 1975. The credit offsets the impact of Social Security taxes paid by low- income workers and encourages low-income persons to seek work rather than welfare. The EITC is available to taxpayers with and without children and depends on the nature and amount of qualifying income and on the number of children who meet age, relationship, and residency tests. The amount of EITC allowed to an individual is first applied as a payment against any income tax liability of that individual. Any remaining amount is refunded to the individual. Workers can receive the credit as a lump sum payment after filing an income tax return or in advance as part of their paycheck. Table 2 shows, for the past 3 years, the number of EITC recipients, the relatively small number of those who reported receiving an advance EITC, and the total EITC amount. In December 1998, the Council of Economic Advisers concluded that “the EITC is one of our most successful programs for fighting poverty and encouraging work.” Among other things, the report said that the EITC had lifted 4.3 million Americans out of poverty in 1997, had reduced the number of children living in poverty that year by 2.2 million, and had increased the labor force participation of single mothers. For many EITC recipients, the credit is more than enough to fully offset Social Security taxes. Most EITC recipients earn credits that exceed their income tax liabilities. The Joint Committee on Taxation has estimated that 87 percent of the credit earned in 2000 will be refunded as direct payments to taxpayers. For many of the recipients these refunds will be more than enough to offset their payroll tax burdens. For example, a head-of-household filer who has two children and earns $15,000 in wages would have earned an EITC of $3,396 in 2000. This amount would have exceeded her precredit income tax liability of $24 plus her $1,148 portion of payroll tax liability. It would also have been more than enough to offset her employer’s $1,148 share of the payroll tax, which most economists believe to be borne by the employee. However, many low-income individuals and couples, especially those without children, do not earn the EITC. Looking at all low-income taxpayers together, the Congressional Budget Office estimated that in 1999 households with cash incomes between zero and $10,000, on average, received EITC refunds equal to 4.1 percent of their incomes. This average refunded credit was enough to offset the average payroll tax liability of these households, but it would not have completely offset the burden of the employer’s portion of the payroll tax. The average refunded credit for households with cash incomes between $10,000 and $20,000 typically would not have been sufficient to offset any of the employer’s share of the payroll tax and only a portion of the employee’s share for those households. Since 1995, we have identified EITC noncompliance as one of the high-risk areas within IRS because such noncompliance exposes the federal government to billions of dollars of risk through overpayments of the EITC. Although IRS has estimated that billions of dollars have been overpaid to EITC recipients, it has not reported on the portions of noncompliance that may be due to unintentional errors, perhaps attributable at least in part to the complexity of the EITC, or to fraudulent efforts to obtain the credit. In April 1997 and September 2000, respectively, IRS reported on the results of two EITC compliance studies—the first involving tax year 1994 EITC claims accepted by IRS between January 15 and April 21, 1995, and the second involving tax year 1997 claims processed by IRS between January 20 and May 29, 1998. Although changes in IRS’ study methodology as well as legislative changes between 1994 and 1997 made the results of the two studies noncomparable, both studies documented a significant amount of EITC noncompliance. Of $17.2 billion in EITC claimed during the first study period, IRS estimated that $4.4 billion (about 26 percent) was overclaimed. Of $30.3 billion in EITC claimed during the second study period, IRS estimated that $9.3 billion (about 31 percent) was overclaimed. The largest source of taxpayer error identified by IRS in both studies related to EITC requirements that are difficult for IRS to verify— principally those related to eligibility of qualifying children. Currently, to be a qualifying child, a child must (1) be the taxpayer’s son, daughter, adopted child, grandchild, stepchild, or eligible foster child (i.e., meet a relationship test); (2) be under age 19, under age 24 and a full-time student, or any age and permanently and totally disabled (i.e., meet an age test); and (3) have lived with the taxpayer in the United States for more than half the year or for the entire year if an eligible foster child (i.e., meet a residency test). Failure to meet the residency test was the most common qualifying child error identified in both studies. IRS’ studies identified the following as other sources of EITC errors. Complicated living arrangements--when a child meets the rules to be a qualifying child of more than one person, the person with the higher modified adjusted gross income (AGI) is the only one who can claim the EITC using that child. The person with the lower modified AGI cannot use that child to claim the EITC even if the other person does not claim the EITC. This rule does not apply if the other person is the taxpayer's spouse and they file a joint return. Misreporting of filing status—these errors involved married taxpayers filing as single or head of household when they should have filed as married filing separately. Persons who file as married filing separately are not eligible to claim the EITC. Income misreporting—these errors included misreporting of earned income and underreporting of investment income. EITC “noncompliance” as identified in IRS’ studies and as referred to in this testimony includes errors caused by mistakes—possibly due to the complexity of the EITC—or an intent to defraud. Both of these potential sources of error have been of concern to IRS and others. Some analysts consider the EITC to be a complex tax provision that challenges those applying for it to properly understand and follow the qualifying rules. On the other hand, the credit’s possible susceptibility to fraud has also been a concern to Congress and IRS for many years. Although being able to differentiate between these different causes may be important in identifying appropriate corrective measures, IRS’ primary goal in conducting its compliance studies was to identify the level of overall EITC noncompliance. Determining the causes of overpayments is more challenging and costly, especially determining whether an EITC claim is fraudulent, which requires knowing the difficult-to- prove intent behind the taxpayer’s actions. IRS’ reports on its two compliance studies did not discuss the extent to which EITC overclaims were due to mistakes versus fraud. However, as we discussed in a July 1998 report on IRS’ first study, IRS examiners and case reviewers did make a determination of intent for almost every case involving an overclaim. Based on those determinations, about one-half of the returns with an EITC overclaim and two-thirds of the total amount overclaimed were considered to be the result of intentional errors. Because these assessments were judgmental and made without any specific criteria, they were considered too imprecise to be included in IRS’ report. However, as we said in 1998, the results did indicate that IRS’ compliance efforts should include activities aimed at taxpayers who intentionally misclaim the EITC. Concerned about the level of EITC noncompliance, Congress and IRS have taken various steps to reduce it. After the 1994 compliance study, Congress took the following steps: According to law, an EITC is not to be allowed unless the tax return contains the EITC-qualifying-child’s Social Security number (SSN) as well as the SSNs of the taxpayer and the taxpayer’s spouse, if any. Before 1997, if IRS identified a return with an invalid SSN, it had to resolve that issue through its normal audit procedures. Because those procedures are resource intensive, IRS was not able to follow up on most of the invalid SSNs identified. In 1995, for example, IRS stopped the refunds on about 3 million returns with invalid SSNs. However, IRS was only able to follow up with taxpayers on about 700,000 of those returns. For the other 2.3 million returns, IRS released the refunds without any follow-up. In 1996, Congress authorized IRS to treat invalid SSNs as “math errors,” similar to the way that IRS had historically handled computational mistakes. With that authority, IRS has been able to (1) automatically disallow any EITC claim associated with an invalid SSN and (2) make appropriate adjustments to any refund that the taxpayer might be claiming. collect SSNs of birth parents and provide IRS with information linking the parents’ and child’s SSNs. Congress began providing IRS with appropriated funds (about $143 million a year) for a 5-year EITC compliance initiative beginning in fiscal year 1998. As part of the 5-year compliance initiative and using the tools provided by Congress, IRS implemented a plan that calls for reducing EITC noncompliance through expanded customer service and public outreach, strengthened enforcement, and enhanced research. In implementing its plan, IRS has taken several actions, with some significant results. For example: In 1999 and 2000, IRS identified a total of about 3.4 million “math errors” related to the EITC, about 24 percent of which involved invalid SSNs.According to IRS, it denied about $675 million in erroneous EITC claims during fiscal years 1999 and 2000 because of EITC-related “math errors.” Other types of EITC noncompliance are not as easy to identify as invalid SSNs. These types of noncompliance can be detected only through an in- depth review. For the past few years, IRS has targeted for in-depth review certain types of EITC claims, such as those involving the use of a child’s SSN on multiple returns for the same year, that IRS had identified as important sources of noncompliance. Returns identified by IRS were to be audited to determine if the EITC claims were valid. During fiscal years 1999 and 2000, according to IRS, it completed more than 500,000 of these audits and identified about $800 million in overclaims. about $435,000 for 143 of those preparers. We do not know how, if at all, IRS’ visits resulted in improved due diligence by preparers. That question may be addressed in IRS’ report on the results of its visits, which, according to IRS, will be issued about May 1. IRS implemented a program to enforce the recertification requirements of the Taxpayer Relief Act of 1997. According to IRS data, (1) about 312,000 taxpayers were required to recertify after being denied the EITC for tax year 1997 and (2) about 193,000 of those taxpayer did not claim the EITC on their tax year 1998 returns. IRS sees these results as an indication that recertification has reduced the number of improper claims. IRS expanded its EITC outreach and educational efforts. For example, it developed partnerships with groups that are advocates for low-income taxpayers and with businesses and large employers who include EITC information in monthly billings or employees’ pay statements. IRS also refocused its media campaign and publications toward educating the public about EITC eligibility requirements. IRS developed a database that can be used to help verify the accuracy of taxpayers’ claimed dependents and EIC-qualifying children. It incorporates data from an assortment of sources including the HHS and SSA information provided for in the 1997 Act. According to IRS, the database is used to screen returns during processing for potential compliance issues and to select for pre-refund audits those with the highest potential. Also, according to IRS, the returns being selected are primarily ones filed by EITC claimants. Despite these initiatives, it remains to be seen how, if at all, Congress’ and IRS’ efforts have succeeded in reducing the 31- percent EITC overclaim rate identified by IRS’ tax year 1997 EITC compliance study. IRS is doing a study of tax year 1999 returns and plans to study tax year 2001 returns. The results of those studies, when compared to the results of the tax year 1997 study, should provide a basis for assessing the impact on overall EITC noncompliance. Although well-designed and effectively-implemented processes should help reduce EITC noncompliance, certain features of the EITC represent a trade-off between compliance and other desired goals. Unlike income transfer programs, such as Temporary Assistance for Needy Families and Food Stamps, the EITC was designed to be administered through the tax system. Accordingly, while other income transfer programs have staff who review documents and other evidence before judging applicants to be qualified to receive assistance, the EITC relies more directly on the self-reported qualifications of individuals. This approach generally should result in lower administrative costs and possibly higher participation rates for the EITC than the other assistance programs. However, EITC noncompliance may also be higher. This is especially true when eligibility depends on information that cannot be readily and rapidly verified by IRS as it processes tax returns. EITC eligibility, particularly related to qualifying children, is difficult for IRS to verify through its traditional enforcement procedures, such as matching return data to third-party information reports. Correctly applying the residency test, for example, often involves understanding complex living arrangements and child custody issues. Thoroughly verifying qualifying child eligibility basically requires IRS to audit individual tax returns, as was done in the tax year 1994 compliance study—a costly, time-consuming, and intrusive proposition. - - - - - I appreciate this opportunity to appear today to provide a basic description of the payroll taxes funding Social Security and Medicare hospital insurance and to discuss what is known about EITC noncompliance. Mr. Chairman, that concludes my prepared statement. I would be happy to answer any questions you or other Members of the Committee might have. contributions to this testimony included David Attianese, Kenneth Bombara, Christine Bonham, Barbara Bovbjerg, Carol Henn, Susan Irving, Deborah Junod, and John Lesser. Long-Term Budget Issues: Moving From Balancing the Budget to Balancing Fiscal Risk (GAO-01-385T, Feb. 6, 2001). Federal Trust and Other Earmarked Funds: Answers to Frequently Asked Questions (GAO-01-199SP, January 2001). Medicare Reform: Issues Associated With General Revenue Financing (GAO/T-AIMD-00-126, Mar. 27, 2000). Medicare Reform: Leading Proposals Lay Groundwork, While Design Decisions Lie Ahead (GAO/T-HEHS/AIMD-00-103, Feb. 24, 2000). Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS- 00-29, Nov. 4, 1999). Social Security Reform: Implementation Issues for Individual Accounts (GAO/HEHS-99-122, June 18, 1999). Social Security: Different Approaches for Addressing Program Solvency (GAO/HEHS-98-33, July 22, 1998). Tax Administration: Assessment of IRS’ 2000 Tax Filing Season (GAO-01-158, Dec. 22, 2000). Earned Income Credit: IRS’ Tax Year 1994 Compliance Study and Recent Efforts to Reduce Noncompliance (GAO/GGD-98-150, July 28, 1998). Tax Administration: Earned Income Credit Noncompliance (GAO/T- GGD-97-105, May 8, 1997). | This testimony discusses (1) how payroll taxes fund Social Security and the Medicare Hospital Insurance (HI) programs and (2) noncompliance associated with the Earned Income Tax Credit (EITC) and efforts to deal with that noncompliance. Payroll taxes fund the Social Security Program and the Medicare HI program. These taxes are paid in equal portions by employees and their employers. Employees and their families become eligible to collect these benefits once workers have been employed for a sufficient period of time. Although Social Security benefits are calculated using a formula that considers lifetime earnings, HI benefits are based on the health of the covered individual and are paid directly to the health care provider. Demographic trends indicate that these programs will impose an increasing burden on the federal budget and the overall economy. Regarding EITC, significant compliance problems can expose the Internal Revenue Service (IRS) to billions of dollars in overpayments. EITC noncompliance is identified as taxpayer errors and intent to defraud. IRS and Congress have taken several steps to reduce noncompliance, including the passage of laws that enabled IRS to disallow EITC claims with invalid social security numbers and the implementation of a five-year EITC compliance initiative. |
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IPP project proposals are prepared and submitted to DOE by officials from the participating national laboratories. Each national laboratory provides technical and financial oversight for a set of projects. An Inter-Laboratory Board (ILAB) serves as the primary coordinating body for the national laboratories involved in the program. Partnerships are formed by the national laboratories between U.S. companies—known as industry partners—and institutes in Russia and other countries. IPP project proposals are reviewed by DOE’s national laboratories, the IPP program office, and other agencies before they are approved for funding. Because the national laboratory prepares the proposal, the laboratory project manager is responsible for including, among other things, a list of intended participants and for designating the WMD experience for each participant. The proposed participants are assigned to one of the following categories: Category I—direct experience in WMD research, development, design, production, or testing; Category II—indirect WMD experience in the underlying technologies of potential use in WMD; or Category III—no WMD-relevant experience. After the project passes an initial review within the national laboratory, it is analyzed by the ILAB and its technical committees, which then forward the proposal to DOE for review. DOE, in turn, consults with State and other agencies on policy, nonproliferation, and coordination considerations. DOE’s IPP program office is responsible for making final decisions on all projects. DOE requires that at least 65 percent of each IPP project’s funding be used as payments to individuals actually working on the project or to the participating institutes in payment for project-related supplies, equipment, and overhead. Because the IPP program is not administered through a government-to-government agreement, DOE distributes IPP funding through three tax-exempt entities to avoid paying foreign taxes. These organizations transfer funds directly to the personal bank accounts of IPP project participants. To receive payment, project participants must submit paperwork to these organizations indicating, among other things, whether they possess WMD experience. DOE has not accurately portrayed the IPP program’s progress in the number of WMD scientists receiving DOE support and the number of long- term, private sector jobs created. Many of the scientists in Russia and other countries that DOE has paid through its IPP program did not claim to have WMD experience. Furthermore, DOE’s process for substantiating the weapons backgrounds of IPP project participants has several weaknesses. In addition, DOE has overstated the rate at which weapons scientists have been employed in long-term, private sector jobs because it does not independently verify the data it receives on the number of jobs created, relies on estimates of job creation, and includes in its count a large number of part-time jobs that were created. Finally, DOE has not revised the IPP program’s performance metrics, which are based on a 1991 assessment of the threat posed by former Soviet weapons scientists. A major goal of the IPP program is to engage former Soviet weapons scientists, engineers, and technicians, and DOE claims to have supplemented the incomes of over 16,770 of these individuals since the program’s inception. However, this number is misleading because this figure includes both personnel with WMD experience and those without any WMD experience, according to DOE officials. We reviewed the payment records of 97 IPP projects, for which information was available and complete, and found that 54 percent, or 3,472, of the 6,453 participants in these projects did not claim to possess any WMD experience in the declarations they made concerning their backgrounds. We also found that DOE is not complying with a requirement of its own guidance for the IPP program—that is, each IPP project must have a minimum of 60 percent of the project’s participants possessing WMD-relevant experience prior to 1991 (i.e., Soviet-era WMD experience). We found that 60 percent, or 58, of the 97 projects for which we had complete payment information did not meet this requirement. Finally, many IPP project participants that DOE supports are too young to have contributed to the Soviet Union’s WMD programs. Officials at 10 of the 22 Russian and Ukrainian institutes we interviewed said that IPP program funds have allowed their institutes to recruit, hire, and retain younger scientists. We found that 15 percent, or 972, of the 6,453 participants in the payment records of the 97 projects we reviewed were born in 1970 or later and, therefore, were unlikely to have contributed to Soviet-era WMD efforts. While DOE guidance for the IPP program does not prohibit participation of younger scientists in IPP projects, DOE has not clearly stated the proliferation risk posed by younger scientists and the extent to which they should be a focus of the IPP program. In 1999, we recommended that, to the extent possible, DOE should obtain more accurate data on the number and background of scientists participating in IPP program projects. DOE told us that it has made improvements in this area, including developing a classification system for WMD experts, hiring a full-time employee responsible for reviewing the WMD experience and backgrounds of IPP project participants, and conducting annual project reviews. However, DOE relies heavily on the statements of WMD experience that IPP project participants declare when they submit paperwork to receive payment for work on IPP projects. We found that DOE lacks an adequate and well-documented process for evaluating, verifying, and monitoring the number and WMD experience level of individuals participating in IPP projects. According to DOE officials, IPP projects are scrutinized carefully and subjected to at least 8, and in some cases 10, stages of review to assess the WMD experience of the project participants. However, we found limitations in DOE’s process. Specifically: DOE has limited information to verify the WMD experience of personnel proposed for IPP projects because government officials in Russia and other countries are reluctant to provide information about their countries’ scientists. For example, three national laboratory officials stated that it is illegal under Russian law to ask project participants about their backgrounds, and that instead they make judgments regarding the WMD experience of the project participants on the basis of their personal knowledge and anecdotal information. Some IPP project proposals may advance from the national laboratories to DOE with insufficient vetting or understanding of all personnel who are to be engaged on the project. Senior representatives at five national laboratories told us that they and their project managers do not have sufficient time or the means to verify the credentials of the proposed project participants. DOE does not have a well-documented process for verifying the WMD experience of IPP project participants, and, as a result, it is unclear whether DOE has a reliable sense of the proliferation risk these individuals pose. DOE’s review of the WMD credentials of proposed project participants relies heavily on the determinations of the IPP program office. We examined the proposal review files that the program maintains, and we were unable to find adequate documentation to substantiate the depth or effectiveness of the program office’s review of the WMD experience of proposed IPP project participants. Because it can be a matter of months or longer between development of an IPP project proposal and project implementation, the list of personnel who are actually paid on a project can differ substantially from the proposed list of scientists. For several IPP projects we reviewed, we did not find documentation in DOE’s project files indicating that the department was notified of the change of staff or had assessed the WMD backgrounds of the new project participants. For example, one IPP project—to discover new bioactive compounds in Russia and explore their commercial application—originally proposed 27 personnel and was funded at $1 million. However, 152 personnel were eventually paid under this project, and we did not find an updated list of the project personnel or any indication of a subsequent review by DOE in the IPP project files. The limited information DOE obtains about IPP project participants and the limitations in DOE’s review of the backgrounds of these individuals leave the IPP program vulnerable to potential misallocation of funds. We found several instances that call into question DOE’s ability to adequately evaluate IPP project participants’ backgrounds before the projects are approved and funded. For example, a National Renewable Energy Laboratory official told us he was confident that a Russian institute involved in a $250,000 IPP project to monitor microorganisms under environmental stress was supporting Soviet-era biological weapons scientists. However, during our visit to the institute in July 2007, the Russian project leader told us that neither he nor his institute was ever involved in biological weapons research. As a result of this meeting, DOE canceled this project on July 31, 2007. DOE’s cancellation letter stated that the information provided during our visit led to this action. Although a senior DOE official described commercialization as the “flagship” of the IPP program, we found that the program’s commercialization achievements have been overstated and are misleading. In its most recent annual report for the IPP program, DOE indicated that 50 projects had evolved to support 32 commercially successful activities. DOE reported that these 32 commercial successes had helped create or support 2,790 new private sector jobs for former weapon scientists in Russia and other countries. In reviewing these projects, we identified several factors that raise concerns over the validity of the IPP program’s reported commercial success and the numbers of scientists employed in private sector jobs. For example: The annual survey instrument that the U.S. Industry Coalition distributes to collect information on job creation and other commercial successes of IPP projects relies on “good-faith” responses from U.S. industry partners and foreign institutes, which are not audited by DOE or the U.S. Industry Coalition. In 9 of the 32 cases, we found that DOE based its job creation claims on estimates or other assumptions. For example, an official from a large U.S. company told us that the number of jobs it reported to have helped create was his own rough estimate. We could not substantiate many of the jobs reported to have been created in our interviews with the U.S. companies and officials at the Russian and Ukrainian institutes where these commercial activities were reportedly developed. For example, officials from a U.S. company we interviewed claimed that 250 jobs at two institutes in Russia had been created, on the basis of two separate IPP projects. However, during our visit to the Scientific Research Institute of Measuring Systems in Russia to discuss one of these projects, we were told that the project is still under way, manufacturing of the product has not started, and none of the scientists have been reemployed in commercial production of the technology. The IPP program’s long-term performance targets do not accurately reflect the size and nature of the threat the program is intended to address because DOE is basing the program’s performance measures on outdated information. DOE has established two long-term performance targets for the IPP program—to engage 17,000 weapons scientists annually by 2015 in either IPP grants or in private sector jobs resulting from IPP projects, and to create private sector jobs for 11,000 weapons scientists by 2019. However, DOE bases these targets on a 16-year-old, 1991 National Academy of Sciences (NAS) assessment that had estimated approximately 60,000 at-risk WMD experts in Russia and other countries in the former Soviet Union. DOE officials acknowledged that the 1991 NAS study does not provide an accurate assessment of the current threat posed by WMD scientists in Russia and other countries. However, DOE has not formally updated its performance metrics for the IPP program and, in its fiscal year 2008 budget justification, continued to base its long-term program targets on the 1991 NAS estimate. Moreover, DOE’s current IPP program metrics do not provide sufficient information to the Congress on the program’s progress in reducing the threat posed by former Soviet WMD scientists. The total number of scientists supported by IPP grants or employed in private sector jobs conveys a level of program accomplishment, but these broad measures do not describe progress in redirecting WMD expertise within specific countries or at institutes of highest proliferation concern. DOE has recognized this weakness in the IPP program metrics and recently initiated the program’s first systematic analysis to understand the proliferation risk at individual institutes in the former Soviet Union. DOE officials briefed us on their efforts in September 2007, but told us that the analysis is still under way, and that it would not be completed until 2008. As a result, we were unable to evaluate the results of DOE’s assessment. DOE has yet to develop criteria for phasing-out the IPP program in Russia and other countries of the former Soviet Union. Russian government officials, representatives of Russian and Ukrainian institutes, and individuals at U.S. companies raised questions about the continuing need for the IPP program, particularly in Russia, whose economy has improved in recent years. Meanwhile, DOE is departing from the program’s traditional focus on Russia and other former Soviet states to engage scientists in new countries, such as Iraq and Libya, and to fund projects that support GNEP. Officials from the Russian government, representatives of Russian and Ukrainian institutes, and individuals at U.S. companies raised questions about the continuing need for the IPP program. Specifically: A senior Russian Atomic Energy Agency official told us in July 2007 that the IPP program is no longer relevant because Russia’s economy is strong and its scientists no longer pose a proliferation risk. Officials from 10 of the 22 Russian and Ukrainian institutes we interviewed told us that they do not see scientists at their institutes as a proliferation risk. Russian and Ukrainian officials at 14 of the 22 institutes we visited told us that salaries are regularly being paid, funding from the government and other sources has increased, and there is little danger of scientists migrating to countries of concern. Representatives of 5 of the 14 U.S. companies we interviewed told us that, due to Russia’s increased economic prosperity, the IPP program is no longer relevant as a nonproliferation program in that country. In economic terms, Russia has advanced significantly since the IPP program was created in 1994. Some of the measures of Russia’s economic strength include massive gold and currency reserves, a dramatic decrease in the amount of foreign debt, and rapid growth in gross domestic product. In addition, the president of Russia recently pledged to invest substantial resources in key industry sectors, including nuclear energy, nanotechnology, and aerospace technologies. Many Russian institutes involved in the IPP program could benefit from these initiatives, undercutting the need for future DOE support. In another sign of economic improvement, many of the institutes we visited in Russia and Ukraine appeared to be in better physical condition and more financially stable, especially when compared with their condition during our previous review of the IPP program. In particular, at one institute in Russia—where during our 1998 visit we observed a deteriorated infrastructure and facilities—we toured a newly refurbished building that featured state-of-the-art equipment. Russian officials told us that the overall financial condition of the institute has improved markedly because of increased funding from the government as well as funds from DOE. In addition, one institute we visited in Ukraine had recently undergone a $500,000 renovation, complete with a marble foyer and a collection of fine art. DOE has not developed an exit strategy for the IPP program, and it is unclear when the department expects the program to have completed its mission. DOE officials told us in September 2007 that they do not believe that the program needs an exit strategy. However, they acknowledged that the program’s long-term goal of employing 17,000 WMD scientists in Russia and other countries does not represent an exit strategy. DOE has not developed criteria to determine when scientists, institutes, or countries should be “graduated” from the IPP program, and DOE officials believe that there is a continued need to engage Russian scientists. In contrast, State has assessed institutes and developed a strategy—using a range of factors, such as the institute’s ability to pay salaries regularly and to attract external funding—to graduate certain institutes from its Science Centers program. We found that DOE is currently supporting 35 IPP projects at 17 Russian and Ukrainian institutes that State considers to already be graduated from its Science Center program and, therefore, no longer in need of U.S. assistance. DOE recently expanded its scientist assistance efforts on two fronts: DOE began providing assistance to scientists in Iraq and Libya, and, through the IPP program, is working to develop IPP projects that support GNEP. These new directions represent a significant departure from the IPP program’s traditional focus on the former Soviet Union. According to a senior DOE official, the expansion of the program’s scope was undertaken as a way to maintain its relevance as a nonproliferation program. DOE has expanded the IPP program’s efforts into these new areas without a clear mandate from the Congress and has suspended parts of its IPP program guidance for implementing projects in these new areas. Specifically: Although DOE briefed the Congress on its plans, DOE officials told us that they began efforts in Iraq and Libya without explicit congressional authorization to expand the program outside of the former Soviet Union. In contrast, other U.S. nonproliferation programs, such as the Department of Defense’s Cooperative Threat Reduction program, sought and received explicit congressional authorization before expanding their activities outside of the former Soviet Union. In Libya, DOE is deviating from IPP program guidance and its standard practice of limiting the amount of IPP program funds spent at DOE’s national laboratories for project oversight to not more than 35 percent of total expenditures. Regarding efforts to support GNEP, DOE has suspended part of the IPP program’s guidance that requires a U.S. industry partner’s participation, which is intended to ensure IPP projects’ commercial potential. Since fiscal year 1994, DOE has spent about $309 million to implement the IPP program but has annually carried over large balances of unspent program funds. Specifically, in every fiscal year from 1998 through 2007, DOE carried over unspent funds in excess of the amount that the Congress provided for the program in those fiscal years. For example, as of September 2007, DOE had carried over about $30 million in unspent funds—$2 million more than the $28 million that the Congress had appropriated for the IPP program in fiscal year 2007. In fact, for 3 fiscal years—2003 through 2005—the amount of unspent funds was more than double the amount that the Congress appropriated for the program in those fiscal years, although the total amount of unspent funds has been declining since its peak in 2003. Two main factors have contributed to DOE’s large and persistent carryover of unspent funds: the lengthy and multilayered review and approval processes DOE uses to pay IPP project participants for their work, and long delays in implementing some IPP projects. DOE identified three distinct payment processes that it uses to transfer funds to individual scientists’ bank accounts in Russia and other countries. These processes involve up to seven internal DOE offices and external organizations that play a variety of roles, including reviewing project deliverables, approving funds, and processing invoices. DOE officials told us that these processes were introduced to ensure the program’s fiscal integrity and acknowledged the enormity of the problem that the lag time between the allocation of funds, placement of contracts, and payment for deliverables creates for the IPP program and told us they are taking steps to streamline their payment processes. In addition, Russian and Ukrainian scientists at 9 of the 22 institutes we interviewed told us that they experienced delays in payments ranging from 3 months to 1 year. Delays in implementing some IPP projects also contribute to DOE’s large and persistent carryover of unspent funds. According to officials from U.S. industry partners, national laboratories, and Russian and Ukrainian institutes, some IPP projects experience long implementation delays. As a result, project funds often remain as unspent balances until problems can be resolved. These problems include implementation issues due to administrative problems, the withdrawal or bankruptcy of the U.S. industry partner, and turnover in key project participants. In part to address concerns about unspent program funds, DOE began implementing its Expertise Accountability Tool, a new project and information management system designed to better manage IPP projects’ contracts and finances, in October 2006. According to DOE officials, the system will allow instant sharing of IPP project data between DOE and participating national laboratories. DOE officials believe that the system will allow the IPP program office to better monitor the progress of IPP projects at the national laboratories, including reviews of IPP project participants’ WMD backgrounds and tracking unspent program funds. Mr. Chairman, this concludes my prepared statement. We would be happy to respond to any questions you or the other Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Gene Aloise (Director), Glen Levis (Assistant Director), R. Stockton Butler, David Fox, and William Hoehn 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. 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. | During the decades before its dissolution, the Soviet Union produced a cadre of scientists and engineers whose knowledge and expertise could be invaluable to countries or terrorist groups trying to develop weapons of mass destruction (WMD). After the Soviet Union's collapse in 1991, many of these scientists suffered significant cuts in pay or lost their government-supported work. To address concerns about unemployed or underemployed Soviet-era weapons scientists, the Department of Energy (DOE) established the Initiatives for Proliferation Prevention (IPP) program in 1994 to engage former Soviet weapons scientists in nonmilitary work in the short term and create private sector jobs for these scientists in the long term. GAO was asked to assess (1) DOE's reported accomplishments for the IPP program, (2) DOE's exit strategy for the program, and (3) the extent to which the program has experienced annual carryovers of unspent funds and the reasons for any such carryovers. In December 2007, GAO issued a report--Nuclear Nonproliferation: DOE's Program to Assist Weapons Scientists in Russia and Other Countries Needs to Be Reassessed, (GAO-08-189)--that addressed these matters. To carry out its work, GAO, among other things, analyzed DOE policies, plans, and budgets and interviewed key program officials and representatives from 22 Russian and Ukrainian institutes. DOE has overstated accomplishments on the number of scientists receiving DOE support and the number of long-term, private sector jobs created. First, although DOE claims to have engaged over 16,770 scientists in Russia and other countries, this total includes both scientists with and without weapons-related experience. GAO's analysis of 97 IPP projects involving about 6,450 scientists showed that more than half did not claim to possess any weapons-related experience. Furthermore, officials from 10 Russian and Ukrainian weapons institutes told GAO that the IPP program helps them attract, recruit, and retain younger scientists and contributes to the continued operation of their facilities. This is contrary to the original intent of the program, which was to reduce the proliferation risk posed by Soviet-era weapons scientists. Second, although DOE asserts that the IPP program helped create 2,790 long-term, private sector jobs for former weapons scientists, the credibility of this number is uncertain because DOE relies on "good-faith" reporting from U.S. industry partners and foreign institutes and does not independently verify the number of jobs reported to have been created. DOE has not developed an exit strategy for the IPP program. Officials from the Russian government, Russian and Ukrainian institutes, and U.S. companies raised questions about the continuing need for the program. Importantly, a senior Russian Atomic Energy Agency official told GAO that the IPP program is no longer relevant because Russia's economy is strong and its scientists no longer pose a proliferation risk. DOE has not developed criteria to determine when scientists, institutes, or countries should "graduate" from the program. In contrast, the Department of State, which supports a similar program to assist Soviet-era weapons scientists, has assessed participating institutes and developed a strategy to graduate certain institutes from its program. Even so, we found that DOE is currently supporting 35 IPP projects at 17 Russian and Ukrainian institutes where State no longer funds projects because it considers them to have graduated from its program. In addition, DOE has recently expanded the program to new areas. Specifically, DOE began providing assistance to scientists in Iraq and Libya and, through the IPP program, is working to develop projects that support a DOE-led international effort to expand the use of civilian nuclear power. In every fiscal year since 1998, DOE carried over unspent funds in excess of the amount that the Congress provided for the program. Two main factors have contributed to this recurring problem--lengthy review and approval processes for paying former Soviet weapons scientists and delays in implementing some IPP projects. In its recent report, GAO recommended, among other things, that DOE conduct a fundamental reassessment of the IPP program, including the development of a prioritization plan and exit strategy. DOE generally concurred with GAO's findings, but does not believe that the IPP program needs to be reassessed. |
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The mission of FAA, as a DOT agency, is to provide the safest, most efficient aerospace system in the world. To fulfill its mission, FAA must rely on an extensive use of technology, including many software-intensive systems. FAA constantly relies on the adequacy and reliability of the nation’s ATC system, which comprises a vast network of radars; automated data processing, navigation, and communications equipment; and ATC facilities. Through this system, FAA provides services such as controlling takeoffs and landings and managing the flow of traffic between airports. FAA is organized into several staff support offices and five lines of business, which include Airports, Aviation Safety, Commercial Space Transportation, the Office of Security and Hazardous Materials, and the newly formed ATO. The ATO was formed in February 2004 to, among other things, improve the provision of air traffic services and accelerate modernization efforts. To create the ATO, FAA combined its Research and Acquisition and Air Traffic Services into one performance-based organization, bringing together those who acquire systems and those who use them, respectively. The ATO is led by FAA’s chief operating officer, consists of 10 service units, and has 36,000 of FAA’s 48,000 employees. The ATO is the principal FAA organizational unit responsible for acquiring ATC systems through the use of the agency’s Acquisition Management System (AMS). Because FAA formerly contended that some of its modernization problems were caused by federal acquisition regulations, Congress enacted legislation in November 1995 that exempted the agency from most federal procurement laws and regulations and directed FAA to develop and implement a new acquisition management system that would address the unique needs of the agency. In April 1996, FAA implemented AMS. AMS was intended to reduce the time and cost of fielding new system acquisitions by introducing (1) a new investment system that spans the life cycle of an acquisition, (2) a new procurement system that provides flexibility in selecting and managing contractors, and (3) organizational and human capital reforms that support the new acquisition system. AMS provides high-level acquisition policy and guidance for selecting and controlling ATC system acquisitions through all phases of the acquisition life cycle, which is organized into a series of phases and decision points that include (1) mission analysis, (2) investment analysis, (3) solution implementation, and (4) in-service management. To select system acquisitions, FAA has two processes--mission analysis and investment analysis–that together constitute a set of policies and procedures, as well as guidance, that enhance the agency’s ability to screen system acquisitions submitted for funding. Also through these two processes, FAA assesses and ranks each system acquisition according to its relative costs, benefits, risks, and contribution to FAA’s mission; a senior, corporate-level decision- making group then selects system acquisitions for funding. After a system acquisition has been selected, FAA officials are required to formally establish the life-cycle cost, schedule, benefits, and performance targets— known as acquisition program baselines, which are used to monitor the status of the system acquisition throughout the remaining phases of its life cycle. Through its NAS modernization program, FAA is upgrading and replacing ATC facilities and equipment to help improve the system’s safety, efficiency, and capacity. These systems involve improvement in the areas of automation, communication, navigation and landing, surveillance, and weather to support the following five phases of flight (see fig. 1): Preflight – The pilot performs flight checks and the aircraft is pushed- back from the gate. For preflight, we looked at Collaborative Decision Making (CDM) and OASIS. Airport Surface – The aircraft taxis to the runway for takeoff or, after landing, to the destination gate to park at the terminal. For airport surface, we examined the Airport Surface Detection Equipment – Model X (ASDE-X). Terminal Departure – The aircraft lifts off the ground and climbs to a cruising altitude. For terminal departure, we examined the following systems: Airport Surveillance Radar (ASR-11), Integrated Terminal Weather System (ITWS), Local Area Augmentation System (LAAS), Standard Terminal Automation Replacement System (STARS), and Traffic Management Advisor (TMA). En route/Oceanic -- The aircraft travels through one or more center airspaces and approaches the destination airport. For en route and oceanic, we examined the following systems: Air Traffic Control Radar Beacon Interrogator-Replacement (ATCBI-6), Advanced Technologies and Oceanic Procedures (ATOP), Controller-Pilot Data Link Communications (CPDLC), and User Request Evaluation Tool (URET). Terminal Arrival -- The pilot lowers, maneuvers, aligns, and lands the aircraft on the destination airport’s designated landing runway. For terminal arrival, we looked at the systems already listed under terminal departure: ASR-11, ITWS, LAAS, STARS, and TMA. In addition, for the major ATC systems that support multiple phases of flight, we examined the following systems: En Route Communications Gateway (ECG), En Route Automation Modernization (ERAM), Next- Generation Air-to-Ground Communication (NEXCOM), and Wide Area Augmentation System (WAAS). Furthermore, for major ATC systems that support NAS infrastructure, we examined FAA Telecommunications Infrastructure (FTI) and NAS Infrastructure Management System (NIMS)– Phase Two. (See app. I for additional information on these 16 systems.) For more than two decades, FAA has experienced cost growth, schedule extensions, and/or performance problems in acquiring major systems under its ATC modernization program and has been on our list of high-risk programs since 1995. For example, 13 of the 16 major system acquisitions we reviewed in detail continue to experience cost, schedule, and/or performance shortfalls when assessed against their original baselines. The three other major system acquisitions that we reviewed in detail are currently operating within their original cost, schedule, and performance targets, but are experiencing challenges symptomatic of past problems. Of the remaining 39 system acquisitions within the ATC modernization program, few have had problems meeting cost and schedule targets. However, the ATO made progress during its first year of operation by meeting its acquisition goal for fiscal year 2004. Thirteen of the 16 major system acquisitions that we reviewed in detail for this engagement under the ATC modernization program have continued to experience cost growth, schedule delays, and/or performance problems when assessed against their original performance targets (see table 1). These major system acquisitions had total cost growth ranging from $1.1 million to about $1.5 billion over their original cost targets. In addition, these systems required extensions in their initial deployment schedules ranging from 1 to 13 years. Furthermore, several systems experienced safety-related performance problems. For 12 of the 13 major system acquisitions we reviewed in detail with cost, schedule, and performance shortfalls, one or more of the following four key factors contributed to these shortfalls: (1) The funding level received was less than called for in agency planning documents. Most major ATC system acquisitions have cost, schedule, and performance baselines that are approved by FAA’s Joint Resources Council--the agency’s body responsible for approving and overseeing major system acquisitions. Each baseline includes annual funding levels that the council agrees are needed for a system acquisition to meet its cost, schedule, and/or performance targets. The estimated cost for a given year assumes that the program received all funding for prior fiscal years as described in the baseline. In practice, however, this is not always the case. For example, when FAA’s budget level does not allow all system acquisitions to be fully funded at the levels approved in their baselines, FAA may elect to fully fund higher-priority acquisitions and provide less funding for lower-priority acquisitions than called for in their baselines. When a system acquisition does not receive the annual funding levels called for in its baseline, its ability to meet cost, schedule, and/or performance targets can be jeopardized, for example, by requiring the agency to defer funding for essential development or deployment activities until sufficient funding becomes available, which, in turn, could require FAA to maintain costly legacy systems until a new system is deployed. Receiving less funding than the agency approved for a given acquisition was a factor contributing to the inability of 8 of the 16 major system acquisitions we reviewed in detail to meet their cost, schedule, and/or performance targets. The ASR-11 acquisition, a digital radar system, illustrates how reduced funding has resulted in schedule delays. FAA officials stated that because of funding reductions and reprogramming, the program received $46.45 million less than requested for fiscal years 2004 and 2005 and program officials plan to request that the program’s deployment schedule be extended to 2013. According to FAA officials, in general, schedules for system acquisitions may slip under such circumstances (e.g., the rate of software development may be reduced and planned hardware and software deployments may be delayed). The ATO’s chief operating officer testified in April 2005 that receiving multiyear rather than annual funding from Congress for system acquisitions would help FAA to address this problem by providing funding stability for system acquisitions. In addition, according to a senior DOT official, 50 percent of cost growth is a result of an unstable funding stream. (2) The system acquisition experienced requirements growth and/or unplanned work. Requirements that are inadequate or poorly defined prior to developing a system may contribute to the inability of system acquisitions to meet their original cost, schedule, and/or performance targets. In addition, unplanned development work can occur when the agency misjudges the extent to which commercial-off-the-shelf (COTS)/ nondevelopmental item (NDI) solutions, such as those procured by another agency, will meet FAA’s needs. Requirements growth and/or unplanned work contributed to the inability of 7 of the 16 major system acquisitions we reviewed in detail to meet their cost, schedule, and/or performance targets. (3) Stakeholders were not sufficiently involved in design and development: Insufficient involvement of relevant stakeholders, such as air traffic controllers and maintenance technicians, throughout the development and approval processes for a system acquisition can lead to costly changes in requirements and unplanned work late in the development process. Not involving stakeholders sufficiently contributed to the inability of 4 of the 16 major system acquisitions to meet their cost, schedule, and/or performance targets. (4) The complexity of software development was underestimated. Underestimating the complexity of developing software for system acquisitions or the difficulty of modifying available software to fulfill FAA’s mission needs may contribute to unexpected software development, higher costs, and schedule delays. Underestimation contributed to the inability of 3 of the 16 major system acquisitions we reviewed in detail to meet their cost, schedule, and/or performance targets. (See table 2.) Several of the 16 major systems acquisitions we reviewed in detail effectively illustrate how these four factors can interact to contribute to cost growth, schedule extensions, and performance problems. For example, for WAAS, a precision approach and landing system augmented by satellites, two of the four key factors came into play: underestimation of software complexity and insufficient stakeholder involvement. Specifically, FAA underestimated the complexity of the software that would be needed to support this system when it accelerated the implementation of performance targets, which included moving up the commissioning of WAAS by 3 years. FAA originally planned to commission WAAS by 2000; however, at the urging of government and aviation industry groups in the 1990s, it decided to change the commissioning date to 1997. FAA then tried to develop, test, and deploy WAAS within 28 months, although the software development alone was expected to take 24 to 28 months. In retrospect, FAA acknowledged that the agency’s in-house technical expertise was not sufficient to address WAAS’s technical challenges and that expert stakeholders should have been involved earlier. Although WAAS was being developed by an integrated product team that included representatives from several FAA offices, the team did not effectively resolve problems in meeting a required performance capability—that pilots be warned in a timely manner when a system may be giving them potentially misleading and therefore hazardous information. Consequently, in 2000, FAA convened a panel of expert stakeholders to help it meet this requirement. These actions resulted in unplanned work and contributed to the rise in WAAS’s cost from the original estimate of $509 million in 1994 to $2.036 billion in 2005, and to a 6-year extension in its commissioning date. According to FAA, adding 6 years to the program’s life cycle also contributed to increased costs. Another example involves STARS, a joint program of FAA and DOD that replaced outdated monochromatic controller workstation monitors with multicolor monitors in ATC facilities. While joint FAA and DOD acquisitions offer the opportunity to leverage federal resources, in the case of STARS, the interaction of insufficient stakeholder involvement and subsequent unplanned work contributed to cost growth and schedule extensions. Specifically, FAA and DOD decided to acquire COTS equipment, rather than developing a new system. This strategy envisioned immediately deploying STARS to the highest priority ATC facilities and making further improvements later, thereby avoiding the increasing cost of maintaining the legacy system. However, this strategy provided for only limited evaluation by FAA and DOD controllers and maintenance technicians during the system’s development phase, although these employees were identified as stakeholders in developing the system’s requirements. While DOD controllers adopted and began using the original COTS version of STARS, FAA elected to modify the acquisition strategy and suspended the STARS deployment to address FAA controller and technician concerns with the new system. These concerns included, for example, that many features of the old equipment could be operated with knobs, allowing controllers to focus on the screen. By contrast, STARS was menu-driven and required the controllers to make several keystrokes and use a trackball, diverting their attention from the screen. The maintenance technicians also identified differences between STARS and its backup system that made it difficult to monitor the system. For example, the visual warning alarms and the color codes identifying problems were not the same for the two systems. According to FAA, the original COTS acquisition strategy that limited the involvement of controllers and maintenance technicians to just prior to deployment caused unplanned work for the agency because it had to revise its strategy for acquiring and approving STARS; this contributed to an increase in the overall cost of STARS of $500 million and a schedule extension of 5 years to deploy the system to its first site. The interaction of these factors also contributed to the agency’s ability to deploy STARS at only 47 of the 172 facilities initially planned. As of February 2005, FAA was developing a long-term acquisition plan to modernize or upgrade the highest-priority Terminal Radar Approach Control facilities that direct aircraft in the airspace that extends from the point where the tower’s control ends to about 50 nautical miles from the airport. The plan consists of alternatives to STARS, including the existing Common Automated Radar Terminal System (CARTS), which STARS was designed to replace. Finally, to help avoid similar problems in the future, stemming from the insufficient involvement of stakeholders during critical phases of a system’s design, development, and implementation, FAA has been more proactive in involving the stakeholders that will operate and maintain system acquisitions. A final example of how these factors can interact is FAA’s acquisition of OASIS, which is designed to replace outdated technology in FAA’s automated flight service stations. The new system is intended to improve the ability of air traffic specialists to process flight plans, deliver weather information, and provide search and rescue services to general aviation pilots. In August 1997, FAA awarded a contract to replace the Flight Service Automation System and console workstations. However, unplanned work, insufficient involvement of stakeholders, and lower funding than the agency had determined was needed to meet cost, schedule, and performance targets have together contributed to cost growth and schedules extensions. For example, the agency saw the system acquisition schedule slip because of a larger-than-planned development effort. According to the DOT IG, FAA identified a number of significant concerns, including the inadequate weather graphics capabilities for air traffic specialists. In our view, this indicates that stakeholders were not sufficiently involved throughout the system’s design and development phases. As a result, FAA eliminated the option of COTS procurement. In addition, the OASIS program was rebaselined in March 2000, when the system acquisition received only $10 million of the $21.5 million called for in its baseline for that year. This reduction in funding reduced the rate of software development, delayed and reduced the rate of planned hardware and console deployments, and led to the incremental deployment of operational software. This contributed to a delay in the first-site implementation from July 1998 to July 2002. According to FAA officials, because OASIS received less funding than the agency had approved for fiscal year 2004 and 2005, its deployment to automated flight service stations was postponed. As of February 2005, FAA had deployed 19 OASIS units: 16 at automated flight service stations and 3 at other sites. Software upgrades that are under way will be completed by June 2005. FAA plans neither installations nor software upgrades beyond those at the automated sites, because the agency awarded a contract to a private vendor in February 2005 to operate flight service stations. Until then, FAA has directed the program to remain within its current Capital Investment Plan funding levels for fiscal years 2004 through 2006. According to FAA, since it completed its evaluation of OASIS in February 2005, planning for the program’s implementation and baseline remain unchanged. FAA plans to phase out OASIS between March 2006 and March 2007 in accordance with the new service provider’s transition plan. Three of the 16 major ATC system acquisitions we reviewed in detail are currently operating within their original cost, schedule, and performance targets; however they have experienced challenges, including symptoms of one or more of the four factors cited earlier, such as requirements growth. These system acquisitions include (1) ECG, a communications system gateway that serves as the point of entry and exit for data used by FAA personnel to provide air traffic control at 20 en route facilities; (2) ERAM, a replacement for the primary computer system used to control air traffic; and (3) ATOP, an integrated system for processing flight data for oceanic flights. While ECG has not exceeded its original cost, schedule, and performance targets, it encountered requirements growth when FAA added a new capability to address a security weakness. According to FAA officials, correcting this weakness cost about $25,000, and an additional $480,000 will likely be needed to improve the monitoring capability for this system’s operation. However, these cost increases will not exceed the system’s cost or schedule targets. ERAM and ATOP also have areas that warrant attention. For example, ERAM is a high-risk effort because of its size and the amount of software that needs to be developed—over 1 million lines of code are expected to be written for this effort. In addition, the DOT IG reports that, to date, ERAM has experienced software growth of about 70,000 lines of code. While the DOT IG considers this amount of software growth to be modest, given FAA’s long-standing difficulties with developing this volume of software for system acquisitions while remaining within cost, schedule, and/or performance targets, sustained management attention is warranted. For ATOP, when FAA tried to accelerate the initial deployment of this system by 14 months, it was unable to do so, because of poorly defined requirements, unrealistic schedule estimates, and inadequate evaluation by the contractor. In addition, according to contract provisions, FAA assumed responsibility in February 2005 for the cost of resolving any additional software problems it identifies. Overall, although these system acquisitions are currently operating within their cost, schedule, and performance targets, the challenges they have experienced thus far indicate that they will require the sustained attention of FAA’s senior managers to help ensure that they stay on track. For the 39 system acquisitions that make up the balance of FAA’s ATC modernization program, only 9 are considered “major” or directly comparable to the 16 major ATC system acquisitions we reviewed in detail.(See table 3.) Of these 9 major systems, 2 have required changes in their cost targets. For example, for an automated weather observation system, the Aviation Surface Weather Observation Network,the cost has increased by 15 percent because of system capacity issues, among other things. For another system that will be used on an interim basis for managing air traffic until the new primary computer system is available, the Host and Oceanic Computer System Replacement, the cost has decreased by 13 percent because the agency determined that parts of the existing system could be sustained through fiscal year 2008, which is within the scope of the program.The remaining 30 systems are not directly comparable, because they do not involve acquiring a new system. Instead, they are what FAA terms “buy-it-by-the pound” purchases—systems that are commercially available and ready for FAA to use without modification, such as a landing system purchased to replace one that has reached the end of its useful life. (See app. II for additional information on these 39 systems.) To its credit, FAA has reported that it met its annual acquisition performance goal for fiscal year 2004--to meet 80 percent of designated milestones and maintain 80 percent of critical program costs within 10 percent of the budget as published in its Capital Investment Plan. Specifically, it set annual performance cost goals and schedule milestones for 41 of the 55 system acquisitions under the ATC modernization program. For these 41 system acquisitions, FAA set 51 schedule milestones and met 46 of them—with “meeting the goal” defined as achieving 80 percent of its designated program milestones. It also set and met its annual cost performance goals for each of these 41 system acquisitions. In our opinion, having and meeting such performance goals is commendable, but it is important to note that these goals are updated program milestones and cost targets, not those set at the program’s inception. Consequently, they do not provide a consistent benchmark for assessing progress over time. Moreover, as indicators of annual progress, they cannot be used in isolation to measure progress in meeting cost and schedule targets over the life of an acquisition. Finally, given the problems FAA has had in acquiring major ATC systems for over two decades, it is too soon to tell whether meeting these annual performance goals will ultimately improve the agency’s ability to deliver system acquisitions as promised. FAA has taken a number of positive steps, primarily through the ATO, to address key legacy challenges in acquiring major systems under its ATC modernization program; however, we have identified additional steps that are warranted to reduce risk and strengthen oversight. Some of the steps FAA has taken directly address the four factors we identified as contributing to cost, schedule, and/or performance problems, while others support more general efforts to improve the modernization program’s management. The steps taken and additional steps needed are discussed below by key areas. To address the concern that some system acquisitions have had difficulty meeting performance targets because they have not received annual funding at the levels called for in key planning documents, the ATO has taken several steps. For example, the ATO has demonstrated a willingness to cut major programs that were not meeting their performance targets even after a significant investment of agency resources. The ATO is currently reviewing all of its capital projects to reassess priorities. Both of these actions should help improve the chances that sufficient funding will be available for priority system acquisitions to conduct the annual activities necessary to keep them on track to meet cost, schedule, and performance targets. Specifically, for fiscal year 2005, the appropriation for FAA’s facilities and equipment budget, which funds the ATC modernization program, was $393 million less than the agency had planned to spend. FAA absorbed the $393 million reduction largely by cutting funding for three of the major system acquisitions we reviewed in detail: a digital e-mail-type capability between controllers and pilots was suspended (CPDLC); the next generation air-to- ground communication system had the funding cut for a major component (NEXCOM); and a precision-landing system augmented by satellites for use primarily by commercial airlines (LAAS) was returned to research and development to focus the remaining funding for the system on resolving a key performance shortfall. FAA also plans to defer funding for CPDLC and LAAS for fiscal year 2006. FAA decisions to cut or eliminate funding for system acquisitions in its current ATC modernization system may prove to be positive in the long run. For example, although FAA and National Air Traffic Controllers Association officials say that the cuts the agency made to 3 of its 16 major ATC system acquisitions will delay system benefits until the acquisitions are fully developed and deployed, the cuts demonstrate FAA’s willingness to suspend major ATC system acquisitions, despite large resource investments. In addition, by delaying a system acquisition, FAA may later be able to save time and money by leveraging the experiences that others have had with developing and deploying systems that provide similar capabilities (e.g., the controller-pilot e-mail-type capability for which FAA cut funding is now in use in both Canada and Europe). Furthermore, as FAA continues to reassesses its funding priorities, it could explore cost- saving options including taking steps to systematically (1) evaluate the costs and benefits of continuing to fund system acquisitions across the ATC modernization program at current and planned levels to identify potential areas for savings and (2) identify potentially lower-cost alternatives to current system acquisitions, such as lower-cost controller workstations. FAA has also taken a number of steps to address two other factors—reduce the risk of requirements growth and/or the need to undertake unplanned work—and to improve its ability to better assess and manage the risks associated with acquiring major ATC systems that require complex software development. However, additional steps are needed in these areas. Processes for acquiring software and systems: FAA has made progress in improving its process for acquiring software-intensive systems-- including establishing a framework for improving its system management processes, and performing many of the desired practices for selected FAA projects. The quality of these systems and software, which are essential to FAA’s ATC modernization program, depends on the value and maturity of the processes used to acquire, develop, manage, and maintain them. In response to our previous recommendations, FAA developed an FAA-integrated capability maturity model (iCMM). Since FAA implemented the model, a growing number of system acquisitions have adopted the model, and its use has paid off in enhanced productivity, higher quality, greater ability to predict schedules and resources, better morale, and improved communication and teamwork. However, ATO did not mandate the use of the process improvement model for all software-intensive acquisition projects. In response to our recommendation, the ATO informed us of its plans to establish, by June 30, 2005, an overall policy defining the ATO’s expectations for process improvement, and by September 30, 2005, a process improvement plan to address and coordinate improvement activities throughout the organization. Management of information technology investments: In 2004, we reported that FAA has made considerable progress in managing its information technology investments.However, we also found that FAA’s lack of regular review of investments that are more than 2 years into their operations is a weakness in the agency’s ability to oversee more than $1 billion of its information technology investments as a total package of competing investment options and pursue those that best meet the agency’s goals. FAA recently informed us that it has taken a number of steps aimed at achieving a higher maturity level, including establishing service-level mission need statements and service-level reviews, which address operational systems to ensure that they are achieving the expected level of performance. While these steps could resolve some of the deficiencies that we previously reported, we have not yet performed our own evaluation of these steps. FAA could potentially realize considerable savings or performance improvements if these reviews result in the discontinuation of some investments, since operating systems beyond their second year of service accounted for 37 percent of FAA’s total investment in information technology in fiscal year 2004. Enterprise architecture: FAA has established a project office to develop a NAS enterprise architecture—a blueprint for modernization—and designated a chief architect, and has committed resources to this effort, and issued its latest version of its architecture. However, FAA has not yet taken key steps to improve its architecture development, such as designating a committee or group representing the enterprise to direct, oversee, or approve the architecture; establishing a policy for developing, maintaining, and implementing the architecture; or fully developing architecture products that meet contemporary guidance and describe both the “As Is” and “To Be” environments and developing a sequencing plan for transitioning between the two. To help address concerns that stakeholders have not been sufficiently involved throughout the development of major systems acquisitions, FAA has taken a number of steps. For example, when the ATO was created, it brought together the FAA entities that develop systems and those who will ultimately use them. Specifically, it reorganized FAA’s air traffic services and research and acquisition organizations along functional lines of business to bring stakeholders together and integrate goals. The ATO is also continuing with a phased approach to system acquisitions that it began using under Free Flight Phase 1, through which it has begun to involve stakeholders more actively throughout a system acquisition’s development and deployment. However, as we reported in November 2004, FAA needs to take additional steps to ensure the continued and active involvement of stakeholders in certifying new ATC system acquisitions. In addition, the union that represents the specialists who install, maintain, troubleshoot, and certify NAS systems, recently testified that over the past 2 years, FAA has systematically eliminated the participation of these specialists in all but a few modernization programs. Given the importance of stakeholder involvement in the development and deployment of new ATC systems, their continued involvement in ATC modernization efforts will be important to help avoid the types of problems that led to cost growth and delays for STARS. Reassessment of capital investment to decrease operating costs: Both the FAA Administrator and the ATO’s chief operating officer have committed to basing future funding decisions for system acquisitions on their contribution to reducing the agency’s operating costs while maintaining safety. This is consistent with our 2004 recommendation that FAA consider its total portfolio of investments as a package of competing options. Currently, only 1 of the 55 system acquisitions in FAA’s ATC modernization program—FAA Telecommunications Infrastructure—helps to reduce the agency’s operating costs. Most of FAA’s major system acquisitions are aimed at increasing the capacity of the NAS and delivering benefits to system users. The ATO is in the process of reviewing all of its capital investments, including system acquisitions under the ATC modernization program, to identify areas of cost savings and to focus limited funding on investments that will reduce operating costs. However, because FAA has only recently begun to incorporate this type of analysis of the costs and operational efficiency of system acquisitions into the decision-making and management processes, it is too early to assess the results. Acquisition Management System: The ATO has taken a number of steps to improve its Acquisition Management System (AMS). For example, it has revised AMS to require that acquisition planning documents be prepared in a format consistent with that prescribed by OMB for use in justifying all major capital investments. In addition, the ATO revised AMS in December 2004, in part to respond to recommendations we made about needed changes in its investment management practices for information technology. However, we have not yet independently assessed the sufficiency of these changes. Moreover, additional changes to AMS are warranted. For example, while AMS provides some discipline for acquiring major ATC systems, it does not use a knowledge-based approach to acquisitions, characteristic of best commercial and DOD practices. A knowledge-based approach includes using established criteria to attain specific knowledge at three critical junctures in the acquisition cycle, which we call knowledge points, and requiring oversight at the corporate executive level for each of these knowledge points. Experience has shown that not attaining the level of knowledge called for at each knowledge point increases the risk of cost growth and schedule delays. We recommended, among other things, that FAA take several actions to more closely align its acquisition management system with commercial best practices. FAA said that our recommendations would be helpful to them as they continue to refine this system. Cost accounting and cost estimating practices: FAA has improved its financial management by moving forward with the development of a cost accounting system, which it plans to fully deploy by 2006. Ultimately, FAA plans to use this cost information routinely in its decision-making. When implemented, this cost accounting system will address a long-standing GAO concern that FAA has not had the needed cost accounting practices in place to effectively manage software-intensive investments, which characterize many of agency’s major ATC system acquisitions. This type of information can be used to improve future estimates of cost for these acquisitions. Organizational culture: FAA has also sought to establish an organizational culture that supports sound acquisitions. We have ongoing work to assess FAA’s efforts concerning cultural change. ATO business practices: To improve its investment management decision- making and oversight of major ATC acquisitions, the ATO has informed us that it has initiated the following steps, which we have reported are important to effective oversight: integrated AMS and OMB’s Capital Planning and Investment Control Process to develop a process for analyzing, tracking, and evaluating the risks and results of all major capital investments made by FAA; conducted Executive Council reviews of project breaches of 5 percent in cost, schedule, and/or performance to better manage cost growth; issued monthly variance reports to upper management to keep them apprised of cost and schedule trends; and increased the use of cost monitoring or earned value management systems to improve oversight of programs. However, much work remains before the ATO will have key business practices in place. Specifically, according to the ATO’s chief operating officer, it will be at least 2 years before the ATO has completed the basic management processes needed to use the new financial management systems it has been putting in place. Despite progress to date, until the agency addresses the residual issues cited above, it will continue to risk the project management problems affecting cost, schedule, and/or performance that have hampered its ability to acquire systems for improving air traffic control. The ATO will be further challenged to modernize the ATC system in the current constrained budget environment and remain within the administration’s future budget targets, which are lower than those of recent years. Specifically, for fiscal year 2005, FAA requested $393 million less than it had planned to spend for activities under the facilities and equipment budget account, which funds the ATC modernization program and related modernization activities. In addition, the President’s fiscal year 2006 budget submission calls for an additional cut to this budget account of $77 million from FAA’s planned level, which would bring the fiscal year 2006 funding level to about $470 million below the fiscal year 2004 appropriation. Moreover, FAA officials told us that funding for the facilities and equipment account is likely to hold near fiscal year 2004 levels, or at about $2.5 billion annually, for the next 5 years. In total, FAA plans to spend $4.4 billion during fiscal years 2005 through 2009 on key modernization efforts, despite FAA receiving about $2 billion less than it had planned in appropriations over this 5-year period for its facilities and equipment budget, which funds the ATC modernization program and related modernization activities. To fund its major system acquisitions while remaining within the administration’s budget targets, the ATO has eliminated planned funding to start new projects and substantially reduced planned funding for other areas. These funding decisions are reflected in FAA’s updated Capital Investment Plan. This plan shows substantially reduced funding for two major system acquisitions in fiscal year 2005—CPDLC and LAAS--and defers funding for them in fiscal year 2006. For the remaining 14 major ATC system acquisitions we reviewed in detail, FAA plans to increase funding by $533 million between fiscal year 2005 and fiscal year 2009. In contrast, for the remaining 39 system acquisitions, FAA has reduced funding by $420 million for this period. The planned increases in funding for these 14 major system acquisitions also come at the expense of other modernization activities outside the ATC modernization program, such as capital expenditures to replace aging ATC facilities that will house the system acquisitions. For example, FAA reports that it needs $2.5 billion (2005 dollars) annually to renew its aging physical infrastructure—assuming a $30 billion value of its assets and a 7- to 12-year useful life. According to the ATO, much of its physical infrastructure, including the buildings and towers that house costly ATC systems, is over 30 years old and needs to be refurbished or replaced. However, FAA plans to reduce funding for facilities by nearly $790 million between fiscal year 2005 and fiscal year 2009—a plan that runs counter to its reported need to refurbish or replace its physical infrastructure. Furthermore, FAA also plans to cut $1.4 billion from its spending plans for fiscal years 2005 through 2009 for, among other things, new system acquisitions in the ATC modernization pipeline that do not yet have agency-approved cost, schedule, and performance targets or baselines (e.g., a new technology that would allow pilots to “see” the location of other aircraft on cockpit display). Our work has shown that FAA has taken some important steps to prioritize the 55 system acquisitions under its ATC modernization program. These revised priorities are reflected in its most recent plans, which detail the areas where FAA plans to make cuts within its facilities and equipment budget to live within its expected means during fiscal years 2005 through 2009. However, our work has also shown that these plans do not provide detailed information about the trade-offs that are underlie decisions to fully fund some systems and to defer, reduce, or eliminate funding for others and how these cuts will affect FAA’s modernization efforts, including what impact they will have on interdependent system acquisitions. To convey information to decision-makers on the impact of reduced funding on modernization, the ATO should detail its rationale and explicitly identify the trade-offs it is making to reach the administration’s budget targets, highlighting those programs slated for increased funding and those slated for reduced funding. Key information includes delayed benefits, the impact of cutting one ATC system acquisition on related or interdependent systems, and increased costs for maintaining legacy systems until new systems are deployed. Overall, the ATO needs to explicitly identify the implications of deferring, reducing, or cutting funding for a particular system or activity on the agency’s ability to modernize both the ATC system and related components of the NAS in the near, mid, and longer term. While funding deferrals, reductions, and cuts to ATC system acquisitions and related activities in FAA’s facilities and equipment budget may be beneficial and necessary in the long run, it is important for senior agency, department, OMB, and congressional decision-makers to have complete information to make informed decisions about the trade-offs that are being made when they consider annual budget submissions. As part of our research, we sought the perspective of an international group of experts, who also suggested that the ATO should provide the administration and Congress with detailed information in its budget submissions about the impact of reduced budgets on both ATC and NAS modernization. These experts were a part of an international panel of aviation experts we convened to address, among other issues, how federal budget constraints have affected ATC modernization and what steps the ATO could take in the short term to address these constraints. For example, aviation experts emphasized the need for the ATO—which is now the organizational entity responsible for acquiring ATC systems—to prioritize its capital investments, as well as its investment in operating systems, with affordability in mind. These experts believe that the ATO needs to review all of its spending plans for modernization, determine which programs can realistically be funded, and select programs to cut. Moreover, they indicated that the ATO should have a mechanism to explain to Congress the implications that cutting one system has on other systems. For example, according to one of these experts, the current budget process tears apart a highly layered, interdependent system and does not reveal synergies between projects. Then, when the budget request goes to Congress, he said, “you have no opportunity to try to explain to anybody the interconnections of these programs.” As a result, when the appropriators decide not to fund a project, they may not understand how their decision will affect other projects. The constrained budgetary environment makes it more important than ever for FAA to meet cost, schedule, and performance targets for each of the major ATC systems it continues to fund and to ensure that related activities, such as those to refurbish or replace the buildings that house ATC modernization systems, receive sufficient funding. The need for FAA to accommodate a 25 percent increase in demand for air travel over the next decade underscores the importance of these efforts. FAA has demonstrated a commitment to live within its expected means during fiscal years 2005 through 2009 by setting priorities among its ATC system acquisitions and identifying areas where it plans to cut funding. However, without detailed information about the trade-offs that underlie decisions to fully fund some systems and to defer, reduce, or eliminate funding for others, FAA’s plans do not allow senior agency, department, OMB, and congressional decision-makers to assess the implications of approving annual budget submissions for the ATC modernization program and related modernization activities that support more comprehensive efforts to modernize the NAS. To help ensure that key administration and congressional decision-makers have more complete information to assess the potential impact of annual budget submissions on individual ATC system acquisitions, the overall ATC modernization program, and related larger-scale NAS modernization activities funded through the facilities and equipment budget, we recommend that the Secretary of Transportation direct FAA to identify which activities under the ATC modernization program have had funding deferred, reduced, or eliminated and to provide detailed information about the impact of those decisions on FAA’s ability to modernize the ATC system and related components of the NAS in the near, mid, and longer term. This information should be reported to Congress annually. We provided a copy of our draft report to DOT for review and comment. The draft was reviewed by officials throughout DOT and FAA, including the Vice President for Acquisition and Business Service. These officials provided comments through email. They generally agreed with the report and provided technical comments on specific aspects of the report, which we incorporated as appropriate. The FAA officials said they are continuing to consider our recommendation and indicated they would provide a response to it as required by 31 U.S.C. §720. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees, the Secretary of Transportation, and the Administrator, FAA. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please call me at (202) 512-2834 if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Modular and expandable, ERAM will replace software and hardware in the host computers at FAA’s 20 en route air traffic control centers, which provide separation, routing, and advisory information. ERAM’s flight data processing capabilities will provide flexible routing around restrictions, such as congestion and weather. It will improve surveillance by increasing the number and types of surveillance sources, such as radars. ERAM will provide safety alerts to prevent aircraft collisions and congestion. ERAM has not breached schedule or cost parameters, but it remains a high- risk program because of its size and its amount of software code (more than 1 million lines). The contractor has reported that engineering costs are rising because of lower productivity than originally planned and an increase in the number of lines of software code. According to FAA officials, the contractor’s management reserve can absorb additional software development costs. We examined (1) FAA’s experience in meeting cost, schedule, and/or performance targets for major system acquisitions under its ATC modernization program, (2) the steps FAA has taken to address long- standing challenges with the ATC modernization program and additional steps that are needed, and (3) the potential effects of the constrained budget environment on FAA’s ability to modernize the ATC system. To address the first objective, we selected 16 of the 55 system acquisitions in the ATC modernization program to review in detail. We selected these 16 systems in July 2004, when this review was still a part of our broader work on FAA’s efforts to modernize the National Airspace System (NAS).Specifically, we selected the 16 ATC system acquisitions with the largest life-cycle costs that met the following criteria: each system had cost, schedule, and/or performance targets, was discussed in our prior and Department of Transportation Inspector General reports, had not been fully implemented or deployed by 2004, and received funding in 2004. We reviewed this list with FAA officials to ensure that we did not exclude any significant system. (See app. I for additional information on these 16 systems.) FAA does not have a formal definition of major systems under its Acquisition Management System; however, agency officials told us that if a system acquisition has a formally approved baseline, we could consider it “major.” Using this definition, we determined that 25 of the 55 system acquisitions under the ATC modernization program are major. The remaining 30 system acquisitions are generally what FAA refers to as buy-it- by-the-pound systems that are commercially available and ready to use without modification, such as those to replace a system that has reached the end of its useful life. For fiscal year 2005, the 55 systems accounted for about 55 percent of FAA’s facilities and equipment (F&E) budget, or $1.38 billion of the $2.52 billion appropriated for the F&E budget. The 16 major systems accounted for 36 percent ($917.3 million), and the other 39 system acquisitions accounted for about 19 percent ($460 million). The remaining 45 percent of the F&E budget will be spent on facilities, mission support, and personnel- related activities ($1.14 billion). To assess the 16 major system acquisitions, we relied largely on data collected from FAA and contracting officials for two engagements we issued in November 2004 on FAA’s acquisition and certification processes. In turn, we updated this information and collected data on the remaining 39 systems under the modernization program, primarily through interviews with FAA officials and analyses of the data they provided, including key acquisition documents. (See app. II for additional information on these 39 system acquisitions.) In addition, we reviewed our past reports and those of the Department of Transportation’s Inspector General. Furthermore, we interviewed FAA officials within the recently created ATO and collected and analyzed the documents they provided. We also interviewed officials with the Aircraft Owners and Pilots Association, Air Transport Association, Department of Defense, National Air Traffic Controllers Association, and RTCA. Furthermore, we convened a panel of international aviation expertsto obtain their views on, among other things, the factors that have affected the cost, schedule, and/or performance of FAA’s ATC modernization program. In addition, we assessed the reliability of FAA’s cost and schedule estimates. Through interviews with FAA officials about their data system and quality controls, we determined that the cost and schedule estimates were appropriate for use in our report. Specifically, the estimates are sufficiently authoritative, appropriate, and reliable to allow us to use them without conducting any further assessment. The estimates appear to be based on reasonable assumptions. Our review did not focus on FAA’s efforts to modernize its facilities. To address the second objective, we interviewed FAA officials, primarily within the recently created ATO, and collected and analyzed the documents they provided. We also interviewed officials with the Aircraft Owners and Pilots Association, Air Transport Association, Department of Defense, National Air Traffic Controllers Association, and RTCA. We also reviewed past GAO reports and those of the Department of Transportation’s Inspector General. In addition, we obtained the views of the international aviation experts who participated in our panel on what steps the ATO could take in the short term to address the factors that have affected the cost, schedule, and/or performance of FAA’s ATC modernization program. To address the third objective, we interviewed officials within FAA’s ATO and obtained and analyzed data on FAA’s capital investments and annual budgets. We also interviewed officials with other organizations cited above. In addition, we obtained the views of the international aviation panelists on how federal budget constraints have affected ATC modernization and what steps the ATO could take in the short term to address these constraints. We conducted our review from November 2004 through May 2005 in accordance with generally accepted government auditing standards. In addition to the person named above, Beverly L. Norwood, Tamera Dorland, Seth Dykes, Elizabeth Eisenstadt, Brandon Haller, Bert Japikse, Maren McAvoy, and Ed Menoche made key contributions to this report. | The Federal Aviation Administration's (FAA) multibillion-dollar effort to modernize the nation's air traffic control (ATC) system has suffered from cost, schedule, and/or performance shortfalls in its system acquisitions for more than two decades and has been on our list of high risk programs since 1995. FAA's performance-based Air Traffic Organization (ATO) was created in February 2004, in part, to address these legacy challenges. In this report, GAO examined (1) FAA's experience in meeting cost, schedule, and performance targets for major ATC system acquisitions; (2) steps taken to address legacy problems with the program and additional steps needed; and (3) the potential impact of the constrained federal budget on this program. The ATO met its acquisition goal for fiscal year 2004. However, prior to the establishment of the ATO, FAA had experienced more than two decades of cost, schedule, and/or performance shortfalls in acquiring major systems under its ATC modernization program. For example, 13 of the 16 major system acquisitions that we reviewed in detail have experienced cost, schedule, and/or performance shortfalls when assessed against their original milestones. These 13 system acquisitions experienced total cost growth from $1.1 million to about $1.5 billion; schedule extensions ranging from 1 to 13 years; and performance shortfalls, including safety problems. We found that one or more of four factors--funding, requirements growth and/or unplanned work, stakeholder involvement, and software complexity--have contributed to these legacy challenges. While FAA met its recent acquisition goal, it is important to note that this goal is based on updated program milestones and cost targets for system acquisitions, not those set at their inception. Consequently, they do not provide a consistent benchmark for assessing progress over time. Also, as indicators of annual progress, they cannot be used in isolation to measure progress over the life of an acquisition. Although additional steps are warranted, FAA has taken some positive steps to address key legacy challenges it has had with acquiring major systems under the modernization program. For example, the ATO has cut funding for some major systems that were not meeting their goals and is reassessing all capital investments to help ensure that priority systems receive needed funding. The ATO has improved its management of software-intensive acquisitions and information technology investments and begun to more actively involve stakeholders. As we recommended, the ATO plans to establish an overall policy to apply its process improvement model to all software-intensive acquisitions. However, additional steps could be taken to improve its management of system acquisitions. For example, the ATO could use a knowledge-based approach to managing system acquisitions, characteristic of best commercial practices, to help avoid cost, schedule, and performance problems. The ATO will also be challenged to modernize the ATC system under constrained budget targets, which would provide FAA with about $2 billion less than it planned to spend through 2009. To fund its major system acquisitions and remain within these targets, the ATO has eliminated planned funding to start new projects and substantially reduced planned funding for other areas. However, when forwarding its budget submission for review by senior officials at FAA, DOT, the Office of Management and Budget, and Congress, the ATO provides no detail on the impact of the planned funding reductions on ATC modernization and related activities to modernize the NAS. Our work shows that the ATO should provide these decision-makers with detailed information in its budget submissions about the impact of funding decisions on modernization efforts. Without this type of information, decision-makers lack important details when considering FAA's annual budget submissions. |
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“The Aerospace Guidance and Metrology Center (AGMC) depot will be closed; some workload will move to other depot maintenance activities including the private sector.” After the BRAC recommendation to close AGMC was finalized, (1) the Air Force moved a small portion of AGMC’s Air Force workload to other Air Force depots, (2) the Navy moved most of its AGMC workload to other sites, and (3) the Army moved all of its AGMC workload to other sites. The Air Force decided to privatize-in-place the remaining AGMC workloads. At the time it made this decision, the Air Force relied on an analysis that estimated privatizing would save about $5 million in 1997. However, the preaward analysis was not documented and Air Force officials do not know the basis for the costs included. Consequently, the Air Force was not able to reconcile its current interim study to its precontract award analysis. Since October 1996, the Newark, Ohio facility has been operated as the Boeing Guidance Repair Center by two contractors—Boeing North American, Inc., (Autonetics Electronics Systems Division) and Wyle Laboratories, Inc. The BGRC repair contract is managed by the Air Force’s Ogden, Utah, Air Logistics Center program office. Weapon system and item management functions for missile inertial guidance systems are performed at Ogden and the same functions for aircraft inertial guidance systems are managed at the Air Force’s Oklahoma City Air Logistics Center. The Air Force is retaining ownership of depot plant equipment with an estimated value of $326 million. The Newark-Heath-Licking County Port Authority is in the process of purchasing the Newark Air Force Base real property. The Port Authority currently leases the facility to Boeing, which then subleases a portion of the facility to Wyle Laboratories. Additional details regarding the AGMC’s mission and the depot’s closure and privatization-in-place are found in appendix I. The Air Force’s AGMC and two Navy facilities are the only privatizations-in-place resulting from BRAC decisions and have, consequently, created much interest in the cost and benefits of this concept. The question of whether closing and privatizing-in-place AGMC’s workload would result in savings arose soon after the 1993 BRAC closure decision. After the decision, Air Force organizations conducted several studies comparing the projected cost of privatizing-in-place the AGMC depot maintenance workload against the historical costs of the Air Force depot. These studies concluded that costs of a privatized-in-place operation would exceed the historic costs by $6.2 million to $20 million, on a projected workload of about $82 million to $90 million. However, in late 1995, at the time of the decision to award the contract, an Air Force Materiel Command (AFMC) analysis concluded that privatization-in-place would save about $5 million in 1997 and a total of $20 million over the 5-year contract period. In April 1996, we testified that preliminary data showed (1) unit costs were higher after privatization-in-place for 201, or about 79 percent of the items we reviewed; and (2) overall, repair costs increased by about $6 million for the 254 items reviewed. We also noted that AFMC’s projected 5-year savings of $20 million did not include all relevant costs. For example, estimated contract costs excluded $15 million in material costs for eight contract items. Following a 9-month transition period, the first full year of the BGRC contract operations began in October 1996. After the first quarter, Ogden and Oklahoma City logistics center personnel noted that funds were being expended faster than anticipated for the BGRC contract. The most significant factor appeared to be the increased amount of material being ordered. After reviewing Ogden and Oklahoma City information, we requested that the aircraft guidance program office at the Oklahoma City Air Logistics Center and the missile guidance program office at Ogden Air Logistics Center compare contractor versus Air Force depot costs for the fiscal year 1997 workload. Headquarters, AFMC, managed this evaluation. The Air Force’s July 1997 interim study projected that the privatization-in-place of guidance repair and metrology workloads at BGRC will result in fiscal year 1997 costs being from $3 million to $32 million more than the costs of performing the same work when the facility was operated as an Air Force depot. Actual data was used to determine AGMC’s pre-closure costs and actual cost data available to date and estimates were used to project BGRC’s costs for 1997. The Air Force plans to update BGRC’s costs using complete actual data after the 1997 workload is closed out. The contractor disagreed with the AFMC interim study and provided its own analysis. Air Force officials said the Boeing analysis was not comprehensive because it (1) did not include contract administration and oversight costs and (2) overstated AGMC costs prior to privatization-in-place. In April 1997, AFMC estimated that privatized-in-place repair operations for the year would cost from $7.7 million to $31.2 million more than historical costs of AGMC operations—a 10.2- to 44.8-percent increase—with a most likely increase of $16.1 million. In July 1997, AFMC expanded its interim cost analysis to include the metrology costs and revised its prior estimates based on a reevaluation of overhead and base operation and support costs. Using actual cost data, this reevaluation increased the costs of each workload repaired prior to privatization by allocating all base operation and support costs from the Newark Air Force Base, including those not directly affecting the depot maintenance business area, to the maintenance and metrology workloads. The later projection indicated that the privatized-in-place repair and metrology operations during the first year of the contract would cost from $3.4 to $32 million more than the historical AGMC cost—a 3.8- to 39-percent increase—with a most likely increase of $14.1 million, or about 16 percent. Because these comparisons are subject to change, AFMC officials noted that they would be revisited when the fiscal year 1997 contract period is over. Appendix II summarizes the results of these analyses. Boeing officials disagreed with the results of AFMC’s most recent interim study. They believe it overstates the contractor’s material consumption and neglected to adjust for historic military construction expenditures. As a result, they are concerned that AFMC miscalculated the cost of privatization-in-place. In response, Boeing did its own analysis estimating that privatization-in-place would cost $67.2 million compared to its estimate of $74.0 million for government operations—a $6.8 million savings over government operations in fiscal year 1997. Boeing officials met with AFMC officials on August 5, 1997, to present their analysis and to gain an understanding of the AFMC methodology. According to Boeing and AFMC officials, the Boeing estimate did not include a detailed analysis of specific workloads and costs. AFMC officials added that the Boeing analysis was not comprehensive. For example, they pointed out that Boeing’s estimate did not include contract administration and oversight costs of about $3.4 million, and it overstated historic AGMC operations and maintenance costs by about $5 million. However, AFMC did acknowledge the need to address Boeing’s concern about historic military construction expenditures and to meet with Boeing to discuss the need for some adjustments to its cost comparison. AFMC stated that the issue of material consumption would be resolved through an Air Force Audit Agency review that is scheduled to be completed in December 1997. Boeing officials also pointed out that they are meeting or exceeding contract requirements for cost, schedule, and performance. For example, Boeing officials, noted that they are: underrunning target costs by 5 percent and 15 percent for Intercontinental Ballistic Missile and aircraft guidance system repair; exceeding minimum delivery schedules and delivering more end-items per month than AGMC had been tasked to deliver in fiscal year 1995; and exceeding quality requirements by achieving less than a 3-percent quality deficiency report rate versus the contract goal of 10 percent or less. We agree with Boeing that preliminary indications show that it is meeting contract goals. It will not be until all the costs are available for 1997, the first full year of privatized operations, that we will be able to determine how the cost of the privatized maintenance operations compares with cost of comparable maintenance operations by the Air Force depot. Our work indicates that, in general, AFMC’s methodology for estimating the cost of work performed at the privatized-in-place BGRC facility and the cost for the same work based on AGMC cost data was reasonable. The methodology was analytically sound and used the best available data. In selecting its methodology and identifying the appropriate data, AFMC gathered input and addressed criticisms from various Air Force, Defense Contract Management Command, and contractor officials. AFMC’s methodology is consistent with DOD guidance on public-private depot competitions found in the Defense Depot Maintenance Council Cost Comparability Handbook and in supplemental Air Force procedures for conducting public-private competitions. Defense contractors participated in the development of the handbook and in subsequent revisions. We previously reviewed the handbook as a part of our assessment of depot maintenance public-private competitions and found that it generally covers the factors that should be considered in such competitions. In performing its analysis, the Air Force Materiel Command used actual data where it was known and estimated costs when actual costs were not available. Estimated costs were expressed as ranges, using most likely, low, and high estimates. A summary of the methodology used for the analysis is provided in appendix III. AFMC’s interim study does not include a variable-by-variable comparison between historical and current costs of operations. However, the study provides sufficient data to identify three factors that increased costs at the facility: (1) material cost, (2) contract administration and oversight, and (3) contractor award fee. Material orders have significantly increased since privatization. However, the Air Force has not determined the extent to which material consumption has increased. Therefore, the interim AFMC study results covered the range of possible contractor material consumption from no increase at the low end to a 100-percent increase, or about $15.7 million at the high end, with the most likely increase being 35 percent, or about $5.5 million. AFMC asked the Air Force Audit Agency to determine the contractor’s actual material consumption. While the Audit Agency does not anticipate completing the audit until December 1997, auditors have visited BGRC to review material ordering and consumption with the contractor and program offices. Based on work performed thus far, the auditors made the following observations: Contractor inventory records are not sufficiently complete to allow them to determine the value of total inventory on hand. Contractor inventory records do not provide an accurate basis for determining the value of inventory usage. The contractor appears to have a greater amount of government-furnished material than necessary for existing needs. Items to be repaired have been misclassified as government-furnished material. According to Audit Agency officials, two factors will inhibit AFMC’s ability to reconcile physical inventory with the inventory records and establish material consumption rates. First, with Air Force and contractor concurrence, the contractor accepted a transfer of initial material inventory from the Air Force without the Air Force performing a physical inventory. According to the Audit Agency, the contractor disputes the accuracy of the Air Force’s inventory transfer documents and, therefore, it may be impossible to determine how much material the contractor has consumed. In addition, the contractor assumed control over stock already issued to the shop floor that was not on Air Force inventory records. Therefore, the Air Force has no accurate way to measure consumption of those items typically held in stock at repair work benches. According to the Air Force Audit Agency, because the contract award fee structure does not emphasize minimizing the use of government-furnished material, the contractor may have used a greater amount of such material than necessary in order to reduce repair turn around time on items. Nonetheless, BGRC personnel maintain that BGRC’s consumption of material does not vary significantly from prior AGMC consumption levels because it is repairing items using the same people, the same facilities, and the same repair procedures. While the increased ordering of material clearly represents an increased cost to the program during the period evaluated, it is uncertain how material consumption will compare over a longer period. Considering the significant increase in material orders and the absence of actual consumption data, we believe it is reasonable for AFMC to reflect this increase in its treatment of material consumption at this time. Consistent with the Defense Depot Maintenance Council’s Cost Comparability Handbook, the interim study includes contract oversight and administration as an additional cost to privatization. AFMC estimated this cost for the two BGRC contracts to be $3.4 million for 1997. The contracts require oversight from three entities: the Defense Contract Management Command (DCMC), the Ogden Air Logistics Center’s program office, and the Defense Contract Audit Agency (DCAA). The payroll costs for these organizations as well as the cost of supplies and travel expenses added by AFMC seem appropriate for the cost comparison. AFMC’s interim study recognizes that the award fee earned by the contractor accounts for a portion of the cost of privatization-in-place. While the fee can range from zero to 10 percent of the estimated contract cost, the average Air Force fee for performance reviews to date has been 9.4 percent. In its cost study, AFMC provided for varying projections of contractor award fees, based on historical data and contractor performance during the first half of 1997. The estimated fee ranged from 5 percent to 10 percent, with 9 percent being suggested as the most likely award fee rate, equating to a most likely contractor fee of about $5.2 million for 1997. Including this cost element is consistent with a December 1996 joint memorandum from the Principal Deputy Assistant Secretaries of the Air Force for Acquisitions and for Financial Management, which called for recognizing award fees in evaluating public-private depot competitions. According to AFMC officials, the award fee adjustment was added to the standard adjustments provided for in the Cost Comparability Handbook to enhance the Air Force’s ability to arrive at decisions that provide the best overall value to the government. The methodology followed in estimating this cost element appears reasonable. The Air Force’s interim comparison estimates that BGRC’s first year privatization-in-place costs will be higher than AGMC’s historical costs for similar work. The methodology used in the comparison is analytically sound and appears reasonable given the status of the program; however, until actual cost data is available, it is premature to reach a final conclusion on the cost issue. Three factors significantly influenced the increased cost at the facility—estimated increased material cost, contract oversight, and contractor award fee. As with any successful privatization, improved contractor process efficiencies and operating cost reductions are needed to offset such cost factors. The contractor disagrees with the Air Force study and is working with AFMC to resolve their differences. Further, the Air Force will continue to monitor these contracts as actual cost data becomes available. DOD officials provided oral comments on a draft of this report addressing two points. The first pertained to our reference to the Air Force’s interim analysis as using 0 percent, 35 percent and 100 percent to simulate the minimum, most likely, and maximum cost. Air Force officials stated that its interim analysis actually assigned 100 percent to both the minimum and most likely material consumption cost computations and 200 percent to the maximum material costs. The 100 percent referred to by the Air Force is the same as the historic material consumptions costs and represents the 0-percent increase we use in our explanation for the minimum condition. In stating that there was no increase in material assigned to the most likely scenario, the Air Force was referring to the material consumption variable input to the model. Our discussion of this factor refers to the material consumption cost estimates that resulted from the processing of the model. The second comment dealt with our discussion of the employee benefits proposal submitted by Boeing. Since the benefit proposal has since been rejected, we have removed from the draft of this report our discussion of the proposal and its potential cost. Officials from the Autonetics and Missile Systems Division of Boeing North American, Inc., also commented, raising concerns about comments made by the Air Force Audit Agency and about the material usage assumptions in the AFMC interim study. Boeing officials said they thought the Audit Agency’s comments about material consumption were misleading because the level of inventory was not properly recorded at the time of transition. Moreover, they said that the Audit Agency’s approach greatly overstated material usage. As previously discussed, lacking precise data on material consumption, the Air Force study used a range from no increase on the low end to a high of a 100-percent increase, with a 35-percent increase used to represent the most likely usage. In the absence of actual consumption data, Air Force officials stated that they based their treatment of consumption on material orders, which should provide a good indicator of consumption. Given the high material usage indicators but the lack of definitive data, the Air Force also took several independent actions. It initiated a material consumption review by the Air Force Audit Agency and made plans for a follow-on analysis when actual consumption data is available. We believe the Air Force study approach and follow-on actions provide a reasonable approach. To obtain information for this report, we reviewed documents and interviewed officials from the Office of the Secretary of Defense and the Headquarters, Air Force, Washington, D.C.; Headquarters, Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio; and two subordinate activities—the Ogden Air Logistics Center, Hill Air Force Base, Utah, and the Oklahoma Air Logistics Center, Tinker Air Force Base, Oklahoma. Since some of the actual data needed to make such an assessment is not yet available, we reviewed preliminary cost estimates. We also discussed and gathered documentation on the program and the benefits and costs of privatization-in-place with representatives from the BGRC, Heath, Ohio; the Newark-Heath-Licking County Port Authority; and Defense Contract Management Command at BGRC. We discussed and reviewed the supporting data for the AFMC’s cost analysis with representatives from the Ogden and Oklahoma Air Logistics Centers, as well as with Boeing representatives and the AFMC cost-analysis team. We reviewed DOD’s guide for making cost comparisons between public depots and private contractors (the Defense Depot Maintenance Council’s Cost Comparability Handbook) to ensure that the AFMC study included all applicable cost elements and included any necessary adjustments. We also reviewed Air Force procedures for conducting public-private depot competitions. To test the reasonableness of the AFMC methodology used to allocate the Newark Air Force Base operating support costs to AGMC aircraft, missile, and metrology workloads, we consulted responsible officials in the DOD comptroller and Air Force financial management organizations, and reviewed applicable DOD instructions on reimbursable base support costs. We reviewed the type of source used for each cost element to ensure that actual data was used when available instead of estimates. We reviewed contractor cost reports to assess for shifts in cost trends that may impact the cost analysis. Further, during the development of the cost study, we held extensive discussions with the cost-analysis team to review adjustments, both additions and deletions, for reasonableness. We conducted our review from March through August 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Director, Office of Management and Budget; the Secretaries of Defense and the Air Force; and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-4812 if you or your staff have any questions concerning this report. Major contributors to this report were Jim Wiggins, Julia Denman, Larry Junek, and John Strong. Prior to its closure in 1996, Newark Air Force Base supported the industrial complex comprising the Aerospace Guidance and Metrology Center (AGMC), supporting two Air Force missions—depot maintenance and metrology and calibration. AGMC provided the Air Force with depot-level repair for inertial guidance and inertial navigation systems and displacement gyroscopes for the Minuteman and Peacekeeper intercontinental ballistic missiles and most of the Air Force’s aircraft. In fiscal year 1994, AGMC’s depot maintenance workload consisted of about 900,000 hours; almost 10,500 items were produced to support repair requirements for 66 Air Force, Navy, and Army systems and components. This work was accomplished by about 500 maintenance and engineering personnel and 325 management and support personnel. Figure I.1 shows an aerial view of the Newark facility. Technician in clean room. AGMC was different from the Air Force air logistics centers because it did not have weapon system and item management responsibility collocated at the same base. For Air Force systems repaired at AGMC, weapon system and item management functions are performed primarily at the Ogden, Utah, or Oklahoma City, Oklahoma, Air Logistics Centers. Receiving area for missile guidance induction showing shipping containers for minute man missiles. Automatic testing on guidance gyros. Diagnostic and functional testing on Pendulous Integrating Gyro Accelerometer (PIGA), a component of the minute man inertial guidance system. For its second Air Force mission—metrology and calibration—AGMC performed overall technical direction and management of the Air Force Metrology and Calibration Program and operated the Air Force Measurement Standards Laboratory. About 200 personnel were involved in the metrology and calibration mission—109 in generating technical orders, certification of calibration equipment, and management operations and 89 in the standards laboratory. The Department of Defense (DOD) considered AGMC’s work conducive to conversion to the private sector and recommended closing Newark Air Force Base/AGMC through privatization and/or transferring the workload to other depots. DOD justified the closure by (1) identifying at least 8.7 million hours of excess Air Force depot maintenance capacity, with the closure of AGMC expected to reduce the excess by 1.7 million hours and (2) applying the eight base closure criteria to Air Force bases having depots and ranking Newark Air Force Base low relative to the others. DOD estimated that implementing its recommendation on Newark Air Force Base/AGMC would cost $31 million, result in an annual savings of $3.8 million, and have an 8-year payback period for closure and relocation expenses. In our report on the base closure and realignment recommendations and selection process, we estimated that the Newark Air Force Base/AGMC closure costs would be $38.29 million, with a 13-year payback. The Base Closure and Realignment Commission determined that the AGMC workload could either be contracted out or privatized-in-place at the same location, although the BRAC noted that industry interest in privatization-in-place was limited. The BRAC recommended closing Newark Air Force Base/AGMC—noting that workload could be moved to other depot maintenance activities, including the private sector. Our December 1994 report questioned the impending closure of AGMC and recommended reassessment of the Air Force closure and privatization-in-place plans. DOD reevaluated its decision and reaffirmed its closure and privatization-in-place plans. In December 1995, the Air Force awarded two 5-year contracts for repair and metrology services at Newark: an estimated $264 million cost plus award fee contract to Rockwell International for AGMC’s repair mission and a $19 million cost plus award fee contract to Wyle Laboratories for operation of the Air Force’s standard metrology laboratory. In October 1996, Boeing acquired the AGMC repair operations through its acquisition of Rockwell International. In addition to these contract operations, the Air Force retained about 130 government employees at Newark—about 69 percent of the preclosure metrology staff. They perform such functions as (1) periodically reviewing and certifying the operations of the Air Force’s 130 metrology laboratories and (2) helping the Defense Contract Management Command monitor Wyle Laboratories’ metrology contract. In addition, 24 government civilian employees of the Defense Contract Management Command provide on-site contract oversight. The Newark-Heath-Licking County Port Authority is in the process of purchasing the Newark Air Force Base real property. The Port Authority currently leases the facility to Boeing, which then subleases a portion of the facility to Wyle Laboratories. Figure I.3 depicts the relationship between the Air Force, the contractors, and the local reuse authority. In performing its cost analysis, the Air Force Materiel Command (AFMC) used actual cost data when it was known. Estimated cost data were expressed as ranges, using most likely, low, and high estimates. The cost analysis was constructed using triangular probability distributions for each estimated cost element. The cost elements were then summed statistically using a probability simulation model, with all estimated costs stated in fiscal year 1997 dollars. To provide a valid basis for comparison, AFMC determined that it was necessary to derive AGMC and contract cost estimates using two distinct methodologies. The AGMC estimate is based largely on fiscal year 1995 data obtained from the end-item cost report dated September 30, 1995, adjusted for quantity differences. The cost categories in that report consist of (1) depot product direct hours, (2) direct labor, (3) direct material, (4) shop overhead, (5) support overhead, and (6) general and administrative costs. The organic estimate also included cost categories for unprogrammed work and cost comparability adjustments. Comparability adjustments were additions to the Defense Maintenance Business Area for expenditures funded by other sources. These adjustments were made in accordance with the Defense Depot Maintenance Council Cost Comparability Committee Handbook dated August 10, 1993. Cost comparability adjustments consisted of the following cost elements: state unemployment tax, unfunded civilian retirement, casualty insurance, impact aid, retiree health benefits, other operation and maintenance costs, and costs associated with the guidance replacement program (new cost on the contract). For the contract estimate, AFMC based many of the most likely input variables on costs as stated in the current contract. Latest revised estimates for the contract cost categories were obtained from the Contractor/Schedule Status Report dated end-of-month December 1996 and February 1997. Additional cost categories for the contract estimate included security, lease, depot maintenance business area contract fees, equipment depreciation, capital expenditures, and privatization-in-place costs. Outsourcing DOD Logistics: Savings Achievable but Defense Science Board’s Projections Are Overstated (GAO/NSIAD-98-48, Dec. 8, 1997). Air Force Depot Maintenance: Information on the Cost Effectiveness of B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997). Navy Depot Maintenance: Privatizing the Louisville Operations in Place Is Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997). Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997). Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18, 1997) and (GAO/T/NSIAD-112, Apr. 10, 1997). Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997). Navy Ordnance: Analysis of Business Area Price Increases and Financial Losses (GAO/AIMD/NSIAD-97-74, Mar. 14, 1997). High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997). Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996). Army Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996). Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place the Louisville, Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996). Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996). Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996). Defense Depot Maintenance: More Comprehensive and Consistent Workload Data Needed for Decisionmakers (GAO/NSIAD-96-166, May 21, 1996). Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/T-NSIAD-96-148, Apr. 17, 1996). Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). Depot Maintenance: Opportunities to Privatize Repair of Military Engines (GAO/NSIAD-96-33, Mar. 5, 1996). Closing Maintenance Depots: Savings, Personnel, and Workload Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996). Navy Maintenance: Assessment of the Public-Private Competition Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan. 22, 1996). Depot Maintenance: The Navy’s Decision to Stop F/A-18 Repairs at Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995). Military Bases: Case Studies on Selected Bases Closed in 1988 and 1991 (GAO/NSIAD-95-139, Aug. 15, 1995). Military Base Closure: Analysis of DOD’s Process and Recommendations for 1995 (GAO/T-NSIAD-95-132, Apr. 17, 1995). Military Bases: Analysis of DOD’s 1995 Process and Recommendations for Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995). Aerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994). Navy Maintenance: Assessment of the Public and Private Shipyard Competition Program (GAO/NSIAD-94-184, May 25, 1994). Depot Maintenance: Issues in Allocating Workload Between the Public and Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994). Depot Maintenance (GAO/NSIAD-93-292R, Sept. 30, 1993). Depot Maintenance: Issues in Management and Restructuring to Support a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993). Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb. 25, 1993). Defense Force Management: Challenges Facing DOD as It Continues to Downsize Its Civilian Workforce (GAO/NSIAD-93-123, Feb. 12, 1993). Navy Maintenance: Public-Private Competition for F-14 Aircraft Maintenance (GAO/NSIAD-92-143, May 20, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | GAO reviewed the Air Force's interim cost comparison of operating its former Aerospace Guidance and Metrology Center (AGMC) prior to its closure with the current privatized-in-place cost as the Boeing Guidance Repair Center (BGRC). GAO noted that: (1) the Air Force's interim comparison estimates that BGRC's first-year privatization-in-place costs will be higher than AGMC's historical costs for similar work; (2) the methodology used in the comparison is analytically sound and appears reasonable given the status of the program; however, until actual cost data is available, it is premature to reach a final conclusion on the cost issue; (3) three factors significantly influenced the increased cost at the facility--estimated increased material cost, contract oversight, and contractor award fee; (4) as with any successful privatization, improved contractor process efficiencies and operating cost reductions are needed to offset such cost factors; (5) the contractor disagrees with the Air Force study and is working with the Air Force to resolve their differences; (6) the Air Force will continue to monitor these contracts as actual cost data becomes available; (7) the Air Force performed an interim analysis comparing both actual and estimated aircraft and missile inertial navigation system repair and metrology costs at BGRC to actual historic costs for comparable workloads prior to privatization-in-place and estimated that the first full year of operations at the privatized-in-place BGRC will likely cost $14.1 million more than it would have if the facility had continued to operate as a public activity; a 16-percent cost increase; (8) Boeing questioned the assessment, saying that its own estimate indicates that costs are about $6.8 million lower than before privatization-in-place; (9) Boeing also noted that it is exceeding contract quality requirements and minimum delivery schedules; (10) Air Force officials stated that Boeing's cost analysis is not complete and comprehensive; (11) the Air Force cost study methodology is analytically sound and used the best available data; (12) based on the available data, the methodology provides a reasonable interim estimate of costs for similar workloads performed by the Air Force depot and during the first year of privatization-in-place; (13) the Air Force's interim study does not include a variable-by-variable comparison between historical and current costs of operations, but it does identify three cost factors contributing to the increased costs at the facility: (a) estimated increased material cost of $3.4 million; (b) contract administration and oversight costs of $5.5 million; and (c) estimated contractor award fees of $5.2 million. |
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FAA’s mission is to provide a safe and efficient airspace system. As part of this mission, the agency uses airport system planning to better understand the interrelationship of airports at the national, state, and regional levels. FAA guidance states that the overall goals of airport system planning are to ensure that the air transportation needs of a state or metropolitan area are adequately served by its airports, and that planning results in products that can be used by the planning organization, airports, and FAA to determine future airport development needs. There are several types and levels of planning involving individual airports or airport systems, including the National Plan of Integrated Airport Systems (NPIAS), state and regional system plans, and airport-level plans. The NPIAS identifies over 3,400 airports as being nationally significant to the national airspace system, including all of the nation’s commercial service and reliever airports and some general aviation airports. Most states periodically develop state airport system plans to inventory airports using a set of criteria developed by FAA. While not required, some regions choose to carry out regional airport planning—which may include the development of regional airport system plans (RASP) or other regional airport plans—to identify critical regional airport issues and to integrate aviation with other modes in a region’s transportation system. At the airport level, two types of plans support airport improvements at individual airports, the airport layout plan (ALP), which is required for federal funding, and the airport master plan. Figure 1 provides additional information about these plans and illustrates the role of each in the FAA in the FAA funding process for airport improvement projects in the AIP. funding process for airport improvement projects in the AIP. Airports in the NPIAS become eligible to apply for FAA’s AIP grants, which provided almost $3.5 billion for capital projects in fiscal year 2008. AIP funding is available for eligible projects, which include projects such as airfield construction or equipment purchases, terminal or terminal access improvements, land acquisition, noise compatibility projects, and regional airport planning. AIP grants generally consist of two types— entitlement funds that are apportioned to airports or states by formula each year based upon statutory criteria, and discretionary funds that FAA approves based on a project's priority. To ensure that the highest priorityprojects nationally are funded, discretionary funds are awarded using a national priority rating system that awards points on a variety of factors including airport size; the purpose of the project (e.g., capacity related, planning, environmental, and safety); and the type of project (e.g., termi improvement and equipment purchase). Airports apply directly to FAA through FAA regional offices for AIP discretionary funding, an projects are scored using the national priority rating system. Furthermore, the Airport and Airway Improvement Act of 1982 (AAIA)— which established the current AIP—provided FAA with the authority to give priority to airport improvement projects that are consistent with integrated airport system plans, such as RASPs. In the guidance provided by FAA for airport system planning, airport sponsors are also encourage d to use findings and recommendations from regional airport plannin develop plans to serve as a guideline for the allocation of funding. While no specific amount is currently set aside for system planning in the AIP program, approximately 2 percent of funds made available annually for AIP grants since 1970 have been used for these purposes. Most of this funding is used for planning at the state or airport level, but some re gions have also applied for and received AIP funding for regional airport planning. This funding has been used for a variety of planning efforts by states, airport sponsors, and regional planning bodies—primarily MPOs— and includes the development of RASPs. Other regional airport planning funded with AIP grants includes special studies to analyze or address new or unique issues, such as compatible land uses around airports, zoning implementation, or airport ground access. There are a number of stakeholders with interests in the airport planning process. They include FAA, states, and airports and may also include MPOs, airlines, and local communities. The FAA’s Office of Airport Planning and Programming provides guidance about airport system planning, while FAA regional offices administer grants and provide technical support to airports and others developing airport plans at the airport, regional, and state levels. The range of involvement by a particular stakeholder group varies by the type of plan under development, among other things. Thus, FAA, airports, and sometimes airlines are typically most involved in the development of ALPs and airport master plans and the resulting capital plans. States work with airports—notably, general aviation or reliever airports, not typically major commercial airports—to identify airports and improvements for inclusion in state airport system plans. MPOs may work with airport sponsors, local jurisdictions, state authorities, and FAA when developing RASPs or carrying out other regional airport planning. FAA accepts plans developed by states or MPOs and reviews and approves ALPs. In addition to federal and state aviation officials, other stakeholders in the process include the following: Airport sponsors: Airport sponsors can be any one of a number of different types of public entities, such as cities, counties, airport authorities, ports, intermodal agencies, or private owners. MPOs: MPOs may lead or participate in regional airport planning, but their primary role is carrying out regional surface transportation planning in urbanized areas, including the development of long-range and short-range transportation plans. To receive federal surface transportation funding, any project in an urbanized area must emerge from the relevant MPO and state department of transportation planning process. Airlines: Airlines play a key role in the functioning of airport systems, since they make decisions about which airports to serve and how frequently to provide service. Airlines may consider a number of factors in making these decisions, such as the location of regional business, economic indicators, the travel patterns of area residents, the cost of establishing service at particular airports, the effects on their service network, and the service provided by competing carriers. FAA guidance on airport system planning identifies eight key elements of the planning process, including inventorying the airport system, identifying air transportation needs, considering alternative airport systems, and preparing an implementation plan (see table 1). The guidance states that the end result should be “the establishment of a viable, balanced, and integrated system of airports to meet current and future demand.” FAA does not approve airport master plans, state airport system plans, or RASPs. For those plans developed with FAA funding, however, FAA is involved in developing the scope of work covered under the grant, reviewing draft documents, approving aviation forecasts, and then accepting the final plan. When considering alternative airport systems (the fifth of the eight elements), regional planners may identify alternate, underutilized airports in a region as having the potential to relieve pressure on congested airports. FAA’s airport system planning guidance states that the development of such alternate airports should only be undertaken when a full assessment has been done of various market factors. The guidance states that it is important to understand the nature of demand within a region, including factors that would divert demand to other airports, and any potential political, economic, or institutional barriers to developing an airport system. It also recommends that planners assess the ability of the airport to offer adequate service—in terms of convenience, schedules, and fares—and the effect on airlines, noting that the development of alternate airports should enhance airline profitability and be compatible with their route systems. In addition to the development of RASPs, other types of regional airport planning, including special studies whose scope of work does not fully correspond with the elements described in the airport system planning guidance, may be undertaken with AIP grants, according to FAA’s airport system planning guidance. Special studies can include but are not limited to work in such areas as air service, air cargo operations, environmental or drainage inventories, surface access, economic impact, obstruction analysis or photogrammetry, general aviation security, and pavement management. FAA’s airport system planning guidance states that MPOs can receive FAA support to conduct regional airport planning in areas that include large- or medium-hub airports (1) when such agencies have the interest in and capabilities to conduct such planning and (2) when regional FAA, state aviation, and local airport officials determine that MPOs should have a role. The guidance continues that the regional airport planning carried out by MPOs should complement—rather than guide—the planning done by FAA, states, and individual airports. According to the guidance, MPO-led regional airport planning may enhance the integration of the entire regional transportation system by promoting aviation enhancement and preservation, identifying critical regional aviation issues, and acting as the contact point for regional surface access, air quality, and land-use planning studies. MPOs can also act as a catalyst in implementing system planning recommendations—which may involve several stakeholders—by resolving local conflicts, promoting airport development funding priorities, and proposing the distribution of grants among eligible projects. The guidance states that an MPO’s ability to implement regional airport planning recommendations is limited to the extent that it can influence airport development through persuasion; leadership; or nonaviation incentives, such as surface transportation improvements that may improve airport access. This stands in contrast to state aviation agencies, which can implement system planning recommendations using legislative and funding mechanisms, including AIP funds, whereas MPOs do not receive AIP funds, other than for planning purposes. FAA’s FACT 2 report forecast that 14 airports will be significantly capacity constrained—and thus potentially congested—by 2025, even if currently planned improvements are carried out. According to FAA, some airports are already significantly capacity constrained, and increased demand is expected to increase delays going forward. Six of these 14 airports will be significantly capacity constrained as early as 2015, according to the report. (See fig. 2.) The FACT 2 study was designed to produce a conservative list of congested airports, according to FAA officials, and identified those airports that will have the greatest need for future additional capacity. FAA officials noted that airports not designated as capacity constrained by the study may also have capacity issues in the future and may need capacity-enhancing projects. (See app. II for a discussion of the FACT 2 report and implications of its design.) The demand forecasts included in FACT 2, however, were conducted before 2007 and do not take into account the reduction in demand resulting from the recent economic downturn. As a result, potential capacity constraints may occur on a different timeline than previously forecast. The improvements considered in the 2025 and 2015 forecasts include those in FAA’s OEP, such as new or extended runways, changes or improvements in air-traffic control procedures and technology, and airspace redesign. Some NextGen improvements, such as reduced separation requirements for arrivals and departures, were included in the 2025 analysis for the 35 airports included in the OEP program and Oakland International Airport. If planned improvements do not occur, the FACT 2 report predicted that the number of airports that will be significantly capacity constrained will increase to 27 by 2025. Likewise, 18 airports were predicted to need additional capacity by 2015, if planned improvements do not occur. Figure 3 shows the airports predicted by FACT 2 to face significant capacity challenges in 2015 and 2025, if planned improvements do not occur. The NextGen program is intended to transform the nation’s navigation system into a satellite-based system, but faces challenges to implementation for both airlines and FAA. Benefits from the program are expected to include increased safety with a reduction in the number of runway incursions; greater design flexibility with the reduction of separation requirements between runways, which may allow for new runways or improved airport layouts; better use of existing capacity with reduced separation standards for aircraft and improved access to airports with mountainous terrain or other obstacles; and reduced environmental impacts since aircraft will be able to descend using the shortest routes at minimum power settings. As we have previously reported, FAA has made some progress in implementing the NextGen program, but still faces some challenges. For example, aircraft operators must purchase equipment to implement NextGen capabilities, but some airlines have been reluctant to do so until FAA specifies requirements, addresses funding concerns, and demonstrates benefits. FAA must also determine that new technologies will operate in a real-life environment with a desired level of confidence and approve their use as well as issue rules for the use of procedures before midterm implementation can occur. Finally, the transformation to NextGen will also depend on the ability of airports to handle greater capacity. Since runways and airspace issues are not the only causes of congestion, improved efficiency in these areas—which may result from implementation of NextGen improvements—may exacerbate capacity constraints involving taxiways, terminal gates, or parking areas. There are 4 airports that were already considered capacity constrained under the FACT 2 methodology, including 2 in the New York/New Jersey region—Newark Liberty International (Newark) and LaGuardia (LaGuardia)—as well as Chicago’s O’Hare International (O’Hare) and Fort Lauderdale/Hollywood International in Southern Florida. In the New York region, FAA has set limitations on the number of takeoffs and landings during peak operating hours at Newark, John F. Kennedy International Airport (JFK), and LaGuardia, to minimize congestion and reduce flight delays. However, these airports are still routinely found to be among the most congested in the country and are on FAA’s list of airports needing additional capacity by both 2015 and 2025. Improvements at O’Hare and Fort Lauderdale/Hollywood International will take them off the list of significantly congested airports by 2015, according to the FACT 2 report. All 14 of the airports forecast by FAA as needing additional capacity by 2025 or 2015 are located in major metropolitan areas with at least 1 large- hub airport. Nine of the airports forecast to be congested are in regions with more than 1 large- or medium-hub airport. Each of the airports identified as potentially capacity constrained in 2015 is also included on the list for 2025. For the purposes of our review, we focused on the 10 metropolitan regions that include the 14 airports forecast by the FACT 2 report to be significantly capacity constrained by 2025, assuming planned improvements occur. (See table 2.) Developing new airport capacity can be costly, complex, and time- consuming. Historically, airports, metropolitan regions, and FAA have looked to airport expansion and facility improvements—such as the construction of new runways—to provide new capacity, but increasingly airport expansion faces obstacles, especially in congested regions. Through the cooperative efforts of the aviation industry, airports, and FAA, 20 airfield projects have opened since 2000 at 18 OEP airports, including new runways at O’Hare, Seattle-Tacoma International, and Washington Dulles International in 2008. However, projects involving new runways often take a decade or more to complete because of legal and other obstacles. In addition, the last major new commercial service airport in the United States was opened in Denver in 1995 and is 1 of only 2 new major airports built in over 40 years. That said, proposals for a new airport in Peotone, Illinois, in the Chicago region and for a new airport to supplement Las Vegas McCarran International Airport are currently in the early stages of FAA environmental review. Going forward, the development of new infrastructure—including the construction or extension of runways as well as new airports—faces many challenges. FACT 2 points out that expanding airport capacity is unlikely in some locations. According to ongoing research being developed for the Airport Cooperative Research Program (ACRP), adverse community reaction to aircraft noise and pollutant emissions at and near major airports continues to impede the development of new airport infrastructure, and this resistance is unlikely to decrease. Another study noted that lawsuits are filed in opposition to virtually every expansion of a major airport, generally challenging the right of airport officials to override local zoning rules or increase noise or air pollution. According to this study, while such legal challenges are usually unsuccessful, projects often take longer than originally anticipated. We have also previously reported that new runway construction from initial planning to completion takes a median of 10 years, but delays can add an additional 4 years to the median time. While we found that the level of challenges that airports faced varied, in part depending on the proximity of the airport to a major city and the amount of community opposition to the runway, some common themes emerged in our 2002 survey of airports that had built or planned to build runways between 1991 and 2010. Challenges identified by those airports included reaching stakeholder agreement on the purpose and need for the new runway, completing required environmental reviews, reaching agreement on how to mitigate the impact of noise and other issues, and designing and constructing the runways in light of weather and site preparation issues. The conversion of former or joint-use military airfields for civilian use is an alternate approach to providing new or additional capacity, but this approach has also faced obstacles similar to those posed with the construction of new facilities. Voters recently rejected the proposed conversion of military airfields at Miramar and El Toro, current and former Marine Corps air stations, respectively. In our discussions with regional and airport officials, we found that environmental constraints, including land-use issues or community concerns about airport noise or the redesign of airspace around congested airports; physical constraints; and local legal constraints are also obstacles to the development of new capacity through airport or runway expansion. Environmental issues have been a constraint on development in the San Francisco region at San Francisco International Airport (SFO) and at Oakland International Airport, for example, where the construction of new runways would involve extensive filling in the San Francisco Bay. A proposal to build a new runway at SFO was dropped due to environmental issues and cost constraints. As conceived, the project would have been the largest construction project in the bay for over 50 years and would have involved dredging and filling up to 2 square miles of the bay. (Fig. 4 shows the 2000 proposal for construction at SFO.) More recent planning has not included runway construction, focusing instead on a terminal development program and other alternatives. Noise concerns have also been a limiting factor for many airports. Proposals for runway expansion in Philadelphia led to a lawsuit filed by surrounding communities seeking to block the development, for example. Likewise, officials at SFO pointed to encroaching neighborhoods as state land-use policies encourage the development of previously industrial areas. Efforts to redesign the airspace around the New York/New Jersey/Philadelphia region also led to community opposition, with several surrounding communities filing lawsuits that, thus far, have been resolved in favor of FAA. Physical constraints on expansion or new construction can also be obstacles. For example, San Diego International has one runway, sits on only 661 acres, and the surrounding terrain limits the slope for departing aircraft, particularly heavier aircraft. The San Diego County Regional Airport Authority is developing a proposal to reconfigure the airport’s terminals, given the lack of room for a new runway. Finally, legal agreements or requirements hamper the use of existing capacity at some airports, including those in the Los Angeles region—in Orange County and Long Beach. Westchester County Airport in White Plains, New York, also has legal limits on airport operations, according to an air service demand study. Other airports have community agreements limiting capacity or growth. For example, Los Angeles International Airport (LAX) has imposed a cap of 78.9 million annual passengers on its operations as part of a settlement agreement with surrounding communities, according to regional officials. Likewise, according to an airport official, Bob Hope Airport is prevented from expanding the footprint of its existing terminal until 2012 by an agreement with the City of Burbank. The airport also recently sought FAA approval to make a voluntary nighttime curfew permanent. This application was denied by FAA, however, based in part on concerns that the curfew would result in congestion and delay in the region and potentially have ripple effects throughout the national airspace system. Regional airport planning can identify solutions for airports and regions seeking to determine how best to manage available capacity and address the challenges posed by congestion. A 2003 study for the Office of the Assistant Secretary for Transportation Policy at the Department of Transportation looked at the potential for alternative airports to meet regional capacity needs and found that the use of these airports can make more efficient use of existing resources and better use of limited funds for airport development. According to the report, to make better use of alternate airports, regional airport planning should focus on both airport development and access issues. The study concluded that as metropolitan areas grow and become more congested and complex, FAA needs to promote regional airport planning. Likewise, according to ongoing research being developed for the ACRP, there are important opportunities to improve aviation system capacity and airport operations by embracing more collaborative and cooperative regional airport planning. The research has found that proactively seeking ways to use commercial airport capacity more efficiently will be important to maintaining the viability of air travel while accommodating forecast growth in demand for air travel. According to the research, airport managers and governing bodies will need to embrace the concept of capacity sharing with other airports in their market areas to maintain this viability and accommodate demand and will also need to look at other potential approaches. Such approaches may include the expansion of high-speed rail in some corridors or the use of demand-management strategies, such as peak pricing or restrictions on the use of congested airports by smaller aircraft. FAA’s FACT 2 report and its 2009–2013 FAA Flight Plan also noted the potential for regional airport planning to identify options to relieve congestion. The FACT 2 report identified regional options that could help meet the future capacity needs of the nation’s airports, among them, continuing to study regional traffic and development alternatives and planning for high-density corridors and multiple modes, including high- speed rail. Likewise, one of the initiatives in the Flight Plan is the use of AIP funding to reduce capacity constraints and provide greater access to alternate airports in the metropolitan areas and corridors where congestion at primary airports creates delays throughout the national airspace system. Finally, FAA’s NextGen program identifies regional airports as having potential to provide additional capacity in 15 metropolitan areas, including Atlanta, Charlotte, Chicago, Houston, Las Vegas, Los Angeles, Minneapolis, New York, Philadelphia, Phoenix, San Diego, San Francisco, Seattle, South Florida, and Washington/Baltimore. Nine of the 10 regions forecast by FAA to have one or more significantly congested airports in 2025 received FAA funding from 1999 through 2008 in support of regional airport planning (see table 3). In all, FAA provided $34 million in AIP grants for metropolitan system planning during this period, and the 9 aforementioned regions received $20 million of the total. According to FAA’s AIP Handbook, metropolitan areas are eligible for funding under FAA’s AIP program if airport problems in the region require a higher level of effort to address them than would be provided as part of a statewide analysis. Such regional problems typically arise in association with large- or medium-hub airports, according to the handbook. Each of the 10 regions forecast to be significantly capacity constrained by 2025 had at least one airport categorized as a large hub in 2008. Since 1999, 6 of the 10 regions with airports that are forecast to be congested by 2025 have developed or are developing RASPs, including Los Angeles, Philadelphia, Phoenix, San Diego, San Francisco, and South Florida. Each of these regions has received one or more FAA grants for regional planning since 1999. The majority of these plans were developed or are being developed under the leadership of the local MPO, although in San Diego and Florida the airport sponsor and the state department of transportation, respectively, assumed leadership roles. Five regions have completed RASPs since 2000, and 2 are in development. Table 4 provides information about the RASPs developed or being developed in the 6 regions. Based on our review, the completed RASPs largely reflect the elements laid out for system planning by FAA and generally contain information about the airport system, forecast information, and a discussion of transportation needs, among other elements. In addition, most of the completed RASPs contained recommendations or strategies regarding the role of regional airports and potential airport improvements. Each of the regions that have completed or are completing RASPs also considered alternative modes of transportation as a means to alleviating airport congestion. FAA guidance for airport system planning discusses alternative modes of transportation, but does so only in the context of improving airport access. The MPO in the Los Angeles region has modeled the potential impacts of high-speed rail. According to ongoing research being developed for the ACRP, this modeling work demonstrated that development of a high-speed rail system would likely result both in the increased use of alternate regional airports—which would be linked to metropolitan centers by the new rail lines—for passenger service and cargo and in air-rail substitution by some passengers as they chose to take the train in lieu of flying. Likewise, San Diego has used its regional airport planning process to identify intermodal solutions. The airport sponsor worked with the region’s MPO to develop a new plan for Sa n Diego International Airport, which includes considerations of an intermodal facility at the airport. The new RASP is also being developed in concert with an air-rail study being undertaken by the MPO, which aims to explore improved access to alternative regional airports and the po diversion of passengers to high-speed rail. We found that the extent of regional airport planning undertaken in the four regions forecast to have significantly congested airports that have not developed RASPs—Atlanta, Chicago, Las Vegas, and New York—varied and was focused on individual airports. The regional airport planning that was undertaken in these regions was typically not led by regional planners in MPOs. Airport sponsors (in the Atlanta, Las Vegas, and New York regions) or state authorities (in Chicago) led efforts, with planning limited to the airports under their direct authority. All of these regions except Chicago have received funding from FAA for regional airport planning, with amounts ranging from nearly $3 million for JFK in the New York region—where the Port Authority of New York and New Jersey (Port Authority) carries out planning for its 5 airports—to $200,000 each in Atlanta and Las Vegas. Table 5 provides information about the range of regional airport planning in regions with airports forecast to be significantly congested that have not prepared RASPs, the leadership of these activities, and funding received from FAA. While regional airport planning has been undertaken in each of the regions forecast to have significantly congested airports, FAA has used the results of this planning selectively when working with airports or making funding decisions. In each of the five potentially congested regions we visited, FAA regional officials stated that they may look at RASPs or other regional airport plans when reviewing projects at individual airports. FAA regions, however, do not carry out a systematic review of RASPs to ensure that they meet the guidance for airport system planning, and none of the FAA regions we spoke with regularly used them in decision making when funding airport improvements, despite the potential identified by FAA and others for RASPs to identify potential options to alleviate congestion. For example, FAA officials in the Western-Pacific Region stated that capital investment decisions are made on the basis of airport master plans or airport layout plans. The officials noted that RASPs can serve as a tiebreaker among projects, but that funding decisions are made using national-level priorities. FAA officials in the Eastern Region also stated that they did not refer to RASPs when selecting projects for AIP funding, although they would assume that regional forecasts and airport roles would be reflected in airport master plans. As in the Western-Pacific Region, we were told that RASPs might be used to resolve tiebreakers for competing projects. Airport officials in the regions we selected told us that no RASP to date had been adopted into the airport-level capital improvement plans— airport layout or airport master plans—that guide decision making. For example, airport officials in Philadelphia stated that regional airport planning, including the RASP, has little influence on decisions made by the City of Philadelphia or by Philadelphia International Airport. Officials at other airports, however, said that these plans may be considered during airport-level planning. In the Los Angeles region, airport officials at John Wayne Airport in Orange County, for example, stated that while they may consider the RASP when making decisions about airport improvements, it is not the primary driver for these decisions because, in their view, regional and airport priorities necessarily differ. By contrast, the airport sponsor of LAX has pursued suggestions or strategies from RASPs when making decisions regarding airport improvements or capacity. Los Angeles World Airports, which operates LAX, as well as airports in Ontario and Van Nuys, based internal strategic planning for LA/Palmdale Regional Airport on the distribution of passenger traffic among regional airports developed by the region’s MPO. Los Angeles World Airports also for a time pursued a decentralization strategy similar to that suggested in the RASP—attempting to develop LA/Palmdale Regional Airport—although the airport sponsor focused on serving local passengers, rather than passengers that might travel to the airport from elsewhere in the region. Finally, Los Angeles World Airports is supporting the development of a high-speed rail line that would divert passenger traffic by either improving access to alternate regional airports or carrying passengers on busy regional corridors, which was also included in the RASP. Airport officials at San Diego International Airport and SFO—both in regions with significantly congested regions currently developing RASPs— anticipate using the RASPs for their airport-level planning. The San Diego RASP is being developed by the airport sponsor itself, and future airport plans at San Diego International are expected to reflect findings from the RASP, according to airport officials, although there is no assurance that the RASP would be considered by other airports in the region. Likewise, in San Francisco, SFO airport officials are supporting ongoing regional airport planning and stated that they expected to consider findings included in the RASP when developing airport plans. While not included in our in-depth analysis of selected regions, state department of transportation officials in Florida explained that RASPs in the state are closely tied to airport decision making, given the link between these plans—which are developed as part of the state’s airport planning process—and the state’s airport improvement program. Airport capital plans reflect state priorities to be eligible for these state funds. RASPs are developed by committees made up of airport sponsors and MPOs. The state department of transportation facilitates and supports these committees, and the resulting regional plans are incorporated into the state’s aviation system plan, thus becoming state priorities. The priorities reflected in the RASPs, however, are not linked to the decision making done by FAA for AIP funding, according to a state official. In those areas that have not developed RASPs, regional airport planning has contributed to some decision making. In the New York region, for example, FAA led efforts to carry out a regional demand study looking at current traffic at regional airports—both the primary and smaller regional airports—as well as surveying passengers to determine where they came from in the region and if alternate airports might be closer than the three congested primary airports. The study also identified the development needs for regional airports. Based in part on the study’s forecasts, the Port Authority acquired Stewart International Airport north of the city in 2007. The newly acquired Stewart International Airport is seen by the Port Authority to have the potential to ease some congestion pressure on other Port Authority airports—without removing passengers from the Port Authority system—if airlines can be attracted to provide service to serve the local population. By contrast, the Port Authority has not included the other potential alternate airports identified in the demand study— Westchester County and Long Island MacArthur Airport—in regional airport planning currently being undertaken by the Regional Plan Association, which is a nonprofit, civic group that has received funding from the Port Authority to develop an airport system plan. These alternate airports are outside the Port Authority system, and Regional Plan Association officials stated that non-Port Authority airports would be invited to participate in finalizing the regional plan if draft recommendations included them. Figure 5 illustrates, as of 2005, the service areas for the main airports in the New York-New Jersey region and shows the location of six other airports in the region, including Stewart International. (BDL) (BDL) (BDL) (SWF) (SWF) (SWF) (HPN) (HPN) (HPN) Newark Liberty Newark Liberty Newark Liberty (LGA) (LGA) (LGA) Lon Iland Lon Iland Lon Iland (EWR) (EWR) (EWR) (ISP) (ISP) (ISP) John F. Kennedy John F. Kennedy John F. Kennedy (JFK) (JFK) (JFK) Philadelphia Philadelphia Philadelphia International International International (TTN) (TTN) (TTN) (PHL) (PHL) (PHL) Atlantic City Atlantic City Atlantic City International International International (ACY) (ACY) (ACY) FAA officials and others pointed to the regional airport planning in the Boston region as being a role model effort. Officials with Massport, the sponsor of Logan International Airport (Logan) in Boston, and planning officials began to seek regional solutions in the 1990s after it was determined that Logan, the region’s primary commercial facility, would be unable to fully accommodate growing regional demand and that there were no options to construct a new primary airport. Regional airport planning has included a series of demand studies and a RASP that concentrated on finding and implementing a mix of solutions. The resulting plans recommend improvements at Logan; the increased use of underutilized airports in the region and improvements at these airports; as well as the expanded use of other modes of travel, notably high-speed rail in the Northeast Corridor. FAA played an important role in the Boston region by supporting regional airport planning and incorporating the regional approach into its decision making for airport capital improvement projects. The regional airport planning in the Boston region was led by local airports and facilitated by the FAA regional office, which provided funding for studies as well as taking a leading role in the most recent demand study and the development of the 2006 RASP. FAA’s involvement in the regional airport planning was credited to the interest of the agency’s regional staff. Massport officials explained that regional airports would have been reluctant to participate in a project headed by Massport, and the involvement of the Massachusetts Aeronautics Division and FAA helped convene stakeholders and get people to participate in the process. FAA also worked with regional airports to develop capital plans to identify needed airport improvements that were consistent with the RASP, according to regional FAA and Massport officials. The Boston region does not have an airport among those forecast to be significantly congested in FAA’s FACT 2 report, assuming planned improvements occur, and FAA and Massport officials give some credit to the implementation of regional airport planning in reducing congestion. Officials at Massport point to improvements at Logan—which included a new runway, new taxiways, reductions in minimum spacing between aircraft, and issuance of peak period pricing mechanisms—as well as to the regional airport planning as being important to addressing the capacity challenges that faced the airport. Furthermore, the region was significantly less congested following the September 11, 2001 (9/11), terrorist attacks, with passenger levels at Logan dropping 18 percent from 2000 to 2002, although this traffic has largely returned. Following the 9/11 attacks, there was an increase in passengers using Amtrak to travel to New York City, demonstrating the potential for high-speed rail to complement air service and potentially reduce airport congestion. The realization of the goals of regional airport planning in the Boston region was greatly aided by the decision of Southwest Airlines to initiate service at T.F. Green Airport near Providence, Rhode Island, in 1996, and at Manchester-Boston Regional Airport in Manchester, New Hampshire, in 1998, and airline officials pointed to regional airport planning as a factor facilitating these decisions. Southwest officials stated that the regional demand study pointed to potential demand near these airports and helped to pique their interest, in addition to their own analysis, in exploring expanded service in the New England region. Furthermore, airport improvements at T.F. Green Airport and Manchester-Boston Regional Airport allowed for the expansion. The airline debuted service at one gate at T.F. Green. Due to the strong demand, the airline requested that the airport construct a terminal expansion, which allowed Southwest to expand to four gates over the next couple of years. According to airline officials, both of these alternate regional airports met the airline’s expectations. The MPOs that conduct regional airport planning have no authority over which airport improvement projects are priorities in their regions and, as a result, the RASPs they produce have little direct influence over airport capital investment and other decisions. Because MPOs do have authority over surface transportation projects—only projects prioritized by MPOs are eligible to receive federal funding from the Federal Transportation Administration (FTA) and the Federal Highway Administration (FHWA)— MPOs can directly influence surface projects that affect airport access, but cannot directly affect the capacity of these airports. None of the airports we met with during the course of our review are required to consider or incorporate the recommendations of RASPs into their ALPs or airport master plans. In most of the 6 regions that have developed or are developing RASPs, airport officials—such as those at LAX and SFO— stated that they would consider the region’s perspective in an informal fashion, even though recommendations included in RASPs are not binding. Other airports we interviewed were more guarded about their consideration of regional airport planning conducted by MPOs. Airport officials at John Wayne Airport in the Los Angeles region stated that the region’s RASP is not a primary driver of airport decision making, in part because regional planning priorities are likely to differ from those of the airport, particularly regarding mitigation strategies for surrounding communities. Airport officials at Philadelphia International stated that the airport does its own planning without input from regional planners, although the airport is active in the development of regional airport plans. As a result, regional priorities may not be reflected in the decision- making documents that guide capital improvements at airports. Ongoing research being developed for the ACRP similarly notes that while regional airport planning could fill the gap between airport- and national-level planning, most regional airport planning conducted to date has not been influential due in part to the fact that airport sponsors retain authority over planning and development decisions. According to FAA, it is also not required to consider MPO-developed RASPs, even when these plans are funded with FAA grants. FAA officials stated that the inclusion or absence of a project in a RASP had little influence whether the agency approved AIP grants for an individual airport project, serving in some cases as a tiebreaker but not guiding project prioritization. FAA considers AIP grants for capital improvements on an airport-by-airport basis, based on national criteria. Airports justify improvement projects individually using forecasts from their own service areas, and the national criteria that FAA uses does not consider how improvements exist in a regional context, except during the environmental review process. As we have previously discussed, FAA regional offices have some latitude in determining which projects to fund, and FAA’s funding and support of regional airport planning itself may vary within the agency and by project. Thus, while FAA guidance and headquarters staff encourage regional airport planning, two MPOs in regions with significantly congested airports have had difficultly in obtaining funding for regional airport planning in recent years. For example, in the Philadelphia region, an MPO official told us they sought funds to assess capacity and demand across the airports in its region with a demand study similar to the ones completed with FAA funding in Boston and New York. FAA officials told us that they rejected the study for Philadelphia because it would have included a significant marketing component—which is ineligible for AIP funding— and it might not be good timing for the MPO to conduct capacity analysis at the same time as the environmental impact statement for proposed improvements at Philadelphia International is under way. An MPO official told us that regional planners hoped to use the results of the study to develop recommendations and prioritize improvement projects in their region—as had been done with the FAA-supported demand study and related RASP in the Boston region. Additionally, FAA officials told us that AIP funding to the MPO had declined in recent years, but that FAA did not view other recent MPO proposals as useful. FAA has not provided funds for regional airport planning in Los Angeles since 2005, although the MPO has developed a RASP in the meantime without FAA funding. According to FAA regional officials, the regional airport planning carried out by the MPO offered impractical solutions—notably, a proposal to construct magnetic levitation (maglev) train lines to regional airports—that were not financially feasible. MPO officials in Los Angeles pointed to other aspects of RASPs developed by the MPO every 4 years, such as the forecasting and consideration of alternate regional airports, as evidence of its value, and expressed frustration that technical support from FAA was difficult to obtain. For MPOs that want to carry out continuous planning, the lack of consistent funding may limit their ability to maintain staff and conduct planning on an ongoing basis. FAA’s guidance on airport system planning points to the importance of continuous planning, but FAA’s AIP funding process is not structured to prioritize it. This is in contrast to the MPO-led surface transportation planning process, which according to FTA and FHWA guidance was developed to ensure continuous planning, among other things. Rather, projects are evaluated on a case-by-case basis for AIP funding, which favors projects with discrete products, although the AIP handbook notes that funding is available for continuous planning, which may include continuing surveillance and coordination of the airport system, periodic plan reevaluation, special studies, and the updating of RASPs. The MPOs in two of the regions with potentially significantly congested airports maintain aviation planning staff to carry out regional airport planning on an ongoing basis. In each of these regions, the MPOs received AIP grant funding from FAA for regional airport planning for a number of years, but this funding has been curtailed in recent years. In Los Angeles, the MPO has received no AIP funding since 2005 and has continued to carry out regional airport planning using its own resources. While it received AIP funding in recent years, the MPO in Philadelphia limited the scope of its regional airport planning to special studies—rather than continuous system planning—according to regional planning officials, as the result of reduced FAA support for continuous system planning. According to ongoing research being developed for the ACRP, these two regions are among a handful of MPOs nationwide that employ aviation specialists—staff that could be involved in the type of monitoring involved in continuous planning. The advisory nature of regional airport planning and its lack of a connection to capital investment decisions are not the only hindrances to regional airport planning and implementation. We also found that a number of competing interests can derail a plan and prevent implementation. When the individual interests of airports, communities, and airlines are not aligned, for example, they can hinder regional airport planning and implementation. Furthermore, the lack of funding for planning can also be a hindrance. Additional hindrances include the following: Airport interests. A major hindrance to regional airport planning and implementation are the differing interests of airports in a region that may conflict with an integrated regional approach. Airport interests may include maximizing revenue generation and protecting markets—including high-value business or long-haul markets. As a consequence, regional airport planning may be more difficult to undertake and implement in locations where airports see themselves to be in direct competition with other airports in their region, particularly if they perceive that such planning may divert traffic or resources to competing airports. Airport officials in Philadelphia told us that they do not want to support federal efforts, including regional airport planning, that could lead to losing or diverting flights from their airport to other airports in the region, for example, because the City of Philadelphia—which owns Philadelphia International—does not want to lose revenue generated at its airport to other airports. In other regions, we found that distrust between some airports has limited the range of solutions considered in RASPs. For example, the MPO and Los Angeles World Airports airport officials told us that other airport sponsors in the region—including those for airports in Long Beach, Burbank, and Orange County—have viewed regional airport planning suspiciously, notably the planning undertaken by the now- defunct Southern California Regional Airport Authority. This authority theoretically had the ability to force airports to accept more traffic. Regional airport planning carried out by the MPO, however, does not include such authority, and since 2001 RASPs have been developed that respect the physical constraints and legal restrictions at individual airports in the region. Community interests. Some local community interests, such as those focused on noise or environmental concerns, may impede or limit regional airport planning and implementation. As the result of community pressure, two airports in the Los Angeles region—John Wayne Airport in Orange County and Long Beach Airport—have legal agreements and requirements, respectively, that allow them to limit the capacity of their facilities, for example. MPO officials in the region told us that airport sponsors at these airports primarily participated in regional airport planning to ensure that existing limits on capacity or expansion were respected. These airports are forecast to need additional capacity by 2025, given that they are not expected to meet passenger demand. Other airports in the region are also working to respond to community pressure to limit growth or operations, and such agreements may further restrict the available airport capacity under certain conditions in the region. For example, the airport sponsor of LAX has agreed to limit the number of operations at the airport in response to community concerns about noise, air quality, and the quality of life in surrounding communities. In addition, the airport sponsor at Bob Hope Airport in Burbank applied to FAA to make a voluntary nighttime curfew permanent, which had the potential to put pressure on nearby airports, such as LAX, or airports in Ontario and Van Nuys. While FAA denied the application, even voluntary agreements of this type reduce the regional options for meeting passenger demand for air travel. Airline interests. Airlines act independently of both airports and communities, and their independence may complicate efforts to plan regionally. Airlines make decisions about which airports to serve and the level of services they will offer according to their business and network plans, and such decisions may not align with airport and MPO plans. Most notably, in a congested region, planning officials might suggest that traffic migrate to lesser-used alternate airports, as they have in Los Angeles. However, this suggestion may conflict with the business plans of airlines that already serve primary airports in a region. Such airlines generally want to focus their traffic in a city at one major airport, both for cost and revenue reasons. In addition, while MPOs may want to develop capacity in the system, this development may not align with the objectives of airlines. Individual airlines may prefer to sell limited capacity at a premium price or limit the ability of other airlines to provide competing service. FAA guidance on airport system planning points to the importance of understanding airline business models when suggesting the use of alternate regional airports. Regional planning and airport officials in several of the regions we visited noted that they concentrated on attracting new entrants to the market or airlines whose business plans included serving alternate airports—primarily low-cost carriers—for service at these airports. The use of demand management strategies that provide incentives for airlines to serve alternate regional airports—or a disincentive to serving congested, primary airports—could serve to align the interests of airlines and airports or regional planners as well, according to some airport officials. Airport sponsors and MPOs in our selected regions indicated that they had little influence over airline service levels and locations, which made it difficult to align divergent and sometimes competing interests. Regional planners with whom we met also indicated that they found it difficult to engage airlines in their regional airport planning. For example, MPO officials in Philadelphia reported that airline representatives had attended only one planning meeting. Likewise, in San Diego, an airline representative was included on the advisory committee, but airlines were not participating in regional planning. According to airline representatives, airlines are typically not involved in regional planning, although they may participate in airport-level planning, given their interest in controlling costs. An additional complicating factor is a difference in airport or regional planning and airline planning. Whereas airports use 5- to 10-year forecasts to develop master plans for capacity investments and RASPs may be updated every 2 to 5 years, airlines’ assets are largely mobile and can move from one market to another with relative ease. Legal restrictions. Current airport revenue rules generally do not allow airports to price their services regionally; therefore, using pricing to even supply and demand among various airports is not possible. Airfield revenues may not exceed the aggregate costs to the airport sponsor of providing airfield services and airfield assets currently in use, with certain exceptions. The fees that airports typically charge airlines to operate at individual airports—including rental charges and landing fees—are based on the historical costs of operating the facility according to FAA. Improving alternate airports can make them more expensive, since the costs for such improvements become part of the rate base charged to airlines. For example, in the Los Angeles region, fees for airlines at the more-congested LAX are less than at less-congested airports in the region, such as Ontario International, in part due to previous improvements at the smaller airport. Furthermore, airport-airline lease agreements, which, according to officials, can prohibit some airport sponsors from transferring funds from one airport to another, even if they have the same sponsor, also can limit the options available for regional airport planning. As a result, it may be challenging to adjust these fees in a regional context to provide financial incentives to airlines to serve less-congested airports, if these airports have higher operating costs. From our in-depth analysis, we identified a number of factors that aided regions in the development and implementation of regional airport planning. In general, we found that when stakeholders were supportive of regional airport planning, the plans resulting from these efforts were more likely to be used. More specifically, the factors that helped align these various stakeholders include the following: Legal considerations. Legal considerations served to facilitate planning in two of our selected regions. After residents of San Diego County rejected a proposal to develop a second airport, a law was passed that required the county’s airport authority to develop a RASP by June 30, 2011. The law requires the airport authority—which operates San Diego International—to prepare and adopt a plan that identifies workable strategies to improve the performance of the regional airport system. In the San Francisco region, a state agency, the Bay Conservation and Development Commission, controls the permitting process for development within 100 feet of the shoreline of San Francisco Bay. Both SFO and Oakland International airports sit on land adjacent to the bay and therefore are subject to the commission’s review and permitting process, depending upon the type of development projects these airports propose. The commission has stated that it would deny projects—including the construction of new runways—that would affect the bay, unless the airports exhaust all reasonable alternatives to providing capacity. In practice, the region’s RASP development process has become the venue to explore such alternatives. Constraints on infrastructure. A number of constraints to airport construction—geographic, environmental, and political—spur regional airport planning. In Boston, for example, Logan is largely locked into its existing footprint, given its waterfront location and surrounding community. Officials in several of our selected regions mentioned similar constraints as reasons for participating in regional airport planning. In San Francisco, filling the bay to build capacity would be extremely costly and may be unlikely, given environmental concerns. Likewise, terrain surrounding San Diego International and the airport’s small footprint limit expansion opportunities. Each of these regions is using regional airport planning to help identify additional options for providing transportation capacity. MPO and FAA interest and involvement. Regional airport planning was more likely to occur when a MPO or FAA took an active interest in advancing regional airport planning. In several of the regions we visited, for example, MPOs had aviation planners that carried out system planning. Such planners in Philadelphia have engaged in a variety of regional airport planning, including the development of a RASP and prioritizing airport projects for state funding. MPO officials are also active in Los Angeles at the Southern California Association of Governments. Over the course of many years, this MPO has developed several RASPs, and FAA has provided funding for some of this planning. The MPO also has created and maintained a sophisticated modeling tool, allowing it to do airport choice modeling for the entire region. Ongoing efforts to create and update RASPs under way in San Diego and San Francisco are being undertaken jointly by MPO and airport officials. While some FAA and airport officials questioned the regional airport planning expertise of MPOs, MPOs regularly prepare surface transportation plans and this experience may aid them in developing RASPs. MPOs are required to develop long-range (20 year) transportation plans and short-range (4 year) Transportation Improvement Programs (TIP) that identify strategies for operating, managing, enhancing, maintaining, and financing a metropolitan area’s transportation system, among other things, and the elements suggested for RASPs are similar to those included in these plans. For example, the surface transportation plans prepared by MPOs monitor existing conditions, carry out forecasting, and identify current and future transportation needs and potential improvement strategies. FAA guidance for airport system planning also includes an inventory of the current aviation system, forecasting, an identification of air transportation needs, and the consideration of alternative airport systems. In a survey conducted of MPOs nationwide for a prior GAO report, nearly 19 percent of MPOs reported that they engaged in regional airport planning—sometimes as a result of state requirements. We found that 17 (41 percent) of the 41 largest MPOs that responded to the survey—those with populations with over 1 million people—indicated that they engaged in regional airport planning. Of these 41 MPOs, 39 have a large- or medium-hub airport within their jurisdictions. Airports noted that outside groups, such as MPOs; nonprofit groups; or FAA can be useful in establishing regional airport planning since they can mitigate some of the suspicion that might be present if airports, particularly dominant ones, lead the planning. According to ongoing research being developed for the ACRP, MPOs can offer airport managers truly regional perspectives on planning, data, and analyses on travel behavior and demand in a geographically broad area and a neutral “table” at which airport managers and other key stakeholders can sit to work through coordination options and opportunities. Establishing a neutral table was especially helpful in the Boston region where FAA took an active role in helping to formulate a RASP and then to implement the recommendations. FAA regional officials helped develop the region’s 2006 RASP by facilitating meetings among potentially reluctant stakeholders and leading an assessment of regional demand, among other tasks. FAA regional office then worked actively with airports in the region to integrate RASP recommendations into their capital plans and reviewed these plans against the RASP when making grant decisions. Political benefit. In several of the regions we visited, airports supported regional airport planning to obtain political acceptance for airport improvement projects. Given sensitive environmental considerations, SFO and Regional Airport Planning Committee officials told us that they worked together on the RASP because any significant capital improvements would need the support of the regional body. Even when regional airport planning is undertaken without the leadership of a MPO, there can be political benefits. In the New York region, the Port Authority is funding a project by the Regional Plan Association to look at ways to build capacity within the Port Authority system. As part of this effort, Regional Plan Association officials told us they planned to poll the region’s residents before and after their planning process regarding delay and the public’s support for potential solutions. They anticipate that polling demonstrating greater public awareness of the problems posed by delays will build support for potential solutions, including less-popular options such as runway construction or other improvements at the three major airports in the region. Airport benefit. When airport objectives complement each other— whether to increase, decrease, or maintain current flight levels—regional airport planning recommendations may be reflected in airport improvement decisions. In regions where a capacity-constrained primary airport wants to specialize in particular types of flights or service, for example, other airports in the region may benefit if they are interested in expanding other types of flights or services. Furthermore, we found that if a region’s primary airport or airports are engaged in regional airport planning, their involvement may engender momentum for planning and result in additional financial resources or other support. In Boston, which is a region generally seen as successful at regional airport planning, FAA officials told us that their efforts to shift traffic away from Logan was aided by Massport’s interest in reducing the number of smaller feeder flights that were consuming an increasing amount of the airport’s runway capacity. Its interest in making capacity available for international and long-haul flights rather than short-haul flights coincided with the interests of regional airports in New Hampshire and Rhode Island that wanted to expand service. Officials at SFO also expressed enthusiasm for renewed regional airport planning in their region. An airport official told us that such an effort might allow SFO to focus on a more-targeted segment of the aviation market, notably long-haul and international flights, while allowing alternate airports to expand shorter-haul domestic flights. SFO, together with the region’s other primary airports, has provided financial support to the regional planning process. In each of these cases, the region’s primary airport or airports took an active role in regional airport planning, by acting as participants as well as by contributing financial resources to sustain the efforts. The national airspace system is plagued by congestion and delay, with nearly one-in-four arriving flights delayed at major airports, even though a majority of the nation’s airports still have adequate capacity. FAA and others forecast that more airports and regions will be congested in the future, even if planned infrastructure and technological improvements occur. However, many regions that contain congested airports also have alternate airports that may be able to provide some congestion relief as well as other options, including using other modes of transportation such as high-speed rail. Regional airport planning can identify solutions to help relieve aviation congestion—that airport-level planning cannot. RASPs should include the range of elements identified by FAA for airport system planning to help establish a viable system of airports. While FAA reviews RASPs and other regional system plans to determine if they are eligible for FAA funding, in those cases where RASPs have been completed, FAA does not necessarily review the plans for conformance with FAA guidance or standards. Without a review process, FAA may not have confidence that RASPs are of a sufficient quality to guide decision making or to ensure that they are integrated with local airport-level plans, state airport system plans, and the NPIAS. Nor is there an incentive for FAA to work with regions to help ensure that RASPs meet certain standards, both in terms of content and quality. Except in the Boston region, the recommendations made in RASPs that we reviewed have not been systematically integrated into airport capital plans that currently guide airport decision making and FAA funding. Rather, both airport sponsors and FAA can choose to ignore RASPs, or to use them selectively, even though the federal government has contributed millions of dollars for their development. Congress, however, in creating the current AIP in 1982 indicated that FAA may give priority to projects that are consistent with integrated airport system plans, such as RASPs. If RASPs are ignored, the time, effort, and resources that MPOs, airports, and other regional bodies expend on these efforts—as well as FAA’s grant support—are not filling the gap between airport- and national-level planning efforts or ensuring that funding is used most efficiently to manage capacity within regions with large- or medium-hub airports. To ensure that federal AIP funds are employed to their maximum benefit and to improve the level of regional- and airport-level coordination, we recommend that the Secretary of Transportation direct the Administrator of FAA to take the following two actions: 1. Develop an FAA review process for regional airport system plans to ensure that they meet FAA standards and airport system planning guidance as well as provide technical support for regional planners undertaking such planning. 2. Use its existing statutory authority to give priority to funding airport projects that are consistent with RASPs. We provided a draft of this report to DOT for its review and comment. DOT provided technical comments in an e-mail message on December 11, 2009, which we incorporated into this report as appropriate. In reviewing the draft’s second recommendation to require that the RASPs are integrated with airport-level plans so that they are consistent and tied to FAA funding decisions, DOT officials indicated that they did not believe they had the authority to require airports to incorporate RASP recommendations unless airports concurred. As a result, to create incentives for airports to work with MPOs and other regional organizations, we modified the second recommendation for FAA to use its existing statutory authority to give airport projects that are consistent with RASPs greater priority for AIP funding. DOT generally agreed to consider our recommendations. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the report date. At that time, we will send copies of this report to interested congressional committees, the Secretary of Transportation and the Acting Administrator of the Federal Aviation Administration. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions concerning 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. Staff members making key contributions to this report are listed in appendix IV. To identify regions with potentially congested airports, we used the Federal Aviation Administration’s (FAA) 2007 report entitled Capacity Needs in the National Airspace System, 2007–2025 (FACT 2). Using both demand and capacity forecasts, this report identifies airports that it predicts will face significant capacity constraints by 2015 and 2025. To obtain clarification on the methodology employed, we met with officials at both FAA and The MITRE Corporation to discuss the study’s design and findings and reviewed both published reports and unpublished work— including the scores received by airports in the four assessments used to measure demand and capacity—supporting the FACT 2 study. Appendix II provides more information about the methodology used in the FACT 2 report and its implications. To evaluate the challenges facing regions with potentially congested airports, the extent of regional airport planning being undertaken, and the factors that have aided or hindered planning and the implementation of regional airport plans, we carried out an in-depth analysis of selected regions. We identified regions for this analysis using the following four criteria: (1) existing and predicted aviation congestion based on FAA’s FACT 2 study, (2) whether regions had sought funding from FAA to carry out regional airport planning and the extent of the funding provided by FAA, (3) whether regional airport planning had occurred, and (4) whether regions were served by a single airport or multiple airports and the extent to which multiple airports in a region were governed by the same sponsor. Our assessment of regions with congested airports included Los Angeles, New York, Philadelphia, San Diego, and San Francisco. We also assessed regional airport planning activities in Boston, although this region is not among those with airports that FACT 2 forecast to be significantly capacity constrained. FAA officials and experts pointed to the Boston region as having undertaken successful regional airport planning. Each of the regions we selected received funding from FAA for regional airport planning from 1999 to 2008, and regional airport planning has been undertaken in each region. Three of the regions are served by multiple airports—sometimes under the same sponsor—while Philadelphia and San Diego are in regions with one major airport. For each of the regions we selected, we reviewed regional airport planning documents and interviewed officials at FAA airport district offices, airports officials or sponsors, state aviation departments, and metropolitan planning organizations (MPO). These interviews addressed the following topics: The nature of the regional airport system, including challenges involving capacity constraints or congestion and local constraints. Participants or stakeholders in the regional airport planning process. The extent that regional airport plans are used by airports, MPOs, states, and others to guide airport decision making and FAA airport funding decisions. The inclusion of intermodal access and other ground transportation in regional airport plans. Factors that aid or hinder regional airport planning or the implementation of regional airport plans. We interviewed FAA officials in the Office of Airport Planning and Programming to collect information about the types of plans involved in aviation planning; the nature and extent of regional airport planning in congested regions; the history of such regional planning; the roles of various stakeholders, including FAA; and the outcomes associated with regional airport planning to date. We also reviewed FAA’s advisory circular on the airport system planning process and related documents from FAA to summarize the guidance that FAA provides to airport system planners, including those in metropolitan areas. To analyze FAA funding for regional airport planning, we obtained grant data from FAA for metropolitan system planning in the agency’s airport improvement program (AIP) from fiscal years 1999 to 2008. These grants were awarded primarily to MPOs, but one state and several airport sponsors also received grants. To assess the reliability of these data, we reviewed the quality control procedures applied to the data by the Department of Transportation and subsequently determined that the data were sufficiently reliable for our purposes. To gain an understanding of the congested aviation regions and the potential impact of regional airport planning, we spoke with industry experts, including those in academia; airline industry representatives; and regional planners. We interviewed academics at the Massachusetts Institute of Technology and the University of California at Berkeley regarding work that they had undertaken on regional airport systems. We discussed airport system planning and congestion with the Air Transport Association, the National Association of State Aviation Officials, the ENO Transportation Foundation, and Airport Councils International. To discuss the results of regional airport planning in the Boston region, we interviewed officials with Southwest Airlines. We met with government officials and industry experts at a Transportation Research Board conference on aviation system planning. We also reviewed various reports and studies, including research on airport systems, congested regions, intermodal issues, and planning and on the use of alternative airports published by authors at the Massachusetts Institute of Technology, the University of California at Berkeley, GRA Incorporated, and the Airport Cooperative Research Program (ACRP) of the Transportation Research Board, among others. Finally, we reviewed previous GAO reports, including our prior work on aviation infrastructure, the Next Generation Air Transportation System (NextGen) program, MPOs, and high-speed rail. We conducted this performance audit from September 2008 to December 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. The purpose of the FAA FACT 2 study is to analyze the extent to which airports and metropolitan areas in the United States will face aviation capacity constraints in the future. The study developed forecasts of expected operations (takeoffs and landings), demand, and the capacity to handle traffic at 56 airports and certain associated metropolitan areas. By comparing, for each of three time frames (2007, 2015, and 2025) an airport’s expected demand with its projected capacity, the study then measured, in four different ways, the extent to which each airport may experience congestion and delay. The study used specific thresholds to designate whether an airport would be capacity constrained according to each of the four capacity assessments. To be so designated, an airport must be found to be capacity constrained across all four assessments for a given time frame. According to FAA and MITRE officials with whom we spoke, the study was designed to identify which airports would be the most capacity constrained. Because of the focus of the study, some airports that are also likely to face some degree of capacity problems are not among those identified as capacity challenged in the study. Using demand and capacity forecasts—each of which is evaluated in two different ways—the FACT 2 study produced four assessments of the extent of capacity challenges at each airport in 2015 and 2025. The FACT 2 study used two different forecasts of future demand, both of which use economic, demographic, and airline industry information (such as expected fares and the degree of competition) to assess the expected level of future aviations operations at each airport. Both forecasts are also generally “unconstrained,” meaning they predict the extent to which demand will grow at an airport regardless of whether that airport would actually be able to handle all of the traffic. Key aspects of the forecasts are summarized as follows: Terminal Area Forecasts (TAF): Produced by FAA each year, TAF forecasts project expected operations demand on an airport-by-airport basis, with separate forecasts for air carrier, commuter and air taxi, military, and general aviation operations. Future Air Traffic Estimator (FATE) forecasts: Produced by MITRE, FATE forecasts project origin to destination traffic between metropolitan areas within the United States. This model then analyses how flights are likely to be scheduled by airlines to meet that demand, based on projections about which airports within a city, flight routes, and types of aircraft will be used for each flight segment. The results are then restated on an airport-by-airport operations basis, and supplemented by the number of projected international and general aviation operations at each airport. FACT 2 used two methods to evaluate airport capacity which then fed into the following two models of capacity constraint: the annual service volume (ASV) and national airspace system (NAS) modeling. Both models assessed existing capacity and for the 2015 and 2025 forecasts took into account planned additions or improvements to runways, technologies, and air traffic procedures. For the 35 Operational Evolution Partnership (OEP) airports and for Oakland International Airport, the 2025 analysis also took into account some elements of the expected improvements offered by NextGen implementation. ASV: The ASV is the level of capacity—expressed in the number of operations during a year—at each airport that, if fully utilized, would be expected to be associated with a given level of average delay. A FAA model established the ASV level by examining existing data on the relationship between the level of operations and extent of delay across a set of runway configurations in varied weather conditions at each airport. The model took into account the expected capacity-enhancing improvements and simulated, based on past experience, an ASV level that would be associated with a 7-minute average queuing delay at each airport. NAS–Wide Modeling: While the ASV method establishes the level of demand that would be associated with an average level of delay, NAS modeling estimates the extent of delay that will result from a specific level of traffic, given an amount of capacity. The NAS modeling begins with “benchmark” airport capacity measures, which were established for most of the FACT 2 airports in an earlier study based on the most commonly used airfield configuration in three weather conditions, information on weight classes of fleet at the airport, and other operational factors. Future capacities were then estimated based on any planned airport improvements at the airport and in ATC procedures and on NextGen improvements. The key findings of the FACT 2 study are that assuming all capacity improvements—including those associated with NextGen for 2025—are taken into account, 6 airports will be capacity constrained in 2015 and 14 (an additional 8) will be capacity constrained in 2025. For an airport to be designated as capacity constrained in 1 of the study’s forecast years, the airport had to be designated as capacity constrained in each of the following four assessments: ASV with TAF forecasts: The ASV was compared with the TAF demand forecasts to obtain a ratio of forecasted demand to ASV. A threshold at 80 percent was used in designating airports as capacity constrained, meaning that forecasted demand was 80 percent or higher than the ASV. ASV with FATE forecasts: The ASV was also compared with the FATE demand forecasts to obtain a ratio of forecasted demand to ASV. A threshold at 80 percent was again used in designating airports as capacity constrained, meaning that forecasted demand was 80 percent or higher than the ASV. For example, for the Dallas–Forth Worth International (DFW) airport, the 2007 ASV ratio was 0.78 with the TAF demand forecast and 0.81 with the FATE forecast, indicating that the airport was just edging toward having a capacity problem at that time, according to the ASV assessments. For the 2025 forecasts at DFW, the ratios are 1.09 and 1.15 under TAF and FATE, respectively, indicating that according to the ASV assessments, DFW will become substantially more delayed by 2025. NAS with TAF forecasts: This NAS assessment uses a “network queuing” model that simulates how traffic flows across the NAS, given the level of demand on routes and the extent of capacity at airports. This analysis measures the following for each airport: (1) average scheduled arrival delay, (2) arrival queue delay, (3) percentage of scheduled arrival delay caused by local conditions, and (4) departure queue delay. An advantage of the NAS method is that by analyzing the relationship between operations and capacity across the network, rather than on an airport-by-airport basis, the model can take into account how circumstances at one airport influence delay experienced at other airports. Moreover, this analysis enables the contributory causes of measured delay at any given airport to be identified; that is, it distinguishes among delay caused by conditions at the given airport, at other airports, and in the airspace. Using this model, two different triggers can cause an airport to be designated as capacity constrained. First, the capacity-constrained designation is triggered if the airport’s scheduled arrival delay is at least 12 minutes and, if in either weather condition examined, either (1) the arrival queue delay exceeds 12 minutes or (2) local conditions causes more than 50 percent of scheduled arrival delay. Using the secondary factors to supplement the scheduled arrival delay criteria allows capacity-constrained airports to be limited to those that experience delay caused by local factors. Second, an airport can also be designated as capacity constrained if the airport’s departure queue delay—which is considered to be fully caused by local factors—is at least 12 minutes. NAS with FATE forecasts: The second NAS assessment uses the NAS- wide modeling approach with the FATE demand forecasts. Instead of rerunning the NAS model with FATE forecasts, outputs from the NAS/TAF runs are used and the differences between the FATE demand forecasts and the TAF forecast are examined to calibrate how model outputs would likely have been different under FATE demand forecasts. This assessment measures only average scheduled arrival delay. Under this model, an airport is designated as capacity constrained if the airport’s average scheduled arrival delay is at least 12 minutes. In addition to identifying airports that would be capacity constrained in the future, the FACT 2 study also identified metropolitan areas that are likely to have significant aviation capacity shortfalls. The study looked at Metropolitan Statistical Areas—geographic areas defined by the Office of Management and Budget—or combinations of such areas in the case of some larger metropolitan areas, and analyzed the expected aviation demand and capacity at the relevant airport or airports within those areas. For determining which metropolitan areas should be designated as capacity constrained, FACT 2 only examined those metropolitan areas that either contained a large- or medium-hub airport or at least two small-hub airports that the FACT 2 airport analysis had identified as capacity constrained. A metropolitan area could be designated in FACT 2 as capacity constrained for any of the following three reasons: The metropolitan area contained a large-hub airport that the study deemed capacity constrained and there were no other secondary airports serving the metropolitan area. The metropolitan area contained at least two large hubs, both of which were identified to be capacity constrained. The study conducted an analysis of demand and capacity across the airports in each area. It used projected airport benchmark capacities and, using historical weather conditions, converted these hourly capacities into an annualized average expected capacity level for each airport in each forecast year. For each of the demand forecasts (TAF and FATE), capacity and demand across the relevant airports were summed for each forecast year. If the resulting ratio of metropolitan area demand (for either TAF or FATE) to metropolitan area capacity exceeded 0.8, then the metropolitan area was considered to be capacity constrained in that year. Long-term forecasts of airport demand and capacity, such as those undertaken in FACT 2, naturally face uncertainties. FACT 2 looked almost 20 years into the future. A number of conditions could change over the course of those years and affect the accuracy of the forecasts, including unexpected changes in regional economic growth patterns, demographic movements, new airline industry business models, and the macroeconomy. New industries may also unexpectedly influence business and societal patterns. Since the time that FACT 2 was conducted, macroeconomic conditions have already changed considerably. In particular, because TAF and FATE demand forecasts were conducted prior to the current economic downturn, they are likely considerably higher than demand forecasts would be if they were to be conducted today. The results of the FACT 2 study are not only impacted by forecasting uncertainties, but also the study’s purpose and design. According to officials from FAA and MITRE with whom we spoke, the FACT 2 study was intended to identify airports that will be highly capacity constrained—not just airports that may have some congestion and delay problems. In fact, the published study findings present only a list of airports that were found to be highly capacity constrained and do not report the underlying scores on the four assessments. For our work, we not only examined the published FACT 2 study, but also airports’ scores on the four assessments, and we also met several times with FAA and MITRE officials to gain a further understanding of the model design. We found that the objective of identifying “the worst of the worst” capacity- constrained airports was critical in structuring several elements of the FACT 2 study. These model elements are discussed more fully in the following text: Meeting all four congestion thresholds: The FACT 2 study identified airports as either being congested or not, rather than presenting airports’ degree of capacity constraints along a continuum. Furthermore, it required that an airport be designated as congested on all four assessments to be designated as capacity constrained. These model design elements have two implications. First, there is not a full presentation of the range of capacity constraint—the published report only states whether an airport was determined to be capacity constrained or not. But the underlying scores are of a continuous nature, and some airports were close to the trigger level on some criteria. Moreover, if an airport did not meet the threshold for a designation of a capacity problem on both of the NAS assessments, the ASV assessment may not have been completed, since ASV levels were only reestablished for later years if they were needed for the analysis. In short, the study’s capacity-constrained designation criteria obscure the more continuous nature of the data when designating which airports are on or off the list, and a complete assessment across all four criteria was not completed in all cases. Second, because underlying scores for the assessments are not provided in the final study, the results also do not show how much greater capacity problems are likely to be at some of the airports than at others that do receive a capacity-constrained designation. For example, the findings for the Newark and Philadelphia Airports indicate that congestion and delay will be substantially more problematic in those locations, even when compared with many other of the designated capacity-constrained airports. Seven-minute average delay threshold: The ASV assessments used a 7- minute average delay threshold for determining available airport capacity, rather than the 4-minute delay that, according to FAA and MITRE officials, is more commonly used to measure delay-prone airports within ASV studies. A lower average delay threshold would have resulted in more airports meeting the capacity-constrained threshold, according to the two ASV criteria. Planned improvements: The FACT 2 findings, which are predicated on the assumption that planned improvements will be completed in a timely manner, may understate future capacity problems if improvements fall behind schedule. The two sets of 2025 findings (i.e., with and without improvements) show that the planned improvements are critical for addressing capacity problems at airports. In particular, many more airports would be predicted to have significant capacity challenges under the FACT 2 analysis were it not for the greater capacity offered by the planned improvements. We have previously reported that some airport improvement projects have faced or may face delay in either funding or implementation. If the planned improvements underlying the FACT 2 study face similar delay, then the study may understate future capacity problems. Similarly, we have reported that NextGen improvements face challenges that may affect timely implementation, including some airlines’ reluctance to invest in the necessary equipment, and the need for FAA to validate and certify new technologies and issue certain rules before midterm implementation can occur. In addition, airport officials with whom we spoke expressed concerns that benefits from NextGen technological gains might not be fully realized if FAA does not change air traffic management standards (such as lowering ceiling requirements for certain types of approaches) to match the new technology. FACT 2 acknowledged that more research on these types of air traffic management improvements is required. Unaccounted for constraints: Certain constraints or local considerations that may limit either the growth at individual airports or traffic distribution among airports within a region were not accounted for in the FACT 2 analyses. For example, the study’s unconstrained demand estimates did not take into account legal restrictions at two airports in the Los Angeles area on the number of flights that can operate or the number of passengers that can be accommodated. Thus, FACT 2 may overestimate the operations at these airports and underestimate traffic growth at other airports in the region. FAA officials told us that they did not take these constraints into consideration since FACT 2 was measuring unconstrained demand. Furthermore, they expressed the opinion that the constraints could be changed if there was an interest in doing so locally. Regional officials noted that the current settlement at John Wayne Airport in Orange County expires in 2015. At that point, the county and community may negotiate changes to the current agreement, according to airport officials. This could mean that the FACT 2 demand forecasts for other airports in the region—most notably Los Angeles International Airport (LAX), which came close to being designated as a capacity-constrained airport in 2025—may underestimate future growth. Unaccounted for capacity constraints: The FACT 2 study also did not consider some potential capacity limitations. As noted in the study, when given an opportunity to comment on the FACT 2 methodology, some airport sponsors noted that an airport’s taxiways and terminal gates as well as airspace—rather than runways—can sometimes limit the number of operations that can be handled at an airport. The FACT 2 study, however, focused only on runways as the limiting capacity factor. MITRE officials told us that further analysis of these elements of capacity limitations are being examined currently. Assumed aircraft upgauging: Both demand forecasts, but particularly the FATE forecast, used in FACT 2 assumed some level of upgauging in aircraft size, meaning the average number of seats per aircraft is assumed to rise over the projection time frame. Some aviation experts with whom we spoke, however, do not believe much upgauging will occur in the coming years. If the upgauge assumptions overstate the extent to which seats per aircraft actually rise, the level of congestion in FACT 2 could be understated because more operations than indicated in the demand forecasts would be needed to accommodate the projected passenger base. Nevertheless, FAA officials discussed the analysis that underlies the upgauge modeling for FATE and noted that the FATE forecasted upgauge is driven by past experience in how airlines have chosen to serve routes as demand has risen. Moreover, they pointed out that certain fleet types that are likely to be phased out in the next decade are likely to be replaced with somewhat larger aircraft. According to the FACT 2 report, the analysis includes planned improvements affecting runway capacity for two future planning periods, 2015 and 2025. The planned improvements include the following: New or extended runways: New or extended runways were included as planned improvements. The OEP v8.0 and airport-specific planning documents were used to incorporate the runway improvements in either the 2015 or 2025 planning period. New or revised air-traffic control procedures: If a new or revised air- traffic control procedure was listed in the OEP v8.0 or defined by the FACT 2 analysis as consistent with a NextGen concept, it was modeled as an improvement in this study. NextGen concepts were applied only to the 35 OEP airports and Oakland International and then only in the 2025 planning scenario, given that NextGen is still in the early planning stages. NextGen concepts for en route or oceanic operations or changes to operations on the airport surface were not included. Airspace redesign: Improvements derived from the redesign of the airspace surrounding an airport were included in the 2015 or 2025 scenario on the basis of the best information available. The redesign itself was not performed as part of this analysis. Other assumptions: The FACT 2 analysis assumed existing environmental restrictions that impact runway capacity, such as noise abatement procedures, would continue through the FACT planning periods. Planned taxiway, terminal, or ground access improvements were not included in this analysis because they were outside the scope of the models used. FAA has provided over $34 million in funding to metropolitan regions or others carrying out metropolitan system planning in fiscal years 1999 to 2008. (See table 6.) These grant funds went to a range of efforts, including developing or updating regional airport system plans (RASP). The majority of these projects were sponsored by local MPOs or other regional planning bodies, although the state of Virginia also received a grant. Funding was also provided to several airports sponsors, including the Port Authority of New York and New Jersey; Clark County in Las Vegas; the Palm Beach County Board of Commissioners in South Florida; the Louisiana Airport Authority in the New Orleans region; and the San Diego County Regional Airport Authority, which operates San Diego International Airport. In a survey conducted of 381 MPOs across the country for a prior report, we found that fewer than 20 percent of the 324 MPOs responding indicated they had responsibility for conducting all or a portion of a region’s aviation planning. Among the larger MPOs responding to a question about their involvement in aviation planning—41 of the 42 planning organizations serving areas with populations greater than 1 million—17 engaged in aviation planning activities, accounting for 41 percent of these MPOs. Ten MPOs indicated that they were required by state law to engage in regional aviation planning, 2 of which had populations over 1 million. (See table 7.) There are three commercial service airports operated by separate sponsors in the Boston region. Boston Logan International is a large-hub airport, and in 2008, 73 percent of flights to this facility arrived on time. A medium-hub airport, T.F. Green, near Providence, Rhode Island, and a small-hub airport, Manchester-Boston Regional in Manchester, New Hampshire, also provide commercial service to the region’s residents. FAA’s FACT 2 report did not forecast that any of the airports in the Boston region would become significantly capacity constrained by 2025, assuming planned improvements occur at Boston Logan and T.F. Green. FAA officials in New England have taken an active role in trying to assist the region’s airports in planning for future capacity needs. Officials at Massport, which operates Boston Logan, told us that they realized that the airport would not be able to meet the region’s capacity needs. After an attempt to develop a second major airport in Massachusetts failed, they worked with FAA and other airports in the region to decentralize the region’s air traffic. This allowed Boston Logan an opportunity to specialize in international and long-haul routes over short-haul trips. Prior to the arrival of Southwest Airlines, regional demand studies demonstrated that there were markets that could be served from Boston’s alternate airports. Southwest Airlines officials told us that the demand forecasts piqued their interest in the alternate airports in the region, and that the airline has been pleased with how customers responded to its entry into Boston’s alternate airports. Prior to the emergence of T.F. Green and Manchester-Boston Regional, many residents drove from areas near these airports to travel from Boston Logan. Expanded service options have allowed some residents of the region to be served closer to where their trips originate. Los Angeles World Airports operates two commercial-service airports in the Los Angeles region: LAX is a large-hub airport, and Ontario International is a medium-hub airport. In 2008, 77 percent of flights to LAX arrived on time. There are two other medium-hub airports in the region operated by separate sponsors—John Wayne Airport in Orange County and Bob Hope Airport in Burbank. There is also a small-hub airport in Long Beach and a nonhub airport in Van Nuys, which is owned and operated by Los Angeles World Airports. FACT 2 predicted that both John Wayne and Long Beach airports will become significantly capacity constrained by 2015. The capacity challenges faced by the Los Angeles region are compounded by flight and operations restrictions at several airports in the region. The airports in Orange County and Long Beach have legal agreements or requirements that limit their ability to increase traffic levels and thereby relieve regional congestion. Likewise, the sponsor of Bob Hope Airport has entered into a voluntary agreement that prevents the development of new gates or the expansion of the footprint of the terminal until 2012, according to airport officials. LAX, for its part, has also agreed to a limit on the number of annual passengers at its facility under a settlement agreement with the surrounding community, according to regional planners. Los Angeles World Airports officials told us that while they previously attempted to promote the development of alternate facilities, such as LA/Palmdale Regional, the focus of their agency has shifted back to LAX, given the recent downturn and the backlog of maintenance at this facility. Several of the airports in the region are proposed to also serve as high-speed rail stops, including Ontario International and LA/Palmdale Regional. Such ground access improvements may help these airports play a greater role in delivering capacity for the region in the future. The Port Authority of New York and New Jersey (Port Authority) operates Newark Liberty International (Newark), John F. Kennedy International (JFK), and LaGuardia. These large-hub airports are consistently amongst the most delayed in the nation. In 2008, 62 to 68 percent of the flights to these facilities arrived on time (i.e., within 15 minutes of their scheduled arrival time). Stewart International, an airport 1 1/2 hours of the city by car, was recently acquired by the Port Authority and is a small-hub airport. Long Island Macarthur Airport in Ronkonkoma is a small-hub airport that operates outside of the Port Authority system. FAA’s FACT 2 report reported that LaGuardia and Newark were already significantly capacity constrained in 2007, and that JFK would become so in 2025. The Port Authority is an intermodal organization that is exempt from some of the revenue-sharing prohibitions affecting other regions. Airports in the Port Authority system are part of a larger portfolio of transportation assets operated by the Port Authority, such as major bridges and tunnels. According to the Port Authority, because it was grandfathered under federal law prohibiting the use of airport revenues off airport property, the Port Authority is able to cross-subsidize transportation modes. The airports in the Port Authority’s system provide some of the revenue for other modes that operate at a loss, according to Port Authority officials. The region recently completed a regional air service demand study, and Port Authority officials told us that the forecasts developed for the study were essential for demonstrating the benefits of acquiring the lease for Stewart International. Port Authority officials told us that while they expected the facility to generate revenue eventually, it is now operating at a loss. At the request of FAA, the Port Authority is presently preparing updates to the airport layout plans for airports in its system. FAA officials told us that the last airport master plans the Port Authority prepared date back to 1970. According to Port Authority officials, planning for the airports happens in an ad hoc fashion, given intermodal competition within the agency. The local MPO, the New York Metropolitan Transportation Commission, does not play a role in regional airport planning beyond surface access. A nonprofit, the Regional Plan Association, has recently begun regional airport planning with Port Authority financing, which will focus on the airports under Port Authority sponsorship. Ground access is a significant consideration for the future development of Stewart International, and the Port Authority is cosponsoring a rail study with the New York Metropolitan Transportation Authority to evaluate access improvements to the airport. There is one large-hub airport in the Philadelphia region—Philadelphia International—and one small-hub airport—Atlantic City International—to the southeast in New Jersey. In 2008, 73 percent of flights to Philadelphia International arrived on time. Philadelphia International is owned by the City of Philadelphia, while Atlanta City International is jointly owned by the South Jersey Transportation Authority and FAA. FACT 2 forecast that Philadelphia International would become significantly capacity constrained by 2015. Philadelphia International is presently pursuing a capital enhancement project to add an additional runway and expand another. The project is contentious, particularly with residents of Tinicum Township and Delaware County where environmental impacts, including emissions and noise, might increase. Atlantic City International provides some residents of the region with an alternate to the more congested Philadelphia International. The local MPO, the Delaware Valley Regional Planning Commission, is active in regional airport planning, focusing in recent years on planning for general aviation airports. MPO officials expressed an interest in continuing regional airport planning as well as undertaking a regional demand study similar to the ones completed in the Boston and New York regions. The San Diego region has one large-hub airport, San Diego International. In 2008, 78 percent of flights to this airport arrived on time. FACT 2 forecast that San Diego International would be significantly capacity constrained by 2025. The primary airport in San Diego is run by the San Diego County Regional Airport Authority, which was previously involved in a major site-selection effort to build a new airport for the region. This effort was rejected by voters in 2006, however, and airport officials are now planning under the assumption that San Diego International will be the only major airport in the region. With this in mind, the airport sponsor is considering how it could maximize San Diego International’s capacity within its existing footprint. In addition, a state law passed in 2007 mandates that the airport authority prepare a RASP for the region by June 30, 2011. While the airport authority is working on the airside components of the study, the MPO is working on a multimodal transportation plan. The San Francisco Bay Area has three major airports with different sponsors. San Francisco International (SFO) is a large-hub airport, and in 2008, 69 percent of flights arrived on time. Both Oakland International and Norman Y. Mineta in San Jose are medium-hub airports. FACT 2 forecast that both SFO and Oakland International will be significantly capacity constrained by 2025. SFO and Oakland International are located on land adjacent to San Francisco Bay and face significant obstacles to the construction of new runways as a result. The Regional Airport Planning Committee, which includes the Metropolitan Transportation Commission—the region’s MPO—will play a significant role in identifying potential alternate solutions for the region, and is currently leading efforts to develop a new RASP. This effort is being funded by FAA, the MPO, and airports in the region. SFO officials told us that they have committed themselves to studying nonconstruction ways to relieve congestion, and that they are not averse to having domestic, short-haul traffic shift to Oakland International or Norman Y. Mineta in San Jose or in instituting demand management strategies such as peak pricing to relieve congestion. SFO officials also stated that they are also considering improvements that may come from NextGen and other technological improvements. In addition to the contact named above, Paul Aussendorf (Assistant Director), Amy Abramowitz, Lauren Calhoun, Delwen Jones, Paul Kazemersky, Molly Laster, Monica McCallum, Sara Ann Moessbauer, and Josh Ormond made key contributions to this report. | The Federal Aviation Administration (FAA) predicts that the national airspace system will become increasingly congested over time, imposing costs of delay on passengers and regions. While transforming the current air-traffic control system to the Next Generation Air Transportation System (NextGen) may provide additional en route capacity, many airports will still face constraints at their runways and terminals. In light of these forecasts, the Government Accountability Office (GAO) was asked to evaluate regional airport planning in metropolitan regions with congested airports. GAO (1) identified which airports are currently or will be significantly congested and the potential benefits of regional airport planning, (2) assessed how regions with congested airports use regional airport planning in decision making, and (3) identified factors that hinder or aid in the development and implementation of regional airport plans. GAO reviewed studies; interviewed FAA, airport, and other aviation and transportation officials; and conducted case studies in selected regions. A number of airports are or will be significantly capacity constrained and thus congested within the next 16 years. However, many of them face environmental and other obstacles to developing additional airport capacity. In 2007, FAA identified 14 airports (in 10 metropolitan regions) that will be significantly capacity constrained by 2025, even assuming all currently planned improvements occur (see figure). Planned improvements include airport construction projects and implementation of NextGen technologies. Without these improvements, FAA predicts that 27 airports will be congested. According to the FAA assessment and other studies, regional airport planning may identify additional solutions, such as the increased use of alternate airports or other modes of travel, to help relieve airport congestion. From 1999 through 2008, 9 of the 10 metropolitan regions with airports forecast to be significantly capacity constrained by 2025 have received a total of $20 million in FAA funding for regional airport planning. Of those regions, 6 have developed or will develop regional airport system plans (RASP), which we found largely followed FAA's guidance for airport system planning. The remaining 4 regions have engaged in less comprehensive planning. FAA does not formally review RASPs, and they have been used selectively by FAA and airports in decision making for the planning and funding of individual airport projects. A few airport sponsors have pursued select strategies outlined in plans, while one airport sponsor rejected the RASP for its decision making. Because regional airport planning is advisory, competing interests can derail development and implementation. Metropolitan planning organizations generally develop RASPs but have no authority over airport development. That authority rests with airports, which are not required to incorporate planning recommendations into their capital plans, and with FAA, which makes funding decisions on the basis of national priorities. In addition, airport, community, and airline interests may conflict in a region. For example, Philadelphia International does not support planning efforts that may divert traffic from its airport to alternate regional airports. By contrast, aligned interests and FAA involvement may aid regional planning and implementation, as has occurred in the Boston region. |
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The PMAs—Alaska Power Administration (Alaska), Bonneville Power Administration (Bonneville), Southeastern Power Administration (Southeastern), Southwestern Power Administration (Southwestern), and Western Area Power Administration (Western)—were established from 1937 through 1977 to sell and transmit electricity generated mainly from federal hydropower facilities. With the exception of Alaska, the PMAs do not own or operate any of the power generation facilities. Most of these facilities were constructed and continue to be owned and operated by the Department of the Interior’s Bureau of Reclamation (Bureau) or the U.S. Army Corps of Engineers (Corps). The Bureau and the Corps constructed these facilities as part of a larger effort in developing multipurpose water projects that have other functions in addition to power generation, including flood control, irrigation, navigation, and recreation. The PMAs, with the exception of Southeastern, have constructed and continue to own and operate a combined total of nearly 33,000 miles of transmission lines to carry out the PMAs’ role in selling and transmitting electric power. Power sold by the five PMAs accounted for about 3 percent of all power generated in the United States in 1993. The PMAs vary widely in their operating characteristics and scope of activities. Alaska has 88 miles of transmission lines, and sales are limited to two areas in the State of Alaska. Southeastern owns no transmission facilities and relies on the transmission services of other utilities to transmit the power that it sells to customers in all or parts of 11 states. Southwestern is comparable to Southeastern in terms of sales volume but owns and operates about 1,400 miles of transmission lines in all or parts of six states. Western owns and operates over 16,000 miles of transmission lines serving customers in all or parts of 15 states. Bonneville owns and operates over 14,000 miles of transmission lines and sells to customers in all or parts of eight states. In 1994, Bonneville accounted for about 69 percent of total PMA revenues. Figure 1 presents the service area and fiscal year 1994 operating revenue for each PMA. In addition, table I.2 in appendix I shows some operating statistics including the amount of generating capacity used to generate the power sold by the PMAs, and the number of power plants, miles of transmission lines, and employees for each PMA, as of September 30, 1994. Each PMA has an administrator who is appointed by the Secretary of Energy. Each administrator is authorized to make decisions regarding the operation of the PMA, although the authority and duties of the administrator are subject to the supervision and direction of the Secretary. The administrators testify before the Congress on the PMAs’ budgets, which are submitted as part of DOE’s annual federal budget. DOE establishes each PMA’s personnel limits as part of DOE’s total personnel ceiling. The administrator also has authority to propose rate adjustments to meet projected revenue needs. Except for Bonneville, the Deputy Secretary of Energy is responsible for approving rate adjustments for the PMAs on an interim basis. The Federal Energy Regulatory Commission has authority over final approval for all of the PMAs’ rates. In addition, the administrators work with numerous federal, state, and local agencies on issues such as flood control, fish and wildlife protection, and irrigation. For example, Bonneville is required to work with the Pacific Northwest Electric Power and Conservation Planning Council, which the Congress created in 1980 to coordinate power planning and fish and wildlife protection in the Pacific Northwest, among other things. As required by law, all PMAs give preference in the sale of power to public power customers—customer-owned cooperatives, public utility and irrigation districts, and municipally owned utilities. Public power customers purchased about 63 percent of the power sold by the PMAs in fiscal year 1993. The remainder of the power is purchased by state and federal agencies and nonpreference customers, such as investor-owned utilities and industrial companies. Figure 2 shows the percentage of power sold by all the PMAs to each type of PMA customer during fiscal year 1993 in megawatt (MW) hours (MWh). (Table I.3 of app. I shows the quantity of power sold and associated revenues for all PMAs for each type of customer during fiscal year 1993.) As shown in figure 3, as a whole, public power customers are not dependent on the PMAs as their sole source of power. For example, as shown in figure 3, in fiscal year 1993, Bonneville’s public power customers obtained about 46 percent of their overall power needs from sources other than Bonneville, while Southeastern’s public power customers obtained about 95 percent of their total power needs from sources other than Southeastern. At the same time, however, some of the PMAs’ public power customers purchase a large percentage of their power from PMAs. For example, during fiscal year 1993, more than 80 percent of Bonneville’s public power customers obtained more than 75 percent of their total power needs from Bonneville. Table I.4 of appendix I shows the quantity of power purchased by public power customers from PMAs and the total quantity of power obtained by the same customers from all sources during fiscal year 1993. Table I.5 of appendix I shows the number of public power customers for each PMA and the percentage of the customers’ overall power needs that were purchased from the PMA. The Congress appropriates money each year to the PMAs for power-related purposes and to the federal operating agencies for both power and nonpower purposes. The PMAs, other than Bonneville, generally receive appropriations annually to cover operations and maintenance expenses and capital investments in their transmission assets.10, 11, In fiscal year 1994, the PMAs received about $328 million in appropriations. The operating agencies receive appropriations for all aspects of the multipurpose hydro projects, including operations, maintenance, and capital expenses related to power and also to other functions, such as irrigation and navigation. The operating agencies expended about $409 million on power-related operating and capital expenses and allocated these expenses to the PMAs for repayment during fiscal year 1994. The PMAs have no control over the amount of generation investment incurred by the operating agencies, which, by law, becomes repayable through rates charged by the PMAs. In 1974, the Congress stopped providing Bonneville with annual appropriations and instead provided it with a revolving fund maintained by the Treasury and permanent Treasury borrowing authority, now limited to $3.75 billion. However, Bonneville remains responsible for repaying its debt stemming from appropriations expended by Bonneville prior to 1974 and debt stemming from appropriations expended by the operating agencies on power-related expenses. Although most of Western’s projects are funded by appropriations, three projects—the Fort Peck Project, which is included in the Pick-Sloan Missouri Basin Program; the Colorado River Storage Project; and the Central Arizona Project—have revolving funds for operational, maintenance, and replacement costs. Western’s Boulder Canyon Project has permanent authority for the same types of costs as well as emergency expenditures. Nonfederal financing has been obtained for the Parker Dam, the Hoover Power Plant upratings, and the Buffalo Bill Power Plant. Nonfederal financing has been obtained for transmission construction through participation agreements with regional utilities. capital investments in generation facilities during the same fiscal year.Table II.1 of appendix II shows this same information for fiscal years 1985-94. Legislation requires the PMAs to set their power rates at the lowest possible level consistent with sound business principles. The PMAs do not set their rates to earn a profit. Instead, they attempt to generate revenues sufficient to recover all costs incurred as a result of producing, marketing, and transmitting electric power, including repayment of the federal investment and other debt with interest. DOE requires each PMA to annually prepare a repayment study to test the adequacy of their rates and to show, among other things, estimated revenues and expenses, estimated payments on the federal investment, and the total amount of federal investment to be repaid. The gross repayable investment assigned to be repaid by power revenues totaled nearly $34 billion, as of September 30, 1994. This amount includes $2.4 billion stemming from costs related to irrigation that Bonneville and Western must repay. PMAs had repaid about $11 billion (32 percent) of the gross repayable amount leaving more than $23 billion of outstanding debt, as of September 30, 1994. Figure 5 shows the gross repayable investment, the amount repaid, and the outstanding repayable investment (debt) for each PMA, as of September 30, 1994. Table II.2 in appendix II shows this information for fiscal years 1985-94. The federal dams from which the PMAs sell electricity also serve a variety of nonpower purposes including flood control, irrigation, navigation, and recreation. The PMAs seek to balance the concerns of the authorized competing uses of the projects in scheduling and delivering power to their customers. In addition to the $34 billion invested in generation and transmission facilities, another $9.5 billion in appropriations has been expended to date by the operating agencies for these nonpower purposes. Unlike the appropriations used for power generation and transmission, appropriations expended for nonpower purposes are not repaid through power-related revenues. Figure 6 shows the percentage of appropriations expended by the PMAs and the operating agencies for both power and nonpower purposes, as of September 30, 1994. Figure II.1 and table II.6 of appendix II show appropriations expended by the PMAs and the operating agencies. The PMAs generated about $3.2 billion in power-related revenues in fiscal year 1994. In accordance with legislation, the PMAs deposit their annual revenues in the Treasury. These receipts are generally applied to expenses in the following order: (1) operations and maintenance expenses, (2) purchased and exchanged power costs, (3) transmission service fees, (4) interest expense, and (5) any debt service on Treasury bonds (Bonneville only). Any remaining revenues are applied to any remaining balance due on unpaid or deferred annual expenses, if any, and then toward the repayment on the federal investment. DOE requires the PMAs to pay their highest interest-bearing debt first whenever possible, consistent with applicable law. The financial characteristics of the PMAs, in many respects, are a reflection of the various statutes and DOE policies and procedures that govern their operations. For example, except for Bonneville, the PMAs, as described earlier, receive appropriations annually to cover their operating and maintenance expenses and to finance capital investments. These financing methods differ from those used by investor-owned utilities. Such utilities generally pay for their operating expenses from operating revenue and finance capital investments by (1) issuing debt, (2) selling common or preferred stock, or (3) using cash generated from operations. In addition, the PMAs’ weighted average interest rates on their outstanding debt to the Treasury ranged from 2.7 to 4.6 percent in fiscal year 1994.This compares with an average interest rate of 8.1 percent on outstanding long-term debt for the nation’s 179 largest investor-owned utilities in 1993, according to a DOE report. These utilities accounted for more than 97 percent of all revenues earned by investor-owned utilities in 1993. As a comparison to the average cost of the PMAs’ debt in relation to the average cost of the Treasury’s debt, the Treasury’s weighted average interest rate on the outstanding marketable interest-bearing public debt was 6.9 percent as of July 31, 1995. As shown in figures 7 and 8, the PMAs’ financing methods and terms of repayment have led to a high amount of outstanding debt in comparison to total investment. These figures present two financial ratios that highlight the amount of debt that the PMAs have outstanding. The first ratio—debt to gross property, plant, and equipment—shows the outstanding portion of the PMAs’ debt, as a percentage of the total amount invested in these facilities. The second ratio—debt service to revenue—shows the amount of annual revenues used to pay principal and interest on outstanding debt (debt service) as a percentage of total revenues. Table II.5 of appendix II shows this information for each PMA during the period 1985-94. Because the PMAs’ debt is at low interest rates, four of the five PMAs have been able to carry high levels of debt without a corresponding increase in financial risk. However, as explained in the following discussion on competitive issues, high levels of debt currently pose problems for Bonneville and could pose problems for other PMAs in a more competitive environment. PMAs have been and generally remain among the sellers of wholesale electric power at the lowest cost. Their ability to operate as low-cost sellers stems from several factors, including the inherent low cost of hydropower relative to other generating sources, federal financing at relatively low interest rates, flexibility in the repayment of principal on the Treasury portion of the PMAs’ debt, the PMAs’ tax exempt status, and operating budgets that seek to break even rather than earn a profit or a return on investment. Partly because of these factors, the average revenue earned per unit of wholesale power sold by the PMAs is low in comparison to the national average for wholesale power sold by all utilities. The average revenue per kilowatt hour (kWh) sold by each PMA ranged from 1.2 to 2.5 cents in 1993. This was less than the national average for wholesale power in 1993 which, according to DOE’s Energy Information Administration, ranged from 3.3 to 4.1 cents, depending on the type of electric utility. The overall average was 3.6 cents. Figure 9 shows the average revenue earned per kilowatt hour of wholesale power sold for each PMA compared with the national average for wholesale power during fiscal year 1993. Table III.1 of appendix III shows (1) the total kilowatt hours of wholesale power sold and the associated power revenues by each PMA and (2) the nationwide total of kilowatt hours of wholesale power sold and associated revenues earned during fiscal year 1993. According to PMA officials, as of June 1995, with the exception of Bonneville, each PMA had rates that remain the lowest in its service area. These PMAs have experienced no major problems in terms of customers’ switching to other suppliers or having to negotiate new rates because of competition from other suppliers. On the other hand, Bonneville has experienced financial difficulty attributable to many factors including investments in nuclear plants. These difficulties coincide with other suppliers in Bonneville’s service area offering electric power service at rates at or below the rate at which Bonneville sells much of its power. Several of Bonneville’s customers have recently signed contracts with other suppliers, and other customers have indicated their willingness to negotiate with other suppliers. As noted in our 1994 report, Bonneville’s high debt and associated fixed costs and low financial reserves provide it with little flexibility to respond to any further operating losses, increasing the possibility that Bonneville would be unable to make its annual Treasury payment. The circumstances in which Bonneville finds itself are part of a larger trend in the wholesale segment of the electric power industry. This segment of the market has grown increasingly competitive in recent years, in part, because of industry changes stemming from the Energy Policy Act of 1992, which allows easier access to power generation markets and promotes greater use of electric transmission lines. As part of the trend toward competition, the Federal Energy Regulatory Commission expects nationwide wholesale rates to decline. Because the PMAs sell most of their power at wholesale, they could be directly affected by this trend. A PMA’s financial condition will play a role in determining whether it can compete with other suppliers. As mentioned earlier, a high debt-to-gross property, plant, and equipment ratio and a high debt service-to-revenue ratio could limit the flexibility of a PMA to match the rates of a competitor while still meeting financial obligations, including repayment of the federal investment. A PMA with rates below other suppliers’ rates in its service area has some flexibility to increase rates if necessary to meet its financial obligations. Conversely, a PMA with rates at or above the level offered by other suppliers in its service area, combined with a high level of debt, would have limited flexibility in reducing rates. We provided copies of a draft of this report to DOE for its review and comment. We received comments from DOE’s Bonneville Power Administration and DOE’s Power Marketing Liaison Office, which is responsible for the other four PMAs, and have included their comments and our response in this report as appendixes IV and V, respectively. Bonneville stated that our report was factually correct and fairly reflected its competitive situation. For the other four PMAs, DOE commented that our report implied that the PMAs were inefficient and used inappropriate operating techniques that could leave the PMAs in a precarious position in the future. We did not evaluate the efficiency of the PMAs’ operations and have drawn no such conclusion. DOE also commented that it is inappopriate to compare investor-owned utilities’ method of operating at a profit with that of the PMAs. Our report does not make this comparision. Rather, it compares the PMAs’ average interest rates and the PMAs’ method of financing capital investments with those of investor-owned utilities. DOE suggested that we include several additional facts in our report that it believed should help explain more fully how the PMAs operate. We have expanded certain descriptive data to include facts suggested by DOE. DOE also provided technical corrections and clarifications that we incorporated where appropriate. To develop the financial information presented in this report, we interviewed officials of each PMA and reviewed data from the five PMAs’ annual reports and financial statements for fiscal years 1985 through 1994. To develop certain financial indicators, we used applicable repayment studies and financial statements. As appropriate, we interviewed officials of each PMA and used the PMAs’ data to develop operating information on the PMAs and to discuss competitive issues. We did not independently verify the accuracy of the PMAs’ data. In developing operating information, we also used available data from sources, such as the Congressional Research Service, DOE, the Federal Energy Regulatory Commission, and the National Academy of Public Administration. We used data from the Energy Information Administration to develop information on the extent to which the PMA’s public power customers purchase PMA-provided power. We performed our review from April through September 1995, in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to appropriate congressional committees, federal agencies, and other interested parties. We will also make copies available to others on request. This report was prepared under the direction of Victor S. Rezendes, Director of Energy and Science Issues in the Resources, Community, and Economic Development Division, who may be reached at (202) 512-3841 and Lisa Jacobson, Director of Civil Audits in the Accounting and Information Management Division, who may be reached at (202) 512-9508, if you have any questions. Major contributors to this report are listed in appendix VI. Generator nameplate capacity (MW) Fiscal year of initial operation (continued) Generator nameplate capacity (MW) Fiscal year of initial operation (continued) Generator nameplate capacity (MW) Fiscal year of initial operation (continued) Generator nameplate capacity (MW) Fiscal year of initial operation (Table notes on next page) APA = Alaska Power Administration IBWC = International Boundary and Water Commission MW = megawatt PMA = power maketing administration PWUA = Provo River Water Users’ Association SRP = Salt River Project WPPSS = Washington Public Power Supply System Bonneville acquired all or part of the generating capability of three nuclear power plants owned by WPPSS. One plant is in commercial operation, and two have been terminated. We do not include Southeastern’s 300-kilowatt Stonewall Jackson Project, which was energized in 1994. No power bills were issued for this project in fiscal year 1994. Power plant was not yet in commercial operation. Generator nameplate capacity (MW) Transmission lines (miles) Annual federal employment (full time equivalent) (continued) (continued) (continued) APA = Alaska Power Administration BPA = Bonneville Power Administration kWh = kilowatt hour MWh = megawatt hour PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Not applicable. lnterdepartmental sales are sales to the facilities that play an integral role in the operation of WAPA’s projects. Project use is mainly sales of electricity necessary to pump water at federal irrigation projects. By law, BPA first serves customers located in the Pacific Northwest (legislatively defined as Oregon, Washington, and portions of Montana, Nevada, Utah, and Wyoming). BPA sells electricity that is surplus to the needs of the Pacific Northwest to customers outside the region, mainly those located in California. In 1993, these customers included public- and investor-owned utilities and one federal agency. All of SEPA’s sales to federal agencies in 1993 were to the Tennessee Valley Authority. Public power customer purchases from PMA (MWh) Total power obtained from all sources (MWh) APA = Alaska Power Administration BPA = Bonneville Power Administration EIA = Energy Information Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Washington Public Power Supply System Eleven public power customers received power from two PMAs; these customers are included in the total number of customers for each PMA from which they purchased power. Other 0.1% Recreation 0.3% Fish & Wildlife 0.9% Municipal & Industrial 1.9% (Figure notes on next page) APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Percentages may not total 100 because of rounding. (19) 131.1 $(0.1) APA = Alaska Power Administration BPA = Bonneville Power Administration DOE = Department of Energy PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Operating agency appropriation amounts are estimates provided by WAPA. $19,764 $20,337 $20,088 $21,141 $21,456 $22,376 $23,648 $24,343 $25,331 14,904 15,237 15,243 15,409 15,911 16,113 16,410 17,279 17,640 $1,398 $1,406 $1,410 $1,419 $1,422 $1,428 $1,434 $1,442 $1,476 $4,032 $4,978 $4,714 $4,974 $5,021 $5,156 $5,335 $5,631 $5,891 APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration The total outstanding repayable investment amounts for WAPA do not include deferred expenses. Deferred expenses totaled $238 million, as of September 30, 1994. (16.0) (0.3) (15.4) (1.9) (1.4) (1.2) 2,881.9 2,625.8 1,674.0 1,946.9 2,063.9 2,080.8 2,220.2 1,928.8 1,942.5 2,195.9 965.3 1,008.0 1,131.5 1,133.6 1,256.4 1,516.8 1,514.6 1,500.0 (64.9) (212.6) (273.6) (296.9) (60.7) (308.6) (373.5) (586.0) (580.8) (540.9) (264.2) 160. 9 (112.7) (409.6) (470.3) (11.5) (3.3) (29.5) (11.6) (99.4) (14.2) (4.9) (11.7) (41.3) (22.0) (18.1) (50.2) 1,291.0 1,456.2 1,689.9 1,774.6 1,760.0 1,715.3 1,564.1 1,451.9 (Table notes on next page) APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Accumulated net revenue (deficit) is as of September 30, 1994. Differences may occur in amounts as stated in the financial statements because of rounding. In fiscal year 1991, APA changed its method of computing depreciation on utility plants from the compound-interest to the straight-line method. The change was applied retroactively to utility plant additions of prior years. The cumulative effect of this change for years prior to 1991 was a decrease in the accumulated net revenue (deficit) of about $16.0 million. In fiscal year 1990, SEPA changed its method of computing depreciation on utility plants from compound-interest to the straight-line method. The change was applied retroactively to utility plant additions of prior years. The cumulative effect of this change for years prior to 1990 was a decrease in accumulated net revenues (deficit) by $138.2 million. The 1989 financial data for SEPA is as reflected in the 1989 financial statements. The 1989 financial data for SEPA were extracted from the 1989 financial statements in SEPA’s 1990 annual report. The financial statements were restated to reflect the change in the method of computing depreciation. SWPA’s financial data for fiscal years 1985, 1986, 1988, 1989, and 1990 were extracted from the restated financial statements in SWPA’s annual reports. In fiscal year 1990, SWPA changed its method for calculating depreciation on utility plants from the compound-interest to the straight-line method. The change was applied retroactively to utility plant additions of prior years. The cumulative effect of this change for years prior to 1990 was a decrease in accumulated net revenue (deficit) of about $114.4 million. Because of prior year adjustments or revenue transfers, the accumulated net revenues (deficit) for certain years may not equal the prior year’s balance in this account plus current year net revenue (deficit). WAPA’s financial data for fiscal year 1993 were extracted from the restated financial statements in WAPA’s 1994 annual report. In fiscal year 1993, WAPA changed its method of accounting for depreciation of utility plant assets from the compound-interest method to the straight-line method. The cumulative effect of this change for years prior to 1993 was a decrease in accumulated net revenues (deficit) by $1.054 billion. Debt to gross PP&E APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration PP&E = property, plant, and equipment SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration The ratio of debt to gross property, plant, and equipment was calculated by dividing outstanding repayable investment (debt) by gross property, plant, and equipment. The ratio of debt service to revenue was calculated by dividing principal debt repayments plus net interest expense by operating revenues. APA = Alaska Power Administration BPA = Bonneville Power Administration PMA = power marketing administration SEPA = Southeastern Power Administration SWPA = Southwestern Power Administration WAPA = Western Area Power Administration Not applicable. Average revenue (in cents per kilowatt hour sold) The following are GAO’s comments on the Power Marketing Liaison Office’s letter dated September 15, 1995. 1. The Power Marketing Liaison Office stated that our report implies that the PMAs generally use inefficient and inappropriate operating techniques that could leave them in a precarious position in the future. We disagree. Our report notes that the PMAs embody the various statutes and DOE policies that govern their procedures. Our report also points out that with the exception of Alaska, the PMAs do not own or operate the hydropower facilities from which they sell power nor do they have control over the amount of investment incurred by the agencies that operate and maintain the facilities. We did not attempt to assess the efficiency or appropriateness of the current operating techniques used by the PMAs or the operating agencies. 2. The Liaison Office stated that it is inappropriate to use investor-owned utilities’ methodology of operating for a profit as the only standard by which to judge the PMAs’ operations. Our report did not compare the fact that investor-owned utilities use a profit-based methodology with the fact that the PMAs’ are not allowed to earn a profit. We compared investor-owned utilities with the PMAs in two cases, both of which we believe are appropriate. First, concerning the manner in which the hydropower facilities and transmission assets were financed, we compared the PMAs’ cost of borrowing from the Treasury with investor-owned utilities’ cost of borrowing from private markets. We believe that this comparison allows the reader to independently assess the relative borrowing costs and potential financial advantages of PMAs versus private sector operations. Second, we explain that most capital investments in federal hydropower and transmission facilities are made through appropriations, which are essentially debt because they must be repaid through power revenues. We compare the PMAs’ method of financing with that of investor-owned utilities that can issue common or preferred stock in addition to debt. Because the PMAs cannot issue stock, it is reasonable to expect that they would have higher levels of debt than investor-owned utilities. We do not assess the levels of the PMAs’ debt in comparison to investor-owned utilities but rather in terms of competitive pressures and how the PMAs’ debt may affect their competitive situation. 3. The Liaison Office suggested several items that should be recognized in the report in order to avoid incorrect conclusions stemming from our comparison of PMAs with investor-owned utilities. The Liaison Office suggested that (1) the Congress never intended the PMAs to make a profit, (2) PMAs have a lower operating cost because their facilities were constructed at a time when construction costs were lower and the facilities have no fuel costs, (3) the PMAs’ high debt ratio results from the capital- intensive start-up costs associated with hydropower facilities and the longer service lives of these facilities and resultant longer repayment periods, and (4) the PMAs’ revenues can vary from year to year depending on water flow, and thus comparisons to nonhydro- based systems, such as those of investor-owned utilities, are misleading. First, our report acknowledges that the PMAs do not set their rates to earn a profit. Rather, they attempt to generate power revenues sufficient to cover all capital and operating costs. Second, although our report lists several reasons why the PMAs remain among the sellers of power at the lowest cost, our list was not intended to be exhaustive. Our intent was to inform the reader that, for many reasons the PMAs have been and generally remain among the sellers of power at the lowest cost. In addition, our report notes the inherent low cost of hydropower relative to other generating sources. Third, we do not compare the PMAs’ high levels of debt with the debt of investor-owned utilities. Instead, we explain how the PMAs’ debt, which is a fixed cost, may constrain the PMAs from adjusting to the increasingly competitive wholesale power markets in which they operate. Fourth, we do not compare any particular year’s revenues or generation of any of the PMAs with a nonhydro-based system of an investor-owned utility. Instead, our report notes that the PMAs’ revenues can vary depending on conditions, such as water flow, which may affect the amount of power that a PMA can sell. 4. The Liaison Office commented that the PMAs operate efficiently within congressional guidelines. The Liaison Office supported this comment by suggesting that the PMAs (1) normally return more funds to the Treasury than the annual congressional appropriations provided for the operating costs of the PMAs and the power-related costs of the operating agencies and (2) seek to balance the concerns of authorized competing uses of the projects and scheduling and delivering power to their customers. While PMAs may normally return more funds to the Treasury than they receive each year in annual appropriations, the repayment does not cover the Treasury’s interest expense associated with the PMAs’ debt. Second, our report notes that in addition to the $34 billion invested in power-related capital investments, more than $9.5 billion has been expended by the operating agencies for nonpower-related purposes, such as flood control, irrigation, and navigation. We revised our report to note that the PMAs must recognize and balance the concerns of these competing uses against the needs of their power customers. 5. We agree with DOE that because Bonneville accounts for the majority of the PMAs’ sales and revenues, its data tend to overshadow the other PMAs’ and may lead to inappropriate conclusions about all of the PMAs when the conclusions only apply to Bonneville. We have limited our presentation to factual material only. Our discussion of Bonneville’s competitive situation was not meant as a reflection on the other PMAs but instead was intended to show what can happen when a PMA with high fixed costs faces a competitive environment. Our report explains that as of the date of our report, the other PMAs were the low-cost sellers of power in their areas. 6. The Liaison Office commented that our report should reinforce the fact that the PMAs have no control over the amount of appropriations expended by the operating agencies for power generation equipment. We agree and have revised our report accordingly. 7. We agree with the Liaison Office that the two financial ratios we cite in our report (debt to gross property, plant, and equipment and debt service to revenue) should not be used alone to accurately assess the PMAs’ financial condition. We use these ratios only as indicators of the PMAs’ financial condition. However, for Bonneville, which now faces significant competition, the high debt service ratio is a critical indicator of its financial condition. Bonneville’s high debt and resultant fixed costs leave it with little flexibility to respond to competitive challenges. The substantial debt of the other PMAs is not currently a problem because they remain the sellers of power at the lowest cost in their service areas. However, competition is expected to result in a general decline in wholesale rates and, if they do not remain low-cost sellers, other PMAs could face a situation similar to Bonneville’s. We agree with the Liaison Office that the PMAs’ debt is at lower interest rates than those available today and that this has allowed PMAs to carry higher debt ratios without a corresponding increase in financial risk. However, as stated above, increased competition in wholesale power markets is a relatively new development and could pose serious challenges for each of the PMAs. 8. The scope of our review did not include an assessment of the quality of the power equipment employed by the PMAs. American Public Power Association. Selected Financial and Operating Ratios of Public Power Systems, 1992. Washington, D.C.: Mar. 1993. Audit of Bonneville Power Administration’s Management of Its Fish Recovery Projects. U.S. Department of Energy, Office of Inspector General. DOE/IG-0357. Washington, D.C.: Sept. 14, 1994. Bonneville Power Administration Business Plan 1995. U.S. Department of Energy, Bonneville Power Administration. DOE/BP-2664. Aug. 1995. The Bonneville Power Administration: To Sell or Not to Sell. U.S. Congressional Research Service. Washington, D.C.: Sept. 1986. BPA at a Crossroads. U.S. House of Representatives, BPA Task Force, Committee on Natural Resources. Washington, D.C.: May 1994. The Columbia River System: The Inside Story. U.S. Department of Energy, Bonneville Power Administration. DOE/BP-1689. Sept. 1991. Electric Trade in the United States, 1992. U.S. Department of Energy, Energy Information Administration. DOE/EIA-0531(92). Washington, D.C.: Sept. 12, 1994. Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets. U.S. Department of Energy, Energy Information Administration. SR/EMEU/92-02. Washington, D.C.: Nov. 1992. Financial Statistics of Major U.S. Investor-Owned Electric Utilities, 1993. U.S. Department of Energy, Energy Information Administration. DOE/EIA-0437(93)/1. Washington, D.C.: Jan. 1995. Financial Statistics of Major U.S. Publicly Owned Electric Utilities, 1993. U.S. Department of Energy, Energy Information Administration. DOE/EIA-0437(93)/2. Washington, D.C.: Feb. 1995. Fitch Research. “Fitch Competitive Indicator.” New York: Fitch Investors Service, L.P., Jan. 30, 1995. Garrison, K. and D. Marcus. “Changing the Current: Affordable Strategies for Salmon Restoration in the Columbia River Basin.” New York: Natural Resources Defense Council. Dec. 1994. Hearing: Review of the Proposed Sale of the Power Marketing Administrations (held on May 7, 1986). U.S. House of Representatives, Committee on Government Operations. Washington, D.C.: U.S. Government Printing Office, 1986. Hydroelectric Power Resources of the United States, Developed and Undeveloped, January 1, 1992. Federal Energy Regulatory Commission. Washington, D.C.: Jan. 1992. The Inspection of Power Purchase Contracts at the Western Area Power Administration. U.S. Department of Energy, Office of Inspector General. DOE/IG-0372. Washington, D.C.: May 9, 1995. Oversight Hearing: BPA Proposed Fiscal Year 1994 Budget (held in Washington, D.C., Apr. 28, 1993). Part I. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1993. Oversight Hearing: BPA Electric Power Resources Acquisition (July 12, 1993). Part II. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Oversight Hearing: BPA Columbia River Salmon Restoration (held in Boise, Idaho, Sept. 24, 1993). Part III. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1994. Oversight Hearing: BPA Competitiveness (held in Eugene, Oregon, Sept. 25, 1993). Part IV. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1994. Oversight Hearing: BPA Proposals (held in Washington, D.C., Oct. 28, 1993). Part V. U.S. House of Representatives, Task Force on Bonneville Power Administration, Committee on Natural Resources. Washington, D.C.: U.S. Government Printing Office, 1994. Power Marketing Administrations: A Time for Change? U.S. Congressional Research Service. Washington, D.C.: Mar. 7, 1995. President’s Private Sector Survey on Cost Control. Task Force of the President’s Private Sector Survey on Cost Control. Washington, D.C.: Aug. 31, 1983. Reinventing the Bonneville Power Administration. National Academy of Public Administration. Washington, D.C.: Dec. 1993. Scotto, D. and B. Chapman. “Electric Utilities Outlook: 1995 and Beyond.” New York: Bear Stearns, Jan. 1995. A Study of Power Marketing Administration Selected Financial Management Practices. U.S. Department of Energy. Washington, D.C.: Oct. 1988. A Study of Power Marketing Administration Selected Financial Management Practices, Appendices. U.S. Department of Energy. Washington, D.C.: Oct. 1988. Subsidies and Unfair Competitive Advantages Available to Publicly-Owned and Cooperative Utilities. Putnam, Hayes & Bartlett, Inc. Washington, D.C.: Sept. 1994. Bonneville Power Administration’s Power Sales and Exchanges (GAO/RCED-95-257R, Sept. 19, 1995). Bonneville Power Administration: Borrowing Practices and Financial Condition (GAO/AIMD-94-67BR, Apr. 19, 1994). Bonneville Power Administration: GAO Products Issued Since the Enactment of the 1980 Pacific Northwest Power Act (GAO/RCED-93-133R, Mar. 31, 1993). Federal Electric Power: Views on the Sale of the Alaska Power Administration Hydropower Assets (GAO/RCED-90-93, Feb. 22, 1990). Policies Governing Bonneville Power Administration’s Repayment of Federal Investment Still Need Revision (GAO/RCED-84-25, Oct. 26, 1983). 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 the Department of Energy's five power marketing administrations (PMA), focusing on operating, financial, and competitive issues facing PMA. GAO found that: (1) five PMA were established between 1937 and 1977 to sell and transmit electricity generated mostly from federal hydropower facilities; (2) PMA power accounted for about 3 percent of the power generated nationally in 1993; (3) each PMA owns and operates about 16,000 miles of transmission lines, serves customers in up to 15 states, and is headed by an appointed administrator that is authorized to make PMA operation decisions; (4) all PMA are required to give preferences in power sales to public power customers, but these customers are not dependent on PMA as their sole source of power; (5) although PMA operations and maintenance expenses and capital investments are covered by congressional appropriations, PMA are required to repay their transmission asset appropriations; (6) PMA are required to set their power rates to generate only enough revenue to recover costs; (7) PMA generated about $3.2 billion in power-related revenues in fiscal year 1994, but gross repayable investments totalled $34 billion as of September 1994; (8) as of September 1994, $23 billion of PMA cumulative debt was outstanding; (9) PMA are required to repay their debt and interest using revenues generated from power sales; and (10) although most PMA have been able to carry high levels of debt without an increase in financial risk, high levels of PMA debt could pose problems for PMA in a more competitive marketplace. |
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This section provides brief descriptions of the financial services industry and its component sectors, the changing demographic characteristics of the United States, and diversity management. The financial services industry plays a key role in the U.S. economy by, among other things, providing vehicles, such as insured deposits, providing credit to individuals and businesses, and providing protection against certain financial risks. We defined the financial services industry to include the following sectors: depository credit institutions, which is the largest sector, include commercial banks, thrifts (savings and loan associations and savings banks), and credit unions; holdings and trusts, which include investment trusts, investment companies, and holding companies; nondepository credit institutions, which extend credit in the form of loans, but are not engaged in deposit banking, include federally sponsored credit agencies, personal credit institutions, and mortgage bankers and brokers; the securities industry, which is made up of a variety of firms and organizations (e.g., broker-dealers) that bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice; and the insurance industry, including carriers and insurance agents, which provides protection against financial risks to policyholders in exchange for the payment of premiums. Additionally, the financial services industry is a major source of employment in the United States. The financial services firms we reviewed for this study, which have 100 or more staff, employed nearly 3 million people in 2004, according to the EEO-1 data. According to the U.S. Bureau of Labor Statistics, employment growth in management and professional positions in the financial services industry was expected to grow at a rate of 1.2 percent annually through 2012. According to the U.S. Census Bureau, the U.S. population is becoming more diverse by race and ethnicity. In 2001, Census projected that the non-Hispanic, white share of the U.S. population would fall from 75.7 percent in 1990 to 52.5 percent in 2050, with a similar increase from the minority population during the same period. Census further projected that the largest increases would be in the Hispanic and Asian populations. According to the Census Bureau’s 2004 American Community Survey results, Hispanics are now the second largest racial/ethic group after whites. The rapid growth of minorities in the Unites States may also influence its economic activities. For example, according to Census, the number of firms owned by minorities and women continues to grow faster than the number of other firms. In particular, a recent Census report based on data from the 2002 Economic Census stated that, between 1997 and 2002, Hispanics in the United States opened new businesses at a rate three times faster than the national average. As we stated in a 2005 report, the composition of the U.S. workforce has become increasingly diverse, and many organizations are implementing diversity management initiatives. Diversity management is a process intended to create and maintain a positive work environment that values individuals’ similarities and differences, so that all can reach their potential and maximize their contributions to an organization’s strategic goals and objectives. On the basis of a literature review and discussions with experts, we identified nine leading diversity management principles: (1) top leadership commitment, (2) diversity as part of an organization’s strategic plan, (3) diversity linked to performance, (4) measurement, (5) accountability, (6) succession planning, (7) recruitment, (8) employee involvement, and (9) diversity training. EEO-1 data indicate that overall diversity among officials and managers within the financial services industry did not change substantially from 1993 through 2004, but that changes by racial/ethnic group varied. The EEO-1 data also show that certain financial sectors, such as depositories, including commercial banks, are somewhat more diverse at the management level than others, including securities firms. Additionally, EEO-1 data do not show material differences in management-level diversity based on the size of individual firms within the financial services industry. Figure 1 shows the representation of minorities and whites at the management level within the financial services industry in 1993, 1998, 2000, and 2004 from EEO-1 data. Management-level representation by minorities increased from 11.1 percent to 15.5 percent during the period, while representation by whites declined correspondingly from 88.9 percent to 84.5 percent. Management-level representation by white men declined from 52.2 percent to 47.2 percent during the period while the percentage of management positions held by white women was largely unchanged at slightly more than one-third. Existing EEO-1 data may actually overstate representation levels for minorities and white women in the most senior-level positions because the “officials and managers” category includes lower- and mid-level management positions that may have higher representations of minorities and white women. According to an EEOC official we spoke with, examples for “officials and managers” would range from the Chief Executive Officer from a major investment bank to an Assistant Branch Manager of a small regional bank. A revised EEO-1 form for employers that becomes effective with the 2007 reporting year divides the category of “officials and managers” into two hierarchical sub-categories based on responsibility and influence within the organization: “executive/senior level officials and managers” and “first/mid-level officials.” According to a trade association that commented on the revised EEO-1 form, collecting information about officials and managers in this manner will enable EEO-1 to more accurately report on the discriminatory artificial barriers (the “glass ceiling”) that hinder the advancement of minorities and white women to more senior-level positions. Figure 2 provides EEO-1 data for individual minority groups and illustrates their trends in representation at the management level, which varied by group. African-American representation increased from 5.6 percent in 1993 to 6.8 percent in 2000 but declined to 6.6 percent in 2004. Representation by Hispanics and Asians also increased, with both groups representing 4 percent or more of industry officers and managers by 2004. Representation by American Indians remained well under 1 percent of all management- level positions. EEO-1 data show that the depository and nondepository credit sectors, as well as the insurance sector, were somewhat more diverse in specific categories at the management level than the securities and holdings and trust sectors (see fig. 3). For example, in 2004, the percentage of management-level positions held by minorities ranged from a high of 19.9 percent for nondepository credit institutions (e.g., mortgage bankers and brokers) to a low of 12.4 percent for holdings and trusts (e.g., investment companies). The share of positions held by white women varied from a high of 40.8 percent in the insurance sector to a low of 27.4 percent among securities firms. The percentage of white men in management-level positions ranged from a high of 57.5 percent in the securities sector to a low of 44.0 percent in both the depository (e.g., commercial banks) and nondepository credit sectors. Consistent with the EEOC data, a 2005 SIA study we reviewed found limited diversity among key positions in the securities sector. EEO-1 data also show that the representation of minorities and whites at the management level in financial services firms generally does not vary by firm size (see fig. 4). Specifically, we did not find a material difference in the diversity of those in management-level positions among firms with 100 to 249 employees, 250 to 999 employees, and more than 1,000 employees. There were some variations across financial sectors by size. However, we note that SIA’s 2005 study of securities firms did find variation in diversity by firm size for a variety of positions within the securities sector. Officials from financial services firms and industry trade associations we contacted stated that the rapid growth of minorities as a percentage of the overall U.S. population and increased global competition have convinced their organizations that workforce diversity is a critical business strategy. Financial firm officials we spoke with said that their top leadership was committed to implementing a variety of workforce diversity programs to help enable their organizations to take advantage of the full range of available talent to fill critical positions and to maintain their firms’ competitive position. However, officials from financial services firms and trade associations also described the challenges they faced in implementing these initiatives, such as ongoing difficulties in recruiting and retaining minority candidates and in gaining commitment from employees to support diversity initiatives, especially at the middle management level. Over the past decade, the financial services firms we contacted have implemented a variety of initiatives to increase workforce diversity, including programs designed to recruit and retain minority and women candidates to fill key positions. Some bank officials said that they had developed scholarship and internship programs to encourage minority high school and college students to consider careers in banking with the goal of increasing the diversity of future applicant pools. Some firms have established formal relationships with colleges and Masters of Business Administration (MBA) programs to recruit minority students from these institutions. Some firms and trade organizations have also developed partnerships with groups that represent minority professionals, such as the National Black MBA Association and the National Society of Hispanic MBAs, as well as with local communities to recruit candidates, using events such as conferences and career fairs. Officials from other firms said that the goal of partnerships was to build long-term relationships with professional associations and communities and to increase the visibility of financial services firms among potential employees. Officials from financial services firms also said that they had developed programs to foster the retention and professional growth of minority and women employees. Specifically, these firms have encouraged the establishment of employee networks. For example, a commercial bank official told us that, since 2003, the company had established 22 different employee networks that enabled employees from various backgrounds to meet each other, share ideas, and create informal mentoring opportunities. established mentoring programs. For example, an official from another commercial bank told us that the company had a Web-based program that allowed employees of all backgrounds to connect with one another and to find potential mentors. instituted diversity training programs. Officials from financial services firms said that these training programs increase employees’ sensitivity to and awareness of workforce diversity issues and helped staff deal effectively with colleagues from different backgrounds. One commercial bank we contacted requires its managers to take a 3- to 5-day training course on dealing with a diverse workforce. The training stressed the concept of workforce diversity and provided a forum in which employees spoke about their differences through role-playing modules. The bank has also developed a diversity tool kit and certification program as part of the training. established leadership and career development programs. For example, an official from an investment bank told us that the head of the firm would meet with every minority and woman senior executive to discuss his or her career development. For lower-level individuals, the investment bank official said that the organization had created a career development committee to serve as a forum for discussions on career advancement. Officials from some financial services firms we contacted as well as industry studies noted that that financial services firms’ senior managers were involved in diversity initiatives. For example, SIA’s 2005 study on workforce diversity in the securities industry found that almost half of the 48 securities firms surveyed had full-time senior managers dedicated to diversity initiatives. According to a report from an executive membership organization, an investment bank had developed a program that involved lower-level employees from diverse backgrounds, along with their senior managers, to develop diversity initiatives. Moreover, officials from a few commercial banks that we interviewed said that the banks had established diversity “councils” of senior leaders to set the vision, strategy, and direction of diversity initiatives. The 2005 SIA study and a few of the firm officials we spoke with also suggested that some companies have instituted programs that link managers’ compensation with progress made toward promoting workforce diversity. Officials from one investment bank said that managers of each business unit reported directly to the company’s Chief Executive Officer who determined their bonuses in part based on the unit’s progress in hiring, promoting, and retaining minority and women employees. According to some officials from financial services firms, their firms have also developed performance indicators to measure progress in achieving diversity goals. These indicators include workforce representation, turnover, promotion of minority and women employees, and internal employee satisfaction survey responses. An official from a commercial bank said that the company monitored the number of job openings, the number of minority and women candidates who applied for each position, the number of such candidates who interviewed for open positions, and the number hired. In addition, a few officials from financial services firms told us that they had developed additional indicators such as promotion rates for minorities and whites and compensation equity across ranks for minorities and whites. Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investments in the resources such initiatives demanded. Financial services trade organizations from the securities, commercial banking, and insurance sectors that we contacted have been involved in promoting workforce diversity. The following are some examples: In 1996 SIA formed a “diversity committee” of senior-level executives from the securities industry to assist SIA’s member firms in developing their diversity initiatives and in their efforts to market to diverse customers. This committee has begun a number of initiatives, such as developing diversity management tool kits, conducting industry demographic and diversity management research, and holding conferences. SIA’s diversity tool kit provides step-by-step guidelines on establishing diversity initiatives, including identifying ways to recruit and retain diverse candidates, overcoming challenges, measuring the results of diversity initiatives, and creating strategies for transforming a firm’s culture. In addition, since 1999 SIA has been conducting an industry-wide diversity survey every 2 years to help its members measure their progress toward increasing workforce diversity. The survey includes aggregated data that measure the number of minority and women employees in the securities industry at various job levels and a profile of securities industry activities designed to increase workforce diversity. In 2005, SIA held its first diversity and human resources conference, which was designed so that human resources and senior-level managers could share best practices and current strategies and trends in human resource management and diversity. The American Bankers Association collaborated with the Department of Labor’s Office of Federal Contract Compliance Programs in 1997 to identify key issues that banks should consider in recruiting and hiring employees in order to create fair and equal employment opportunities. The issues include managing the application process and selecting candidates in a way that ensures the equal and consistent treatment of all job applications. The Independent Insurance Agents and Brokers of America (IIABA) established the IIABA Diversity Task Force in 2002 to promote diversity within the insurance agent community. The task force is charged with fostering a profitable independent agency force that reflects, represents, and capitalizes on the opportunities of the diverse U.S. population. Among its activities, the diversity task force is developing a database of minority insurance agents and minority-owned insurance agencies as a way to help insurance carriers seeking to expand their business with a diverse agent base and potentially reach out to urban areas and underserved markets. According to IIABA, the task force has just completed a tool kit for IIABA state associations, volunteer leadership, and staff. This step-by-step guide advises state associations on how to recruit and retain a diverse membership through their governance, products, service offerings, and association activities. In addition, IIABA participates in a program to educate high school and community college students on careers in insurance, financial services, and risk management and encourages students to pursue careers in the insurance industry. The Mortgage Bankers Association (Association) has established plans and programs to increase the diversity of its own leadership, as well as to promote diversity within the Association’s member firms in 2005. The Association plans to increase diversity within its leadership ranks by 30 percent by September 2007 and has asked member firms to recommend potential candidates. To help member firms expand the pool of qualified diverse employees in the real estate finance industry, the Association has instituted a scholarship program called “Path to Diversity,” which awards between 20 and 30 scholarships per year to minority employees and interns from member firms. Recipients can take courses at CampusMBA, the Association’s training center for real estate finance, in order to further their professional growth and development in the mortgage industry. Although financial services firms and trade organizations we contacted have launched diversity initiatives, they cited a variety of challenges that may have limited their success. First, the officials said that the industry faces ongoing challenges in recruiting minority and women candidates even though firms may have established scholarship and internship programs and partnered with professional organizations. According to officials responsible for promoting workforce diversity from several firms, the industry lacks a critical mass of minority and women employees, especially at the senior levels, to serve as role models to attract other minorities to the industry. Officials from an investment bank and a commercial bank also told us that the supply (or “pipeline”) of minority and women candidates in line for senior or management-level positions was limited in some geographic areas and that recruiting a diverse talent pool takes time and effort. Officials from an investment bank said that their firm typically required a high degree of specialization in finance for key positions. An official from another investment bank noted that minority candidates with these skills were very much in demand and usually receive multiple job offers. Available data on minorities enrolled in and graduated from MBA programs provide some support for the contention that there is a limited external pool that could feed the “pipeline” for some management-level positions within the financial services industry, as well as other industries. According to the Department of Labor, many top executives from all industries, including the financial services industry, have a bachelor’s degree or higher in business administration. MBA degrees are also typically required for many management development programs, according to an official from a commercial bank and an official from a foundation that provides scholarships to minority MBA students. We obtained data from the Association to Advance Collegiate Schools of Business (AACSB) on the percentage of students enrolled in MBA degree programs in accredited AACSB schools in the United States from year 2000 to 2004. As shown in table 1, minorities accounted for 19 percent of all students enrolled in accredited MBA programs in 2000 and 23 percent in 2004. African-American and Hispanic enrollment in MBA programs was generally stable during that period, and both groups accounted for 6 and 5 percent of enrollment, respectively, in 2004. Asian representation increased from 9 percent in 2000 to 11 percent in 2004. Other data indicate that MBA degrees awarded may be lower than the MBA enrollment data reported by AACSB. For example, Graduate Management Admission Council® (GMAC®) data indicate that minorities in its survey sample accounted for 16 percent of MBA graduates in 2004 versus 23 percent minority enrollment during the same year as reported by AACSB. Because financial services firms compete with one another, as well as with companies from other industries to recruit minority MBA graduates, their capacity to increase diversity at the management level may be limited. Other evidence suggests that the financial services industry may not be fully leveraging its “internal” pipeline of minority and women employees for management-level positions. As shown in figure 5, there are job categories within the financial services industry that generally have more overall workforce diversity than the “officials and managers” category, particularly among minorities. For example, minorities held 22 percent of professional positions as compared with 15 percent of “officials and managers” positions in 2004. See appendix II for more information on the specific number of employees within other job categories, as well as more specific breakouts of various minority groups by sector. According to a recent EEOC report, which used 2003 EEO-1 data, the professional category represented a likely pipeline of internal candidates for management-level positions within the industry. Compared with white males, the EEOC study found that the chances of minorities and women (white and minority combined) advancing from the professional category into management-level positions were low. The study also found that the chances of Asians (women and men) advancing into management-level positions from the professional category were particularly low. Although EEOC said there are limitations to its analysis, the agency suggests that the findings could be used as a preliminary screening device designed to detect potential disparities in management-level opportunities for minorities and women. Following are descriptions of the job categories in EEO-1 data from EEOC: (1) “officials and managers”: occupations requiring administrative and management personnel who set broad policies, exercise overall responsibility for execution of these policies, and direct individual departments or special phases of a firm’s operations; (2) “professionals”: occupations requiring either college graduation or experience of such kind and amount as to provide a comparable background; (3) “technicians”: occupations requiring a combination of basic scientific knowledge and manual skill that can be obtained through 2 years of post high school education; (4) “sales workers”: occupations engaging wholly or primarily in direct selling; (5) “office and clerical”: includes all clerical-type work regardless of level of difficulty, where the activities are predominantly nonmanual; and (6) the category “other” includes craft workers, operatives, laborers, and service workers. Many officials from financial services firms, industry trade groups, and associations that represent minority professionals agreed that retaining minority and women employees represented one of the biggest challenges to promoting workforce diversity. The officials said that one reason minority and women employees may leave their positions after a short period is that the industry, as described previously, lacks a critical mass of minority women and men, particularly in senior-level positions, to serve as role models. Without a critical mass, the officials said that minority or women employees may lack the personal connections and access to informal networks that are often necessary to navigate an organization’s culture and advance their careers. For example, an official from a commercial bank we contacted said he learned from staff interviews that African-Americans believed that they were not considered for promotion as often as others partly because they were excluded from informal employee networks. While firms may have instituted programs to involve managers in diversity initiatives, some industry officials said that achieving commitment, or “buy-in,” can still pose challenges. Other officials said that achieving the commitment of middle managers is particularly important because these managers are often responsible for implementing key aspects of the diversity initiatives, as well as explaining them to their staffs. However, the officials said that middle managers may be focused on other aspects of their responsibilities, such as meeting financial performance targets, rather than the importance of implementing the organization’s diversity initiatives. Additionally, the officials said that implementing diversity initiatives represents a considerable cultural and organizational change for many middle managers and employees at all levels. An official from an investment bank told us that the bank has been reaching out to middle managers who oversee minority and woman employees by, for example, instituting an “inclusive manager program.” According to the official, the program helps managers examine subtle inequities and different managerial and working styles that may affect their relationships with minority and women employees. Studies and reports, as well as interviews we conducted, suggest that minority- and women-owned businesses have faced challenges obtaining capital (primarily bank credit) in conventional financial markets for several business reasons, such as the concentration of these businesses in the service sector and relative lack of a credit history. Other studies suggest that lenders may discriminate, particularly against minority-owned businesses. However, assessing lending discrimination against minority- owned businesses may be complicated by limited data availability. Available research also suggests that factors, including business characteristics, introduce challenges for both minority- and women-owned businesses in obtaining access to equity capital. However, some financial institutions, primarily commercial banks, have recently developed strategies to market their loan products to minority- and women-owned businesses or are offering technical assistance to them. Reports issued by the MBDA, SBA, and academic researchers, as well as interviews we conducted with commercial banks, minority-owned banks, and trade groups representing minority- and women-owned businesses suggest that minority- and women-owned businesses may face challenges in obtaining commercial bank credit. The reports and interviews typically cite several business characteristics shared by both minority-owned firms and, in most cases, women-owned firms that may compromise their ability to obtain bank credit as follows: First, recent MBDA reports found that many minority-owned businesses in the United States are concentrated in retail and service industries, which have relatively low average annual capital expenditures for equipment. Low capital expenditures are an attractive feature for start-up businesses, but with limited assets to pledge as collateral against loans, these businesses often have difficulty obtaining financing. According to the U.S. Census Bureau’s 2002 Survey of Business Owners, approximately 61 percent of minority-owned businesses and approximately 55 percent of women-owned firms operate in the service sectors as compared to about 52 percent of all U.S. firms. Second, the Census Bureau’s 2002 Survey of Business Owners indicated that many minority- and women-owned businesses were start-ups or relatively new and, therefore, might not have a history of sound financial performance to present when applying for credit. Some officials from a private research organization and a trade group official we contacted said that banks are reluctant to lend to start-up businesses because of the costs involved in assessing the prospects for such businesses and in monitoring their performance over time. Third, the relatively small size and lack of technical experience of some minority-owned businesses may affect their ability to obtain bank credit. For example, an MDBA report stated that minority businesses often need extensive mentoring and technical assistance such as help developing business plans in addition to financing. Several other studies suggest that discrimination may also be a reason that minority-owned businesses face challenges obtaining commercial loans. For example, a 2005 SBA report on the small business economy summarized previous studies by researchers reporting on lending discrimination. These previous studies found that minority-owned businesses had a higher probability of having their loans denied and would likely pay higher interest rates than white-owned businesses, even after controlling for differences in creditworthiness and other factors. For example, a study found that given comparable loan applications—by African-American and Hispanic-owned firms and white-owned firms—the applications by the African-American and Hispanic-owned firms were more likely to be denied. Another study found that minorities had higher denial rates even after controlling for personal net worth and homeownership. The SBA report concludes that lending discrimination is likely to discourage would-be minority entrepreneurs and reduce the longevity of minority-owned businesses. Another 2005 report issued by SBA also found that minority-owned businesses face some restrictions in access to credit. This study investigated possible restricted access to credit for minority- and women- owned businesses by focusing on two types of credit—“relationship loans” (lines of credit) and “transaction loans” (commercial mortgages, equipment loans, and other loans) from commercial banks and nonbanks, such as finance companies. The researchers found that minority business owners were more likely to have transaction loans from nonbanks and less likely to have bank loans of any kind. The researchers also found that African-American and Hispanic business owners have a greater probability of having either type of loan denied than white male owners. The researchers did not find evidence suggesting that women or Asian business owners faced loan denial probabilities different from those of firms led by white, male-owned firms. Although studies have found potential lender discrimination against minority-owned businesses, assessing such discrimination may be complicated by limited data availability. The Federal Reserve’s Regulation B, which implements the Equal Credit Opportunity Act, prohibits financial institutions from requiring information on race and gender from applicants for nonmortgage credit products. Although the regulation was implemented to prevent the information from being used to discriminate against underserved groups, some federal financial regulators have stated that removing the prohibition would allow them to better monitor and enforce laws prohibiting discrimination in lending. We note that under the Home Mortgage Disclosure Act (HMDA), lenders are required to collect and report data on racial and gender characteristics of applicants for mortgage loans. Researchers have used HMDA data to assess potential mortgage lending discrimination by financial institutions. In contrast, the studies we reviewed on lending discrimination against minority and small business tend to rely on surveys of small businesses by the Federal Reserve or the Census rather than on lending data obtained directly from financial institutions. According to available research, many minority- and women-owned businesses face challenges in raising equity capital—such as, from venture capital firms. For example, one study estimated that only $2 billion of the $95 billion available in the private equity market in 1999 was managed by companies that focused on supplying capital to entrepreneurs from traditionally underserved markets, such as minority-owned businesses. Moreover, according to a study by a private research organization, in 2003 only 4 percent of women-owned businesses with $1 million or more in revenue had been funded through private equity capital as compared with 11 percent of male-owned businesses with revenues of $1 million or more. According to studies and reports by private research organizations, some of the same types of business characteristics that may affect the ability of many minority- and women-owned businesses to obtain bank credit also limit their capacity to raise equity capital. For example, industry reports and industry representatives that we contacted state that venture capitalists place a high priority on the management and technical skills companies; whereas some minority-owned businesses may lack a proven track record of such expertise. Although venture capital firms may not have traditionally invested in minority-owned businesses, a recent study suggests that firms that do focus on such entities can earn rates of return comparable to those earned on mainstream private equity investments. This study, funded by a private foundation, found that venture capital funds that specialize in investing in minority-owned businesses were relatively profitable compared with a private equity performance index. According to the study, the venture capital funds that specialized in minority-owned businesses invested in a more diverse portfolio of businesses than the typical venture capital fund, which typically focuses on high-tech companies. The study found that investing in broad portfolios helped mitigate the losses associated with the downturn in the high-tech sector for firms that focused on minority-owned businesses. While minority- and women-owned businesses may have traditionally faced challenges in obtaining capital, as noted earlier, Census data indicate that such businesses are forming rapidly. Officials from some financial institutions we contacted, primarily large commercial banks, told us that they are reaching out to minority- and women-owned businesses. Some commercial banks are marketing their financial products to minority- and women-owned businesses by, for example, printing financial services brochures in various languages and assigning senior executives with diverse backgrounds to serve as the spokespersons for the institutions efforts to reach out to targeted groups (e.g., a bank may designate an Asian executive as the point person for Asian communities). However, officials at a bank and a trade organization told us that the loan products marketed to minority- and women-owned businesses did not differ from those marketed to other businesses and that underwriting standards had not changed. Bank officials also said that their companies had established partnerships with trade and community organizations for minorities and women to reach out to their businesses. Partnering allows the banks to locate minority- and women-owned businesses and gather information about specific groups of business owners. Bank officials said that such partnerships had been an effective means of increasing their business with these target groups. Finally, officials from some banks said that they educate potential business clients by providing technical assistance through financial workshops and seminars on various issues such as developing business plans and obtaining commercial bank loans. Other bank officials said that their staffs work with individual minority- or women-owned businesses to provide technical assistance. Officials from banks with strategies to market to minority- and women- owned businesses said that they faced some challenges in implementing such programs. Many of the bank officials told us that it was time- consuming to train their staff to reach out to minority- and women-owned businesses and provide technical assistance to these potential business customers. In addition, an official from a bank said that Regulation B limited the bank’s ability to measure the success of its outreach efforts. The official said that because of Regulation B the bank could only estimate the success of its efforts using estimates of the number of loans it made to minority- and women-owned businesses. We requested comments on a draft of this report from the Chair, U.S. Equal Employment Opportunity Commission (EEOC). We received technical comments from EEOC and incorporated their comments into this report as appropriate. We also requested comments on selected excerpts of a draft of this report from 12 industry trade associations, federal agencies, and organizations that examine access to capital issues. We received technical comments from 4 of the 12 associations, agencies, and organizations and incorporated their comments into this report as appropriate. The remaining eight either informed us that they had “no comments” or did not respond to our request. 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 Senate Committee on Banking, Housing, and Urban Affairs. We also will send copies to the Chair of EEOC, the Administrator of SBA, and the Secretary of the Department of Commerce, among others, and 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 about this report, please contact me at 202-512-8678 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix IV. The objectives of our report were to discuss (1) what the available data show regarding diversity at the management level in the financial services industry, from 1993 through 2004; (2) the types of initiatives that the financial services industry and related organizations have taken to promote workforce diversity and the challenges involved; and (3) the ability of minority and women-owned businesses to obtain access to capital in financial markets and initiatives financial institutions have recently taken to make capital available to these businesses. To address objective one, we requested Employer Information Reports (EEO-1) data from the Equal Employment Opportunities Commission (EEOC) for the financial services industry. The EEO-1 data, which is reported annually generally by firms with 100 or more employees, provides information on race/ethnicity and gender for various occupations, within various industries, including financial services. We used the racial/ethnic groups specified by EEOC; whites, not of Hispanic origin (whites); Asians or Pacific Islanders (Asians); Blacks, not of Hispanic origin (African- Americans); Hispanics or Latinos (Hispanics); and American Indians or Alaskan Natives (American Indians) for our analysis. The EEO-1 occupations are officials and managers, professional, technicians, sales workers, clerical workers, and others. The other category includes laborers, craft workers, operatives, and service workers. We defined the financial services industry to include the following five sectors: depository credit institutions (including commercial banks), holdings and trusts (including investment companies), non-depository credit institutions (such as mortgage bankers), securities firms, and insurance (carriers and agents). We also requested and analyzed EEO-1 data for the accounting industry. We chose to use the EEO-1 database because it is was designed to provide information on representation by a variety of groups within a range of occupations and industries, covered many employers, and had been collected in a standardized fashion for many years. Although the EEO-1 data generally do not capture information from small businesses with less than 100 employees, we believe, due to their annual mandatory reporting, they allow us to characterize the financial services industry of firms with 100 or more employees. We also corroborated the EEO-1 data with other available studies, particularly a 2005 study by the Securities Industry Association on diversity within the securities sector. We did consider other sources of data besides EEO-1, but chose not to use them for a variety of reasons including their being more limited or less current. We requested and analyzed the EEO-1 data, focusing on the “officials and managers” category, for the years 1993, 1998, 2000, and 2004 for financial services firms having 100 or more employees. We compared that data from the selected years to determine how the composition of management-level staff had changed since 1993. We also analyzed the data based on the number of employees in the firm or firm size. The four firm size categories we used were 100 or more employees, 100-249 employees, 250-999 employees, and 1,000 or more employees. We also requested EEO-1 data for the accounting industry for 2004, and therefore did not perform a trend analysis. The scope of our work did not include developing appropriate benchmarks to assess the extent of workforce diversity within the financial services industry. EEOC collects EEO-1 data from companies in a manner that allowed us to specify our data request and analysis by financial sector (e.g., commercial banking or securities). EEOC assigns each firm a code based on its primary activity (referred to as the North American Industry Classification System or the Standard Industrial Classification ). For example, a commercial bank will have a specific code denoting commercial banking, whereas a securities firm would have its own securities code. In addition, EEOC assigns codes to companies and their subsidiaries based on their primary line of business. For example, a commercial bank with an insurance subsidiary would have a separate code for that subsidiary. By requesting the EEO-1 data by the relevant codes, we were able to separate the different financial services businesses within a firm and then aggregate the data by sector. Although the NAICS replaced the SIC in 1997, EEOC staff are to assign both codes to each firm that existed prior to 2002 to ensure consistency. We conducted a limited analysis to assess the reliability of the EEO-1 data. To do so, we interviewed EEOC officials regarding how the data are collected and verified as well as to identify potential data limitations. EEOC has conducted a series of data reliability analyses for EEO-1 data to verify the consistency of the data over time. For example, EEOC reviewed the 2003 EEO-1 data for its report on diversity in the financial services industry. As part of this review, EEOC deleted 81 of the 13,000 establishments because the data for the deleted establishments were not consistent year to year. The EEOC staff do not verify the EEO-1 data, which are self-reported by firms, but they do review the trends of the data submitted. For example, EEOC staff look for major fluctuations in job classifications within an industry. On the basis of this analysis, we concluded that the EEO-1 data are sufficiently reliable for our purposes. To address objective two, we interviewed a range of financial services firms, including commercial banks and securities firms. We also interviewed representatives from a large accounting firm to discuss workforce diversity in the accounting industry. We chose these firms for a variety of reasons including whether they have ever received public recognition of their diversity programs or on the basis of recommendations from industry officials. We also interviewed representatives from industry trade organizations such as the American Bankers Association, the Securities Industry Association, the Independent Insurance Agents and Brokers of America, the American Institute of Certified Public Accountants, and Catalyst, which is a private research firm. We reviewed the trade organizations’ available studies and reports to document the state of diversity within the different sectors of the financial services industry. In addition, we reviewed publicly available data on firms’ programs by searching their Web sites. We also interviewed representatives of federal agencies such as the Bureau of Labor Statistics of the Department of Labor, the Minority Business Development Agency of the Department of Commerce, the Small Business Administration, and federal bank regulators. Additionally, we collected and analyzed demographic data on enrollment in accredited Masters of Business Administration (MBA) programs from Association to Advance Collegiate Schools of Business and MBA graduation data from the Graduate Management Admissions Council®. To address objective three, we reviewed 20 available studies and reports from federal agencies, such as the Small Business Administration and the Minority Business Development Agency, and academic studies on the ability of minority- and women-owned businesses to access credit. We also interviewed officials from banks, investment firms and private equity/venture capital firms to discuss their initiatives to provide capital to minority- and women-owned businesses. Moreover, we interviewed officials from organizations that represent minority- and women-owned businesses such as the U.S. Hispanic Chamber of Commerce, the Pan Asian American Chamber of Commerce, National Black Chamber of Commerce, and the National Association of Women Business Owners. In addition, we interviewed officials from organizations that examine access to capital issues, such as the Milken Institute and the Kauffman Foundation. We conducted our work from July 2005 to May 2006 in Washington, D.C., and New York City and in accordance with generally accepted government auditing standards. This appendix provides Employer Information Report (EEO-1) data on the number of employees within the financial services industry by position (see fig. 6) and more specific breakouts of the various racial/ethnic groups by position (see fig. 7). This appendix discusses workforce diversity of management-level positions in the accounting industry for 2004 as depicted by Employer Information Report (EEO-1) data. Additionally, it describes the findings of a report by the American Institute of Certified Public Accountants (AICPA) that assessed diversity within the accounting industry in a broad range of positions. Finally, the appendix summarizes efforts by AICPA and a large accounting firm to increase diversity in key positions. According to the 2004 EEO-1 data, minorities held 13.5 percent (5.9 percent for minority women and 7.7 percent for minority men) of all “officials and managers” positions, white women held 32.4 percent while white men held 54.1 percent of all official and manager positions in the accounting industry (see fig. 8). Contrary to the financial services sector where diversity among firms generally did not vary by firm size, EEO-1 data also show that larger accounting firms are in general more diverse than smaller firms. For example, minorities accounted for 17.8 percent of all officials and managers in accounting firms with 1,000 or more employees. For firms with 100 to 249 employees, minority representation for officials and managers accounted for 10.1 percent. Within the minority category in the accounting industry, EEO-1 2004 data show that Asians held 7.3 percent of all management-level positions, which is more than the representation of African-Americans (3.0 percent) and Hispanics (3.0 percent) combined (see fig. 9). AICPA’s 2005 demographic study showed that, in 2004, minorities represented 10 percent of all professional staff, 8 percent of all certified public accountants (CPA), and 5 percent of all partners/owners employed by CPA firms. Correspondingly, the representation of whites among professional staff, CPAs, and the partner/owner level at accounting firms were all at 89 percent or above (see table 2). In addition, consistent to the 2004 EEO-1 data for the accounting industry, the AICPA study found that the largest CPA firms were, in general, the most ethnically and racially diverse (see table 3). According to officials from AICPA and a large accounting firm we spoke with, one reason for the lack of diversity in key positions in the industry is that relatively few racial/ethnic minorities take the CPA exam and thus relatively few minorities are CPAs. According to the 2004 congressional testimony of an accounting professor, passing the CPA exam is critical for achieving senior management-level positions in the accounting industry. According to officials we spoke with from AICPA and an accounting firm, similar to the financial services industry, the accounting industry had also initiated programs to promote the diversity of its workforce. An official from the large accounting firm we spoke with told us that his firm’s top management is committed to workforce diversity and has implemented a minority leadership development program, which ensures that minorities and women become eligible for and are recommended for progressively more senior positions. As part of the commitment to workforce diversity, the firm also has a mentoring program, which pairs current partners with senior management-level minority and women staff to help them achieve partnership status. In addition, the firm also requires middle- and high- level managers to undergo diversity training to encourage an open dialogue around racial-ethnic and gender issues. An AICPA official said the organization formed a minority initiatives committee to promote workforce diversity with a number of initiatives to increase the number of minority accounting degree holders, such as scholarships for minority accounting students and accounting faculty development programs. AICPA also formed partnerships with several national minority accounting organizations such as the National Association of Black Accountants and the Association of Latino Professionals in Finance and Accounting to develop new programs to foster diversity within the workplace and the community. In addition to the individual named above, Wesley M. Phillips, Assistant Director; Emily Chalmers; William Chatlos; Kimberly Cutright; Simin Ho; Marc Molino; Robert Pollard; LaSonya Roberts; and Bethany Widick made key contributions to this report. | During a hearing in 2004 on the financial services industry, congressional members and witnesses expressed concern about the industry's lack of workforce diversity, particularly in key management-level positions. Witnesses stated that financial services firms (e.g., banks and securities firms) had not made sufficient progress in recruiting and promoting minority and women candidates for management-level positions. Concerns were also raised about the ability of minority-owned businesses to raise capital (i.e., debt or equity capital). GAO was asked to provide an overview on the status of diversity in the financial services industry. This report discusses (1) what available data show regarding diversity at the management level in the financial services industry from 1993 through 2004, (2) the types of initiatives that financial firms and related organizations have taken to promote workforce diversity and the challenges involved, and (3) the ability of minority- and women-owned businesses to obtain access to capital in financial markets and initiatives financial institutions have taken to make capital available to these businesses. Between 1993 through 2004, overall diversity at the management level in the financial services industry did not change substantially, but increases in representation varied by racial/ethnic minority group. During that period, Equal Employment Opportunity Commission (EEOC) data show that management-level representation by minority men and women increased from 11.1 percent to 15.5 percent. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 percent to 0.3 percent. The EEOC data also show that representation by white women remained constant at slightly more than one-third whereas representation by white men declined from 52.2 percent to 47.2 percent. Financial services firms and trade groups GAO contacted stated that they have initiated programs to increase workforce diversity, including in management-level positions, but these initiatives face challenges. The programs include developing scholarships and internships, establishing programs to foster employee retention and development, and linking managers' compensation with their performance in promoting a diverse workforce. However, firm officials said that they still face challenges in recruiting and retaining minority candidates. Some officials also said that gaining employees' "buy-in" to diversity programs was a challenge, particularly among middle managers who were often responsible for implementing key aspects of such programs. Research reports suggest that minority- and women-owned businesses have generally faced difficulties in obtaining access to capital for several reasons such as these businesses may be concentrated in service industries and lack assets to pledge as collateral. Other studies suggest that lenders may discriminate in providing credit, but assessing lending discrimination may be complicated by limited data availability. However, some financial institutions, primarily commercial banks, said that they have developed strategies to serve minority- and women-owned businesses. These strategies include marketing existing financial products specifically to minority and women business owners. |
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Title II of the Social Security Act, as amended, establishes the Old-Age, Survivors, and Disability Insurance (OASDI) program, which is generally known as Social Security. The program provides cash benefits to retired and disabled workers and their eligible dependents and survivors. Congress designed Social Security benefits with an implicit focus on replacing lost wages. However, Social Security is not meant to be the sole source of retirement income; rather it forms a foundation for individuals to build upon. The program is financed on a modified pay-as-you-go basis in which payroll tax contributions of those currently working are largely transferred to current beneficiaries. Current beneficiaries include insured workers who are entitled to retirement or disability benefits, and their eligible dependents, as well as eligible survivors of deceased insured workers. The program’s benefit structure is progressive, that is, it provides greater insurance protection relative to contributions for earners with lower wages than for high-wage earners. Workers qualify for benefits by earning Social Security credits when they work and pay Social Security taxes; they and their employers pay payroll taxes on those earnings. In 2005, approximately 159 million people had earnings covered by Social Security, and 48 million people received approximately $521 billion in OASDI benefits. Currently, the Social Security program collects more in taxes than it pays out in benefits. However, because of changing demographics, this situation will reverse itself, with the annual cash surplus beginning to decline in 2009 and turning negative in 2017. In addition, all of the accumulated Treasury obligations held by the trust funds are expected to be exhausted by 2040. Social Security’s long-term financing shortfall stems primarily from the fact that people are living longer and labor force growth has slowed. As a result, the number of workers paying into the system for each beneficiary has been falling and is projected to decline from 3.3 today to about 2 by 2040. The projected long-term insolvency of the OASDI program necessitates system reform to restore its long-term solvency and assure its sustainability. Restoring solvency and assuring sustainability for the long term requires that either Social Security gets additional income (revenue increases), reduces costs (benefit reductions), or undertakes some combination of the two. 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 goals of individual equity (rates of return on individual contributions) and income adequacy (level and certainty of monthly benefits); and 3. how readily such changes could be implemented, administered, and explained to the public. Moreover, reform proposals should be evaluated as packages that strike a balance among the individual elements of the proposal and the interactions among these elements. The overall evaluation of any particular reform proposal depends on the weight individual policy makers place on each of the above criteria. Changing the indexing used by the OASDI program could be used to increase income or reduce costs. Indexing provides a form of regular adjustment of revenues or benefits that is pegged to a particular economic, demographic, or actuarial variable. An advantage of such indexing approaches is that they take some of the “politics” out of the system, allowing the system to move toward some agreed-upon objective; they may also be administratively simple. However, this “automatic pilot” aspect of indexing poses a challenge, as it may make policy makers hesitant to enact changes, even when problems arise. While Social Security did not use automatic indexing initially, it is now a key feature of the program’s design, as well as a central element of many reform proposals. Under the current program, benefits for new beneficiaries are computed using wage indexing, benefits for existing beneficiaries are adjusted using price indexing, and on the revenue side, the cap on the amount of earnings subject to the payroll tax is also adjusted using wage indexing. Reform proposals have included provisions for modifying each of these indexing features. Before the 1970s, the Social Security program did not use indexing to adjust benefits or taxes automatically. For both new and existing beneficiaries, benefit rates increased only when Congress voted to raise them. Benefit levels, when adjusted for inflation, fell and then jumped up with ad hoc increases, and these fluctuations were dramatic at times. Similarly, Congress made only ad hoc changes to the tax rate and the cap on the amount of workers’ earnings that were subject to the payroll tax, which is also known as the maximum taxable earnings level. Adjusted for inflation, the maximum taxable earnings level also fluctuated dramatically, and as a result, the proportion of all wages subject to the payroll tax also fluctuated. (See app. II for more detail.) For the first time, the 1972 amendments provided for automatic indexing. They provided for automatically increasing the maximum taxable earnings level based on increases in average earnings, and this approach is still in use today. However, the 1972 amendments provided an indexing approach for benefits that became widely viewed as flawed. In particular, the indexing approach in the 1972 amendments resulted in (1) a “double- indexing” of benefits to inflation for new beneficiaries though not for existing ones; (2) a form of “bracket creep” based on the structure of the benefit formula that slowed benefit growth as earnings increased over time, which offset the double indexing to some degree; and (3) instability of program costs that was driven by the interaction of price and wage growth in benefit calculations. (See app. II for more detail.) Within a few years, problems with the 1972 amendments became apparent. Benefits were growing far faster than anticipated, especially since wage and price growth varied dramatically from previous historical experience. Addressing the instability of this indexing approach became a focus of policy makers’ efforts to come up with a new approach. As a 1977 paper on the problem noted, “Clearly, it is a system that needs to be brought under greater control, so that the behavior of retirement benefits over time will stop reflecting the chance interaction of certain economic variables.” The 1977 amendments instituted a new approach to indexing benefits that remains in use today. The experience with the 1972 amendments and double indexing made clear the need to index benefits differently for new and existing beneficiaries, which was referred to as “decoupling” benefits. Indexing now applies to several distinct steps of the benefit computation process, including (1) indexing lifetime earnings for each worker to wage growth, (2) indexing the benefit formula for new beneficiaries to wage growth, and (3) indexing benefits for existing beneficiaries to price inflation. Under this approach, benefit calculations for new beneficiaries are indexed differently than for existing beneficiaries, and earnings replacement rates have been fairly stable. The cap on taxable earnings is still indexed to wage growth as specified by the 1972 amendments. Social Security benefits are designed to partially replace earnings that workers lose when they retire, become disabled, or die. As a result, the first step of the benefit formula calculates a worker’s average indexed monthly earnings (AIME), which is based on the worker’s lifetime history of earnings covered by Social Security taxes. The formula adjusts these lifetime earnings by indexing them to changes in average wages. Indexing the earnings to changes in wage levels ensures that the same relative value is accorded to each year’s earnings, no matter when they were earned. For example, consider a worker who earned $5,000 in 1965 and $40,000 in 2000. The worker’s earnings increased by eight times, but much of that increase reflected changes in the average wage level in the economy, which increased by about seven times (690 percent) over the same period. The growth in average wages in turn partially reflects price inflation; however, wages may grow faster or slower than prices in any given year. Indexed to reflect wage growth, the $5,000 would become roughly $35,000, giving it greater weight in computing average earnings over time and making it more comparable to 2000 wage levels. Once the AIME is determined, it is applied to the formula used to calculate the worker’s primary insurance amount (PIA). This formula applies different earnings replacement factors to different portions of the worker’s average earnings. The different replacement factors make the formula progressive, meaning that the formula replaces a larger portion of earnings for lower earners than for higher earners. For workers who become eligible for benefits in 2006, the PIA equals 90 percent of the first $656 dollars of AIME plus 32 percent of the next $3,299 dollars of AIME plus 15 percent of AIME above $3,955. For workers who do not collect benefits until after the year they first become eligible, the PIA is adjusted to reflect any COLAs since they became eligible. The PIA is used in turn to determine benefits for new beneficiaries and all types of benefits payable on the basis of an individual’s earnings record. To determine the actual monthly benefit, adjustments are made reflecting various other provisions, such as those relating to early or delayed retirement, type of beneficiary, and maximum family benefit amounts. Figure 1 illustrates how the PIA formula works. The dollar values in the formula that indicate where the different replacement factors apply are called bendpoints. These bendpoints ($656 and $3,955) are indexed to the change in average wages, while the replacement factors of 90, 32, and 15 percent are held constant. In contrast, under the 1972 amendments, the bendpoints were held constant and the replacement factors were indexed. (See app. II.) Indexing the bendpoints and holding replacement factors constant prevents bracket creep and keeps the resulting earnings replacement rates relatively level across birth years. Indexing the benefit formula in this way helps benefits for new retirees keep pace with wage growth, which reflects increases in the standard of living. Figure 2, which shows earnings replacement rates for successive groups of illustrative workers, illustrates the program’s history with indexing initial benefits. Replacement rates declined before the first benefit increases were enacted in 1950 and then rose sharply as a result of those increases. From 1950 until the early 1970s, replacement rates fluctuated noticeably more from year to year than over other periods; this pattern reflects the ad hoc nature of benefit increases over that period. Between 1974 and 1979, replacement rates grew rapidly for new beneficiaries, reflecting the double indexing of the 1972 amendments. The 1977 amendments corrected for the unintended growth in benefits from double indexing, and replacement rates declined rapidly as a result. This pattern of increasing and then declining benefit levels is known as the notch. Finally, replacement rates have been considerably more stable since the 1977 amendments took effect, a fact that has helped to stabilize program costs. (See app. II.) After initial benefits have been set for the first year of entitlement, benefits in subsequent years increase with a COLA designed to keep pace with inflation and thereby help to maintain the purchasing power of those benefits. The COLA is based on the consumer price index (CPI), in contrast to the indexing of lifetime earnings and initial benefits, which are based on the national average wage index. The cap on taxable earnings increases each year to keep pace with changes in average wages. As a result, in combination with a constant tax rate, total program revenues tend to keep pace with wage growth and therefore also with benefits to some degree. In 2006, the cap is set at $94,200. As the distribution of earnings in the economy changes, the percentage of total earnings that fall below the cap can also change. (See app. II.) Table 1 summarizes the various indexing and automatic adjustment approaches that affect most workers and beneficiaries under the current program. Various reform proposals have suggested changes to most of the indexing features of the current Social Security system. Some proposals would use alternative indexes for initial benefits in order to slow their growth. Other proposals would take the same approach but would limit benefit reductions on workers with lower earnings. Some propose modifying the COLA in the belief that the CPI overstates the rate of inflation. Still others propose indexing revenue provisions in new ways. Changes to the indexing of Social Security’s initial benefits could be implemented by changing the indexing of lifetime earnings or the PIA formula’s bendpoints. However, they could also be implemented by adjusting the PIA formula’s replacement factors, even though these factors are not now indexed. Under this approach, which is used in this report, the replacement factors are typically multiplied by a number that reflects the index being used. The replacement factors would be adjusted for each year in which benefits start, beginning with some future year. So such changes would not affect current beneficiaries. Indexing the replacement factors would reduce benefits at the same proportional rate across income levels, while changing the indexing of lifetime earnings or the bendpoints could alter the distribution of benefits across income levels. Recent reform proposals, as described by the Social Security Administration’s (SSA) Office of the Chief Actuary in its evaluations, generally implement indexing changes as adjustments to the PIA formula’s replacement factors. Two indexing approaches—to reflect changes in the CPI or increasing longevity—have been proposed as alternatives to the average wage index for calculating initial benefits. Proponents of using CPI indexing for initial benefit calculations generally offer the rationale that wage indexing has never been fiscally sustainable and CPI indexing would slow the growth of benefits to an affordable level while maintaining the purchasing power of benefits. They say that maintaining the purchasing power of benefits should be the program’s goal, as opposed to maintaining relative standards of living across age groups (that is, earnings replacement rates), which the current benefit formula accomplishes. Proponents of longevity indexing offer the rationale that increasing longevity is a key reason for the system’s long-term insolvency. Since people are living longer on average, and are expected to continue to do so in the future, they will therefore collect benefits for more years on average. Using an index that reflects changes in life expectancy would maintain relatively comparable levels of lifetime benefits across birth years and thereby promote intergenerational equity. Also, longevity indexing could encourage people to work longer. Some indexing proposals accept the need to slow the growth of initial benefits in general but seek to protect benefit levels for the lowest earnings levels, consistent with the program’s goal of helping ensure income adequacy. Such proposals would modify how a new index would be applied to the formula for initial benefits so that the formula is still wage-indexed below a certain earnings level. As a result, they would maintain benefits promised under the current program for those with earnings below that level such as, for example, those in the bottom 30 percent of the earnings distribution. Such an approach has been called progressive price indexing. A few proposals would alter the COLA used to adjust benefits for current retirees. Some proposals respond to methodological concerns that have been raised about how the CPI is calculated and would adjust the COLA in the interest of accuracy. In general, such changes would slightly slow the growth of the program’s benefit costs. However, other proposals call for creating a new CPI for older Americans (CPI-E) specifically tailored to reflect how inflation affects the elderly population and using the CPI-E for computing Social Security’s COLA. Depending on its construction, such a change could increase the program’s benefit costs. Some proposals would index revenues in new ways. Some would apply a longevity index to payroll tax rates, again focused on the fact that increasing life expectancy is a primary source of the program’s insolvency. Proponents of indexing tax rates feel that benefits are already fairly modest, so the adjustment for longevity should not come entirely from benefit reductions. Other proposals would institute other types of automatic revenue adjustments. Some would raise the maximum taxable earnings level gradually until some percentage of total earnings are covered and then maintain that percentage into the future. Implicitly, such proposals reflect a desire to hold constant the percentage of earnings subject to the payroll tax. Still another proposal would provide for automatically increasing the tax rate when the ratio of trust fund assets to annual program costs is projected to fall. Table 2 summarizes the various indexing and automatic adjustment approaches that reform proposals have contained. Faced with adverse demographic trends, many countries have enacted reforms in recent years to improve the long-term fiscal sustainability of their national pension systems. New indexing methods now appear in a variety of forms around the world in earnings-related national pension systems. In general, they seek to contain pension costs associated with population aging. Some indexing methods affect both current and future retirees. A number of reforms have focused on methods that primarily adjust benefits rather than taxes to address the fiscal solvency of national pension systems. There are two main reasons for this. First, contribution rates abroad are generally high already, making it politically difficult to raise them much further. For example, while in the United States total employer-employee Social Security contribution rates are 12.4 percent of taxable earnings, they are above 16 percent in Belgium and France, more than 18 percent in Sweden and Germany, above 25 percent in the Netherlands and the Czech Republic, and over 30 percent in Italy. In fact, some countries have stipulated a ceiling on employee contribution rates in order to reassure the young—or current contributors—that the burden would be shared among generations. For example, Japan settled, with the 2004 Reform Law, its pension premium rates for the next 100 years with an increase of 0.35 percent per year until 2017, at which time premium levels are to be fixed at 18.3 percent of covered wages. Similarly, Canada chose to raise its combined employer-employee contribution rate more quickly than previously scheduled, from 5.6 percent to 9.9 percent between 1997 and 2003, and maintain it there until the end of the 75-year projection period. This increase is meant to help Canada’s pension system build a large reserve fund and spread the costs of financial sustainability across generations. Germany’s recent reforms set the workers’ contribution rate at 20 percent until 2020 and at 22 percent from 2020 to 2030. Second, increasing employee contribution rates without significantly reducing benefit levels will tend to make continued employment less attractive compared to retirement. In the context of population aging and fiscally stressed national pension systems facing many countries, reform measures seek to do the opposite: encourage people to remain in the labor force longer to enhance the fiscal solvency of pension programs. Contribution rates that become too high are not likely to provide sufficient incentives to continue work. One commonly used means of reducing, or containing the growth of, promised benefits involves changing the method used to compute initial benefits. For example, France, Belgium, and South Korea now adjust past earnings in line with price growth rather than wage growth to determine the initial pension benefits of new retirees. In general, this shift to price indexation tends to significantly lower benefits relative to earnings, as over long periods prices tend to grow more slowly than wages. Because of compounding, the effect of such a change is larger when benefits are based on earnings over a long period than when they reflect only the last few years of work, as in pension plans with benefits based on final salaries. In fact, the OECD estimates that, in the case of a full-career worker with 45 years of earnings, price indexation can lead to benefits 40 percent lower than with wage indexation. In contrast to full price indexing, some nations use an index that is a mix of price growth and wage growth, which tends to produce higher benefits than those calculated using price indexation only, then adjust the relative weights of the two to cover program costs. Finland, for example, changed its indexation of initial benefits from 50 percent prices and 50 percent wages to 80 percent and 20 percent, respectively. Similarly, Portugal’s index combines 75 percent price growth and 25 percent wage growth. A few countries have moved away from wage indexing but without necessarily adopting price indexation. Sweden, for instance, uses an index that reflects per capita wage growth to compute initial benefits, provided the system is in fiscal balance. However, when the system’s obligations exceed its assets, a “brake” is applied automatically that allows the indexation to be temporarily abandoned. This automatic balancing mechanism (ABM) ensures that the pension system remains financially stable. In Germany and Japan, recent reforms changed benefit indexation from a gross-wage base to a net-wage base—i.e., gross wages minus contributions. In Italy, workers’ benefit accounts rise in line with gross domestic product (GDP) growth so both the changes in the size of the labor force and in productivity dictate benefit levels. Another approach countries have used is adding a longevity index to the formula determining pension payments. In Sweden, Poland, and Italy, for example, remaining life expectancy at the time of retirement inversely affects benefit levels. Thus, as life spans gradually increase, successive cohorts of retirees get smaller benefit payments unless they choose to begin receiving them later in life than those who retired before them. Also, people who retire earlier than their peers in a given cohort get significantly lower benefits throughout their remaining life than those who retire later. Longevity indexing helps ensure that improvements in life expectancy do not strain the system financially. Germany, on the other hand, now uses a sustainability factor that links initial benefits to the system’s dependency ratio—i.e., the number of people drawing benefits relative to the number paying into the system. This dependency ratio captures variations in fertility, longevity, and immigration, and consequently makes the pension system self-stabilizing. For example, higher fertility and immigration, which raise labor force growth, will, other things equal, improve the dependency ratio, leading to higher pension benefits, while higher longevity or life expectancy will increase the dependency ratio, and hence cause benefits to decline. In some of the countries we studied, changes in indexing methods affect both current and future retirees. In Japan, for example, post-retirement benefits were indexed to wages net of taxes before 2000. However, reforms enacted that year altered the formula by linking post-retirement benefits to prices. As a result, retirees saw their subsequent benefits rise at a much slower pace. The 2004 reforms reduced retirees’ purchasing power further by introducing a negative “automatic adjustment indexation” to the formula. With this provision, post-retirement benefits increase in line with prices minus the adjustment rate, currently fixed at 0.9 percent until about 2023. This rate is the sum of two demographic factors: the decline in the number of people contributing to the pension program (projected at 0.6 percent) plus the increase in the number of years people collect pensions (projected at 0.3 percent). This negative adjustment also enters the formula determining the benefit of new recipients as past earnings are indexed to net wages minus the same 0.9 percent adjustment rate. Sweden’s ABM modifies both the retirement accounts of workers—or future retirees—and the benefits paid to current pensioners. As explained earlier, this mechanism is triggered whenever system assets fall short of system liabilities. Moreover, post-retirement benefits in Sweden are indexed each year to an economic factor equal to prices plus the average rate of real wage increase minus 1.6 percent, which is the projected real long-term growth in wages. As a result, if average real wages grow annually at 1.6 percent, post-retirement benefits are adjusted for price increases. On the other hand, if real wage growth falls below 1.6 percent, benefits do not keep up with prices, leading to a decline in retiree purchasing power. Germany’s sustainability factor affects those already retired, as it is included in the formula that adjusts their benefits each year. If, as projected, the number of contributors falls relative to that of pensioners, increasing the dependency ratio, all benefits are adjusted downward, so all cohorts share the burden of adverse demographic trends. This intergenerational burden sharing is also apparent in the indexation of all benefits to net wages—wages minus contributions, which affect workers and pensioners alike. Thus an increase in contributions, everything else equal, lowers both initial benefits and benefits already being paid. Table 3 summarizes relevant characteristics of earnings-related public pension programs in selected countries. In the U.S. Social Security program, indexing can have different effects on the distribution of benefits and on the relationship between contributions and benefits, depending on how it is applied to benefits or taxes. There are a variety of proposals that would change the current indexing of initial benefits, including a move to the CPI, to longevity or mortality measures, or to the dependency ratio. When the index is implemented through the benefit formula, each will have a proportional effect, with constant percentage changes at all earnings levels, on the distribution of benefits (i.e., the progressivity of the current system is unchanged). However, indexing provisions can be modified to achieve other distributional effects. For example, so-called progressive indexing applies different indexes at different earnings levels in a manner that seeks to protect the benefits of low-income workers. Indexing payroll tax rates would also have distributional effects. Such changes maintain existing benefit levels but affect equity measures like the ratio of benefits to contributions across age cohorts, with younger cohorts having lower ratios because they receive lower benefits relative to their contributions. Finally, proposals that modify the indexing of COLAs for existing beneficiaries have important and adverse distributional effects for groups that have longer life expectancies, such as women and highly educated workers, because such proposals would typically reduce future benefits, and this effect compounds over time. In addition, disabled worker beneficiaries, especially those who receive benefits for many years, would also experience lower benefits. There are a variety of proposals that would change the current indexing of initial benefits from the growth in average wages. These include a move to a measure of the change in prices like the CPI, to longevity measures that seek to capture the growth in population life expectancies, or to the dependency ratio that measures changes in the number of retirees compared to the workforce. We analyzed three indexing scenarios; the dependency ratio index, which links the growth of initial benefits to changes in the dependency ratio, the ratio of the number of retirees to workers; the CPI index, which links the growth of initial benefits to changes in the CPI; and the mortality index, which links the growth of initial benefits to changes in life expectancy to maintain a constant life expectancy at the normal retirement age. Figure 3 illustrates the projected distribution of benefits for workers born in 1985 under three different indexing scenarios (on the left side of the figure) and under a so-called benefit reduction benchmark that reduces benefits just enough to achieve program solvency over a 75-year projection period (on the far right). Median benefits under the dependency ratio index and the CPI index are lower than the median benefit for the benchmark; they reduce benefits more than is needed to achieve 75-year solvency. In contrast, the mortality index has a higher median benefit level than the benchmark, so without further modifications, it would not achieve 75-year solvency. Regardless of the index used to modify initial benefits, most proposals apply the new index in a way that has proportional effects on the distribution of benefits. Thus, benefits at all levels will be affected by the same percentage reduction, for example, 5 percent, regardless of earnings. The left half of figure 3 illustrates this proportionality in terms of monthly benefits. While the level of benefits differs, the distribution of benefits for each scenario has a similar structure. However, the range of each distribution varies by the difference in the size of the proportional reduction. A larger proportional reduction—the dependency ratio index— will result in a distribution with a similar structure, compared to promised benefits. However, each individual’s benefits are reduced by a constant percentage; therefore, the range of the distribution, the difference between benefits in the 25th and 75th percentile, would be smaller, compared to promised benefits. This proportional reduction in benefits is also illustrated in figure 4, which compares the currently scheduled or promised benefit formula with our three alternative indexing scenarios. Under each scenario, the line depicting scheduled benefits is lowered, by equal percentages at each AIME amount, by the difference between the growth in covered wages and the new index. Each indexing scenario maintains the shape of the current benefit formula; thus the progressivity of the system is maintained, but the line for each scenario is lower than scheduled benefits, which would affect the adequacy of benefits. The proportional effects of indexing are best illustrated by adjusting, or scaling, each index to achieve comparable levels of solvency over 75 years. Thus, for those indexes that do not by themselves achieve solvency, the benefit reductions are increased until solvency is achieved; for those that are more than solvent, the benefit reductions are decreased until solvency is achieved but not exceeded. The right half of figure 3 shows the distribution of monthly benefits for each of the scaled indexing scenarios and the benchmark scenario. Once the different indexing scenarios are scaled to achieve solvency, the distribution of benefits for each scenario is almost identical in terms of the level of benefits. Differences in the distributions deal with the timing associated with implementing the changes. Scaling the indexing scenarios also reveals that the shape of the distributions is the same. The distributions of monthly benefits for the indexing scenarios are also very similar to the distribution of benefits generated under the benefit reduction benchmark. Therefore, changes to the benefit formula, applied through the replacement factors, will have similar results regardless of whether the change is an indexing change or a straight benefit reduction, because of the proportional effect of the change. Indexing could also be modified to achieve other distributional goals. For example, so-called progressive indexing, or the use of different indexes— such as prices and wages—at various earnings levels, has been proposed as a way of changing the indexing while protecting the benefits of low- income workers. Thus, under progressive price indexing, those individuals with indexed lifetime earnings below a certain point would still have their initial benefits adjusted by wage indexing; those individuals with earnings above that level would be subject to a combination of wage and price indexing on a sliding scale, with those individuals with the highest lifetime earnings having their benefits adjusted completely by price indexing. The effect that progressive price indexing would have on the benefit formula can be seen in figure 5, where the CPI indexing scenario is compared to a progressive CPI indexing scenario and to benefits promised under the current program formula. Many lower-income individuals would do better under the progressive application of the CPI index than under the CPI indexing alone. However, a progressive application of CPI indexing does not by itself achieve 75-year solvency, and further changes would be necessary to do so. Figure 6 shows what happens to the benefit formula when each of these indexing scenarios is scaled to achieve comparable levels of solvency over 75 years. Under progressive price indexing, to protect the benefits of low-income workers, the indexing to prices at higher earnings levels begins to flatten out benefits, causing the line in figure 6 to plateau. Thus, under this scenario, most individuals with earnings above a certain level would receive about the same level of benefits regardless of income—in the case of figure 6, a retiree with average indexed monthly earnings of $2,000 would receive a similar benefit level as someone with average indexed monthly earnings of $7,000. Since progressive price indexing would change the shape of the benefit formula, making it more progressive, it would reduce individual equity for higher earners, as they would receive much lower benefits relative to their contributions. While proposals that have suggested progressive indexing have focused on using prices, any index can be adjusted to achieve the desired level of progressivity, and the results will likely be similar. However, to the extent that wages grow faster than the new index over a long period of time, the benefit formula will eventually flatten out and all individuals above a certain income level would receive the same level of benefits. Indexing changes could also be applied to program financing. Under the current structure of the system, one way this could be accomplished is by indexing the Social Security payroll tax rate. As with indexing benefits, the payroll tax rate could be indexed to any economic or demographic variable. Under the tax scenarios presented, only the indexing of taxes would change, so promised benefits would be maintained. However, workers would be paying more in payroll taxes, which, like any tax change, could affect work, saving, and investment decisions. While benefit levels would be higher under tax increase scenarios, as compared to benefit reduction scenarios, the timing of the tax changes matters, just as it did with benefit changes. Since benefits would be unchanged in the tax-increase-only scenarios, we use benefit-to-tax ratios to compare the effects of different tax increase scenarios. Benefit-to-tax ratios compare the present value of Social Security lifetime benefits with the present value of lifetime Social Security taxes. The benefit-to-tax ratio is an equity measure that focuses 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. With benefits unchanged in the tax increase scenarios, the benefit-to-tax ratios would vary across scenarios because of differences in the timing of tax increases. To illustrate the effects of the timing of a change in tax rates, figure 7 shows the benefit-to-tax ratios, for four different birth cohorts, for two tax increase scenarios: (1) the dependency ratio tax indexing scenario scaled to achieve 75-year solvency and (2) our tax increase benchmark scenario that increases taxes just enough to achieve program solvency over a 75- year projection period. By raising payroll taxes once and immediately, the tax increase benchmark would spread the tax burden more evenly across generations. This is seen in figure 7, where the benefit-to-tax ratios are fairly stable across cohorts for this scenario. The dependency ratio tax indexing scenario would increase the tax rate annually, in this case with changes in the dependency ratio. Under this scenario, later cohorts would face a higher tax rate and thus bear more of the tax burden, compared to earlier cohorts. This would result in declining benefit-to-tax ratios across cohorts, with later generations receiving relatively less compared to their contributions. Indexing changes can also be applied to the COLA used to adjust existing benefits. Under the current structure of the program, benefits for existing beneficiaries are adjusted annually in line with changes in the CPI. The COLA helps to maintain the purchasing power of benefits for current retirees. Some proposals, under the premise that the current CPI overstates the rate of price inflation because of methodological issues associated with how the CPI is calculated, would alter the COLA. Figure 8 shows the difference in benefit growth over time under the current COLA and two alternatives: growing at rate of CPI minus 0.22 and growing at rate of CPI minus 1. Changes to the COLA would also have adequacy implications. After 20 years, benefits growing at the rate of the CPI minus 0.22 would slow the growth of benefits by about 4 percent below the level given by the current COLA and growing at the rate of the CPI minus 1 by about 17 percent. This slower benefit growth would improve the finances of the system, but would also alter the distribution of benefits, particularly for some subpopulations. Since changes to the COLA compound over time, those most affected are those with longer life expectancies, for example, women, as they would have the biggest decrease in lifetime benefits as they tend to receive benefits over more years. In addition, as education is correlated with greater life expectancy, highly educated workers would also experience a significant benefit decrease. There could also be a potentially large adverse effect on the benefits paid to disabled beneficiaries, especially among those who become disabled at younger ages and receive benefits for many years. These beneficiaries could have a large decrease in lifetime benefits. Reducing the COLA would also have equity implications. Since the COLA is applied to all beneficiaries, reductions in the COLA would lower the return on contributions for all beneficiaries. However, the magnitude of the effect will vary across subpopulations, similar to its effect on adequacy. Those individuals who have the biggest decrease in lifetime benefits will have the biggest decrease in individual equity. While these individuals have a large decrease in equity, they would still receive higher lifetime benefits since they live longer and collect benefits over more years. Individuals with shorter life expectancies will experience a decrease in equity, but they will fare comparably better than other groups that live longer, since their lifetime benefits will decrease much less. Therefore, men, African-Americans, low earners, and less educated individuals would experience a much smaller decrease in equity compared to their counterparts. Indexing raises other important considerations about the program’s role, the stability of the variables underlying the index, and the treatment of Disability Insurance (DI) beneficiaries. The choice of the index implies certain assumptions about the appropriate level of benefits and taxes for the program. Thus, if the current indexing of initial benefits was changed to price growth, there is an implication that the appropriate level of benefits is one that maintains purchasing power over time rather than the current approach that maintains a relative standard of living across age groups (i.e., replacement rates). The solvency effects of an index are predicated upon the relative stability and historical trends of the underlying economic or demographic relationships implied by the index. For example, the 1970s were a period of much instability, in which actual inflation rates and earnings growth diverged markedly from past experience, with the result that benefits unexpectedly grew much faster than expected. Finally, since the benefit formulas for the Old-Age and Survivors Insurance (OASI) and DI programs are linked, an important consideration of any indexing proposal is its effect on the benefits provided to disabled workers. Disabled worker beneficiaries typically become entitled to benefits much sooner than retired workers and under different eligibility criteria. As with other ways to change benefits, an index that is designed to improve solvency by adjusting retirement benefits may result in large reductions to disabled workers, who often have fewer options to obtain additional income from other sources. The choice of an index suggests certain assumptions about the appropriate level of benefits and the overall goal of the program. The current indexing of initial benefits to wage growth implies that the appropriate level of benefits is one that maintains replacement rates across birth years. In turn, maintaining replacement rates implies a relative standard of adequacy and an assumption that initial benefits should reflect the prevailing standard of living at the time of retirement. In contrast, changing the current indexing of initial benefits to price growth implies that the appropriate level of benefits is one that maintains purchasing power. In turn, maintaining purchasing power implies an absolute standard of adequacy and an assumption that initial benefits should reflect a fixed notion of adequacy regardless of improvements in the standard of living. Also, any index that does not maintain purchasing power results in workers born in one year receiving higher benefits than workers with similar earnings born 1 year later. This would occur with any benefit change that would reduce currently promised benefits more than price indexing initial benefits would, since price indexing maintains the purchasing power of initial benefits. In the case of longevity indexing, if the growth of initial benefits were indexed to life expectancy, then this implies that the increased costs of benefits that stem from increasing life expectancy should be borne by all future beneficiaries, even if society has become richer. Therefore, the desired outcome, in terms of initial benefit levels at the time of retirement, should drive the choice of an index. The current indexing of existing benefits with the COLA implies that maintaining the purchasing power of benefits for current retirees is the appropriate level of benefits. Revising the COLA to reflect a more accurate calculation of the CPI retains this assumption. However, adjusting the COLA in a way that does not keep pace with the CPI would change that assumption and imply a view that the costs of reform should be shared by current as well as future retirees. Similarly, on the revenue side, the program currently uses a constant tax rate, which maintains the same proportion of taxes for all workers earning less than the maximum taxable earnings level. Applying a life expectancy index to payroll tax rates suggests that the appropriate level of taxes is one that prefunds the additional retirement years increased life expectancy will bestow on current workers, but also that the appropriate level of benefits is one that maintains replacement rates, as benefits are unchanged. Indexing raises other considerations about the stability of the underlying relationships between the economic and demographic variables captured by the index. The choice of an index includes issues of risk and methodology. Some indexes could be based on economic variables that are volatile, introducing instability because the index generates wide swings in benefits or taxes. In other cases, long-standing economic or demographic relationships premised by the index could change, resulting in unanticipated and unstable benefit or tax levels. While most indexes will also pose methodological issues, these can become problematic to address after the index has already been widely used, and the correction will have implications for benefits or taxes. An example is the current measurement limitations of the CPI. In other instances, the index may be based on estimates about future trends in variables like mortality that could later prove incorrect and erode public confidence in the system. Some indexes are premised on the past behavior of economic or demographic relationships. If these long-standing relationships diverge for a significant period of time, they may result in unanticipated and unstable benefit or tax levels. For example, the 1972 amendments that introduced indexing into the Social Security program were premised on the belief that over time, wage growth will generally substantially exceed price inflation. However, for much of the 1970s, actual inflation rates and earnings growth diverged markedly from past experience; price inflation grew much faster than wages, with the result that benefits grew much faster than anticipated. This development introduced major instability into the program, which was unsustainable. Congress addressed this problem when it passed the 1977 amendments. Moreover, even though the 1977 amendments succeeded in substantially stabilizing the replacement rates for initial benefits, a solvency crisis required reforms just 6 years later with the 1983 amendments. High inflation rates resulted in high COLAs for existing benefits just as recession was depressing receipts from the payroll taxes. The indexing of initial benefits under the 1977 amendments did not address the potential for such economic conditions to affect COLAs or payroll tax receipts. Many indexes have methodological issues associated with their calculation, which can become problems over time. For example, the CPI has long been in use by the Social Security program and other social welfare programs. However, the CPI is not without its methodological problems. Some studies have contended that the CPI overstates inflation for a number of reasons, including that it does not account for how consumers can substitute one good for another because the calculation assumes that consumers do not change their buying patterns in response to price changes. Correcting for this “substitution effect” would likely lower the CPI. Changing the calculation in response to this concern might improve accuracy but is controversial because it would also likely result in lower future benefits and put more judgment into the calculation. Indexes that are constructed around assumptions about future experience raise other methodological issues. An example is a mortality index, which seeks to measure future changes in population deaths. Such a measure would presumably capture an aspect of increased longevity or well-being in retirement and could be viewed as a relevant determinant of program benefits or taxes. Accuracy in this index would require forecasts of future mortality based on assumptions of the main determinants influencing future population deaths (i.e., medical advances, diet, income changes). Such forecasts would require a clear consensus about these factors and how to measure and forecast them. However, currently there is considerable disagreement among researchers in terms of their beliefs about the magnitude of mortality change in the future. In choosing an index, such methodological issues would need to be carefully considered to maintain public support and confidence. Under the current structure of the U.S. Social Security system, the OASI and DI programs share the same benefit formula. Thus, any changes that affect retired workers will also affect survivors and disabled workers. However, the circumstances facing these beneficiaries differ from those facing retired workers. For example, the disabled worker’s options for alternative sources of income, especially earnings-related income, to augment any reduction in benefits are likely to be more limited than are those for the retired worker. Further, DI beneficiaries enter the program at younger ages and may receive benefits for many years. As a result, disabled beneficiaries could be subject to benefit changes for many years more than those beneficiaries requiring benefits only in retirement. These differing circumstances among beneficiaries raise the issue of whether any proposed indexing changes, or any other benefit changes, should be applied to disabled worker and survivor beneficiaries, as well as to retired worker beneficiaries. If disabled worker beneficiaries are not subject to indexing changes applied to retirees, benefit levels for disabled workers could ultimately be higher than those of retired workers. This difference in benefit levels would occur because disabled workers typically become entitled to benefits sooner than retired workers, and thus any reductions in their replacement factors would be smaller. Such a differential could increase the incentive for older workers to apply for disability benefits as they near retirement age. Excluding the disability program from indexing changes has implications for solvency and raises implementation issues. If the indexing changes are not applied to the disability program, even larger benefit reductions or revenue increases would be needed to achieve fiscal solvency. Since the OASI and DI programs share the same benefit formula, excluding disabled worker beneficiaries from indexing changes might also necessitate the use of two different benefit formulas or require a method to recalculate benefits in order to maintain different indexing in each program. Such changes could lead to confusion among the public about how the programs operate, which may require significant additional public education. Indexing has played an important role in the determination of Social Security’s benefits and revenues for over 30 years. As in other countries seeking national pension system reform, recent proposals to modify the role of indexing in Social Security have primarily focused on addressing the program’s long-term solvency problems. In theory, one index may be better than another in keeping the program in financial balance on a sustainable basis. However, such a conclusion would be based on assumptions about the future behavior of various demographic and economic variables, and those assumptions will always have considerable uncertainty. Future demographic patterns and economic trends could emerge that affect solvency in ways that have not been anticipated. So, while indexing changes may reduce how often Congress needs to rebalance the program’s finances, there is no guarantee that the need will not arise again. Yet program reform, and the role of indexing in that reform, is about more than solvency. Reforms also reflect implicit visions about the size, scope, and purpose of the Social Security system. Indexing initial benefits, existing benefits, tax rates, the maximum taxable earnings level, or some other parameter or combination will have different consequences for the level and distribution of benefits and taxes, within and across generations and earnings levels. These questions relate to the trade-off between income adequacy and benefit equity. In the final analysis, indexing, like other individual reforms, comes down to a few critical questions: What is to be accomplished or achieved, who is to be affected, is it affordable and sustainable, and how will the change be phased in over time? Although these issues are complex and controversial, they are not unsolvable; they have been reconciled in the past and can be reconciled now. Indexing can be part of a larger, more comprehensive reform package that would include other elements whose cumulative effect could achieve the desired balance between adequacy and equity while also achieving solvency. The challenge is not whether indexing should be part of any necessary reforms, but that necessary action is taken soon to put Social Security back on a sound financial footing. We provided a draft of this report to SSA and the Department of the Treasury. SSA provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Social Security Administration and the Treasury Department, as well as other interested parties. Copies will also be made available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-7215, if you have any questions about this report. Other major contributors include Charles Jeszeck, Michael Collins, Anna Bonelli, Charles Ford, Ken Stockbridge, Seyda Wentworth, Joseph Applebaum, and Roger Thomas. 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 worker, spouse, survivor, 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 provide only very rough estimates of future incomes. However, these estimates may be useful for comparing future incomes across alternative policy scenarios and over time. GEMINI can be operated as a free-standing model or it can operate as a SSASIM add-on. When operating as an add-on, GEMINI is started automatically by SSASIM for one of two purposes. GEMINI can enable the SSASIM macro model to operate in the Overlapping Cohorts (OLC) mode or it can enable the SSASIM micro model to operate in the Representative Cohort Sample (RCS) mode. The SSASIM OLC mode requests GEMINI to produce samples for each cohort born after 1934 in order to build up aggregate payroll tax revenues and OASDI benefit expenditures for each calendar year, which are used by SSASIM to calculate standard trust fund financial statistics. In either mode, GEMINI operates with the same logic, but typically with smaller cohort sample sizes in OLC mode than in the RCS or stand-alone-model mode. For this report we used GEMINI to simulate Social Security benefits and taxes primarily 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 various indexation approaches. 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 2010 and 2040 to strike a balance between the size of the incremental reductions each year and the size of the ultimate reduction. SSA actuaries scored our original 2001 benchmark policies and determined the parameters for each that would achieve 75-year solvency. Table 5 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 greater 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, and so forth), b. maintaining a proportional level of income transfers in 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 disabled and survivor 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 becoming initially entitled in 2010 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 greater 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 13 percent; this would create a notch. 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 1994-1996 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 assumes 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 a sudden, large benefit reduction 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 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 2006. 90% (AIME ≤ $656) + 32% (AIME > $656 and ≤ $3955) + 15% (AIME > $3955) 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 three 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 gets 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 harder than higher earners because the constant x percent of the higher formula factors results in a larger percentage 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. Table 6 summarizes the features of our benchmarks. Social Security did not originally use indexing to automatically adjust benefit and tax provisions; only ad hoc changes were made. The 1972 amendments provided for automatic indexing of benefits and taxes for the first time, but the indexing approach for benefits was flawed, introducing potential instability in benefit costs. The 1977 amendments addressed those issues, resulting in the basic framework for indexing benefits still in use today. Before the 1970s, the Social Security program did not use indexing to adjust benefits or taxes automatically. For both new and existing beneficiaries, benefit rates increased only when Congress voted to raise them. The same was true for the tax rate and the cap on the amount of workers’ earnings that were subject to the payroll tax. Under the 1972 amendments to the Social Security Act, benefits and taxes were indexed for the first time, and revisions in the 1977 amendments created the basic framework still in use today. Until 1950, Congress legislated no changes to the benefit formula of any kind. As a result, average inflation-adjusted benefits for retired workers fell by 32 percent between 1940 and 1949. Under the 1950 amendments to the Social Security Act, these benefits increased 67 percent in 1 year. Afterward, until 1972, periodic amendments made various ad hoc adjustments to benefit levels. Economic prosperity and regular trust fund surpluses facilitated gradual growth of benefit levels through these ad hoc adjustments. In light of the steady growth of benefit levels, the 1972 amendments instituted automatic adjustments to constrain the growth of benefits as well as to ensure that they kept pace with inflation. Table 7 summarizes the history of benefit increases before 1972. It illustrates that between 1940 and 1971, average benefits for all current beneficiaries tripled while prices nearly doubled and wages more than quintupled. Some benefit increases were faster and some were slower than wages increases. On the revenue side, payroll tax rates have never been indexed. However, Social Security’s revenue also depends on the maximum amount of workers’ earnings that are subject to the payroll tax. This cap is technically known as the contribution and benefit base because it limits the earnings level used to compute benefits as well as taxes. Just as with benefits, the maximum taxable earnings level did not change until the 1950 amendments even as price and earning levels were increasing. From 1940 to 1950, the inflation-adjusted value of the cap fell by over 40 percent. Also, until the 1972 amendments, adjustments to the maximum taxable earnings level were made on an ad hoc basis. With the enactment of the 1972 amendments, the maximum taxable earnings level increased automatically based on increases in average earnings. Figure 9 shows the inflation-adjusted values for the maximum taxable earnings level before automatic adjustments took effect in 1975. Figure 10 shows that as a result of the fluctuations in the maximum taxable earnings level, the proportion of earnings subject to the payroll tax varied widely before indexing, ranging from 71 to 93 percent. The 1972 amendments, in effect, provided for indexing initial benefits twice for new beneficiaries. The indexing changed the benefit formula in the same way that previous ad hoc increases had done. Before the 1972 amendments, benefits were computed essentially by applying different replacement factors to different portions of a worker’s earnings. For example, under the 1958 amendments, a workers’ PIA would equal 58.85 percent of first $110 of average monthly wages plus 21.40 percent of next $290, where the 58.85 and 21.40 percents are the replacement factors that determine how much of a worker’s earnings will be replaced by the Social Security benefit. Subsequent amendments increased benefits by effectively increasing the replacement factors. For example, the 1965 amendments increased benefits by 7 percent for a given average monthly wage by increasing the replacement factors by 7 percent to 62.97 from 58.85 and to 22.9 percent from 21.4. The automatic adjustments under the 1972 amendments increased these same replacement factors according to changes in the CPI. These changes in the benefit computation applied equally to both new and existing beneficiaries. To illustrate how the benefit formula worked, take, for example, a worker with an average monthly wage of $200 who became entitled in 1959 (when the 1958 amendments first took effect). The PIA for this worker would be 58.85 percent of $110 plus 21.4 percent of the average monthly wage over $110, that is, $200-110 = $90, which equals $64.74 + $19.26 = 84.00. When the 1965 amendments took effect, this same beneficiary would have the PIA recalculated using the new formula. Assuming no new wages, the average monthly wage would still be $200, and the new PIA would be 62.97 percent of $110 plus 22.9 percent of the average monthly wage over $110, that is, $200-110 = $90, which equals $69.27 + $20.61 = 89.88, which is 7 percent greater than the previous $84.00. Now consider the example of a new beneficiary, who became entitled in 1965 (when the 1965 amendments first became effective). For the purposes of this illustration, to reflect wage growth, assume this worker had an average monthly wage of $240.00, or 20 percent more than our previous worker who became entitled in 1959. For this new beneficiary, the PIA in 1965 would be $99.04, which, as a result of the wage growth, is much more than 7 percent higher than the initial benefit for the worker in 1959. The 1972 amendments provided for automatic indexing of benefits and taxes for the first time. The indexing approach for benefits was flawed and raised issues that the 1977 amendments addressed; these issues help explain the basic framework for indexing benefits still in use today. In particular, the indexing approach in the 1972 amendments resulted in (1) double-indexing benefits to inflation for new beneficiaries though not for existing ones and (2) a form of bracket creep that slowed benefit growth as earnings increased over time. Within a few years, the problems raised by the double indexing under the 1972 amendments became apparent, with benefits growing far faster than anticipated. Under the 1972 amendments, indexing the replacement factors in the benefit formula to inflation had the effect of indexing twice for new beneficiaries. First, the increase in the replacement factors themselves reflected changes in the price level. Second, the benefit calculations were based on earnings levels, which were higher for each new group of beneficiaries, partially as a result of inflation. Thus, benefit levels grew for each new year’s group of beneficiaries because both the benefit formula reflected inflation and their higher average wages reflected inflation. For existing beneficiaries who had stopped working, the average earnings used to compute their benefits did not change, so growth in earnings levels did not affect their benefits and double indexing did not occur. Once the double indexing for new beneficiaries was understood, the need became clear to index benefits differently for new and existing beneficiaries, which was referred to as “decoupling” benefits. The effect of double indexing on replacement rates could be offset by a type of “bracket creep” in the benefit formula, depending on the relative values of wage and price growth over time. Bracket creep resulted from the progressive benefit formula, which provided lower replacement rates for higher earners than for lower earners. As each year passed and average earnings of new beneficiaries grew, more and more earnings would be replaced at the lower rate used for the upper bracket, making replacement rates fall on average, all else being equal. The combination of double indexing and bracket creep implied in the 1972 amendments introduced a potential instability in Social Security benefit costs. Price growth determined the effects of double indexing, and wage growth determined the effects of bracket creep. The extent to which bracket creep offset the effects of double indexing depended on the relative values of price growth and wage growth, which could vary considerably. Had wage and price growth followed the historical pattern at the time, benefits would not have grown faster than expected and replacement rates would not have risen; the inflation effect and the bracket creep effect would have balanced out. However, during the 1970s, actual rates of inflation and earnings growth diverged markedly from past experience (see fig. 11), with the result that benefit costs grew far faster than revenues. In contrast, an indexing approach that stabilized replacement rates would help to stabilize program costs. To illustrate this, annual benefit costs can be expressed as a fraction of the total taxable payroll in a given year, that is, total covered earnings. In turn, this can be shown to relate closely to replacement rates. taxable earningsWhile not precisely a replacement rate, the second term on the last line above—the ratio of the average benefit to average taxable earnings—is closely related to the replacement rates provided under the program. While replacement rates are now relatively stable after the 1977 amendments, it is the first term on the last line above—the ratio of beneficiaries to workers—that has been increasing and placing strains on the system’s finances. The inverse of this is the ratio of covered workers to beneficiaries. While 3.3 workers support each Social Security beneficiary today, only 2 workers are expected to be supporting each beneficiary by 2040. (See fig. 12.) Social Security Reform: Answers to Key Questions. GAO-05-193SP. Washington, D.C.: May 2005. Options for Social Security Reform. GAO-05-649R. Washington, D.C.: May 6, 2005. Social Security Reform: Early Action Would Be Prudent. GAO-05-397T. Washington, D.C.: Mar. 9, 2005. Social Security: Distribution of Benefits and Taxes Relative to Earnings Level. GAO-04-747. Washington, D.C.: June 15, 2004. Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario. GAO-03-907. Washington, D.C.: July 29, 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: 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: Restoring Long-Term Solvency Will Require Difficult Choices. GAO/T-HEHS-98-95. Washington, D.C.: Feb. 10, 1998. | The financing shortfall currently facing the Social Security program is significant. Without remedial action, program trust funds will be exhausted in 2040. Many recent reform proposals have included modifications of the indexing currently used in the Social Security program. Indexing is a way to link the growth of benefits and/or revenues to changes in an economic or demographic variable. Given the recent attention focused on indexing, this report examines (1) the current use of indexing in the Social Security program and how reform proposals might modify that use, (2) the experiences of other developed nations that have modified indexing, (3) the effects of modifying the indexing on the distribution of benefits, and (4) the key considerations associated with modifying the indexing. To illustrate the effects of different forms of indexing on the distribution of benefits, we calculated benefit levels for a sample of workers born in 1985, using a microsimulation model. We have prepared this report under the Comptroller General's statutory authority to conduct evaluations on his own initiative as part of a continued effort to assist Congress in addressing the challenges facing Social Security. We provided a draft of this report to SSA and the Department of the Treasury. SSA provided technical comments, which we have incorporated as appropriate. Indexing currently plays a key role in determining Social Security's benefits and revenues, and is a central element of many proposals to reform the program. The current indexing provisions that affect most workers and beneficiaries relate to (1) benefit calculations for new beneficiaries, (2) the annual cost-of-living adjustment (COLA) for existing beneficiaries, and (3) the cap on taxable earnings. Some reform proposals would slow benefit growth by indexing the initial benefit formula to changes in prices or life expectancy rather than wages. Some would revise the COLA under the premise that it currently overstates inflation, and some would increase the cap on taxable earnings. National pension reforms in other countries have used indexing in various ways. In countries with high contribution rates that need to address solvency issues, recent changes have generally focused on reducing benefits. Although most Organisation for Economic Co-operation and Development (OECD) countries compute retirement benefits using wage indexing, some have moved to price indexing, or a mix of both. Some countries reflect improvements in life expectancy in computing initial benefits. Reforms in other countries that include indexing changes sometimes affect both current and future retirees. Indexing can have various distributional effects on benefits and revenues. Changing the indexing of initial benefits through the benefit formula typically results in the same percentage change in benefits across income levels regardless of the index used. However, indexing can also be designed to maintain benefits for lower earners while reducing or slowing the growth of benefits for higher earners. Indexing payroll tax rates would maintain scheduled benefit levels but reduce the ratio of benefits to contributions for younger cohorts. Finally, the effect of modifying the COLA would be greater the longer people collect benefits. Indexing raises considerations about the program's role, the treatment of disabled workers, and other issues. For example, indexing initial benefits to prices instead of wages implies that benefit levels should maintain purchasing power rather than maintain relative standards of living across age groups (i.e., replacement rates). Also, as with other ways to change benefits, changing the indexing of the benefit formula to improve solvency could also result in benefit reductions for disabled workers as well as retirees. |
Subsets and Splits